Stephen Kalb was in the middle of a meeting on Thursday around 1 p.m. when a fellow company executive sent him a panicked Slack message: “Do you know what’s happening at SVB?”
Kalb, CEO and co-founder of Seattle-based food management startup Shelf Engine, had been following news of a bank run at a Silicon Valley bank attempting to withdraw $42 billion from the bank on Thursday alone, fearing that it was teetering on the edge.
The financial condition of the bank was strong on Wednesday. The next day, it was under water.
For Shelf Engine, a 40-person startup founded in 2015 that uses artificial intelligence to help grocery stores reduce food waste, this was a big problem.
Not only did the Silicon Valley bank help the company process checks and payments, but all of the startup’s cash was locked up in the bank.
The club swung into action. He and his team quickly set up an account at JPMorgan Chase and attempted to wire transfer every last penny from the Silicon Valley bank.
“Unfortunately, our wire was not honored and our money is still in the Silicon Valley bank,” Kalb, 37, said in an interview Friday. “We woke up this morning expecting the money to be in that JPMorgan bank account, and it wasn’t.”
While he declined to provide the exact amount, he said Shelf Engine has raised more than $60 million from investors. “It was a huge amount,” he said of the transfer.
Many tech startups deeply entrenched in the Silicon Valley bank are now in a nail-biting situation in the wake of the bank implosion, the biggest US bank failure since the 2008 financial crisis.
For tech startups, which for decades have been heavily dependent on the Santa Clara, California-based bank, this could lead to mass layoffs, or the collapse of hundreds of startups, according to industry insiders.
“If the government doesn’t intervene, I think an entire generation of startups will be wiped off the planet,” Gary Tan, president and CEO of startup incubator Y Combinator, said in an interview.
An ‘existential risk’ to innovation and competition in America
Founded in 1983 over a poker game, the Silicon Valley bank became a lender to tech startups that appeared too risky in the eyes of larger, more traditional banks. Eventually, the Silicon Valley bank would come to do business with nearly half of all US tech startups backed by venture capitalists.
“If you’re a high-growth startup, you can’t get a credit card from a typical credit card provider, you can’t get a loan from a big bank, but Silicon Valley Bank will give you that,” Shelf Engine Club said. Said. “These are services that startups can’t get anywhere else.”
The Silicon Valley bank did business with well-known tech companies including Shopify, Pinterest, Fitbit and thousands of lesser-known startups, in addition to established venture capital firms like Andreessen Horowitz.
TV streaming provider Roku was one of the companies caught in the middle of the $487 million bailout, it said in a regulatory filing on Friday. “At this time, the company does not know to what extent the company will be able to deposit its cash in SVB,” Roku executives wrote, adding that the company holds approximately 26% of its cash.
Tan, with Y Combinator, which helped launch startups including Airbnb, Reddit, and Instacart, said the biggest threat right now isn’t to the Rokus of the world, but to the fledgling startups that already have a challenging time. Fighting to stay alive in the midst of a tumultuous fundraising environment. ,
Founders have been grappling with a sense of fear and dread ever since the Silicon Valley bank failure sent them a message — and increasingly facing what could be the end of their companies.
“Founders are texting me now saying they don’t know how to make payroll next week. Will they have to take out personal loans to keep the business going? Will they have to lay off workers?” Tan said. “This could be a potential risk to competition and innovation in the US economy for the next decade.”
While most banking experts do not expect the collapse of the Silicon Valley bank to spread to other parts of the financial world, how much depositors will be able to recover their money is an open question.
Silicon Valley bank failure amid ‘challenging’ times for startups
The Federal Deposit Insurance Corporation said depositors would be able to access up to $250,000 of their funds as of Monday morning. Any amount higher than this will result in a “certificate of receipt”.
And when the FDIC sells the Silicon Valley bank’s assets, those with the certificates will receive payment — but how long it will take, and how much will be paid, is unclear.
Some estimates suggest that about 3% of bank deposits are less than $250,000, meaning that a vast majority of depositors have money that exceeds standard federal insurance.
Kalb said it is exploring debt financing or other lines of credit to survive.
Securing $250,000 from the FDIC will allow the startup to stay open for an additional several days, but not much longer.
He paid his employees this week, and his next payroll deadline is March 20.
“If we don’t have access to capital by then, we will have to make some very difficult decisions,” he said.
Y Combinator’s Tan said the meltdown of one of Silicon Valley’s cornerstone financial institutions couldn’t have come at the worst time for the startup ecosystem.
High interest rates and market uncertainty have put pressure on lenders for money after several years of low interest rates and valuation increases due to easy money.
Lately, entrepreneurs have been warning about the quick drying up of existing cash, which has forced thousands of startups to lay off workers or shut down entirely.
Those dire circumstances lead to the collapse of a Silicon Valley bank, considered a financial pillar of the startup world.
“Venture capital funding was already in a contraction mode,” Tan said. “So it’s a really challenging time for something catastrophic to happen.”