Panic in the Valley as tech start-ups’ bank collapses

Crisis has spread to Britain despite assurances the UK branch is ring-fenced, reports James Titcomb

When on the brink of a crisis, it is rarely good advice to plead with people not to panic. But that is precisely what Greg Becker did. “My ask is to stay calm because that’s what is important,” the chief executive of Silicon Valley Bank told tech industry bosses in a private phone call on Thursday. “We have been long-term supporters of you – the last thing we need you to do is panic.”

The plea did not have the intended effect. Silicon Valley Bank, the lender to the artificial intelligence start-ups and fintech giants of the San Francisco Bay Area, fell victim to a very analogue phenomenon: the bank run.

Yesterday, US regulators seized control of the California lender in the biggest banking collapse since the 2008 crisis. Shares had already been suspended, a day after falling 60pc as venture capitalists told start-ups to pull their deposits.

Contagion fears cascaded around the world over the following 24 hours. Shares in Wall Street giants JP Morgan, Citigroup and Bank of America slumped, and fears spread to European lenders, with HSBC, Barclays and Standard Chartered falling yesterday morning.

Meanwhile, Silicon Valley Bank executives abandoned plans to raise funds in a desperate attempt to patch up its balance sheet and instead began talks on a fire sale.

Start-up founders and investors were frantically assessing their exposure to the bank. Venture capital firm Hustle Fund, in an email titled “Urgent announcement for SVB clients”, said that they “do not want to create panic”, but advised companies which other banks they could switch to, offering to provide introductions.

Techies are used to boom and bust, but their favourite bank has been defined by its reliability. Silicon Valley Bank was founded in 1982 when Wells Fargo bankers Roger Smith and Bill Biggerstaff, along with Stanford professor Bob Medearis, saw an opportunity to serve the growing crop of technology companies in Northern California, many of which felt misunderstood by traditional bankers. Medearis convinced his poker buddies to provide some of the initial investment in the bank, and early customers such as Cisco gave it a toehold in the market.

Unlike many other Californian finance businesses, Silicon Valley Bank was not in the business of investing. While venture capitalists and start-ups made and lost billions in the tech bubble and crash, the bank was in the more sober business of holding deposits and making loans. It expanded gradually and carefully, opening a London branch in 2004 and spreading across Europe and Asia in addition to its US base. The company bills itself as the “only bank dedicated to the innovation sector around the world”. Becker, its chief executive, has also been a constant, joining the bank in 1993 and becoming chief executive in 2011. “They’ve been a champion to start-ups,” says Haakon Overli, an investor at Dawn Capital.

The bank’s crisis began from a position of strength. In 2020, as working from home and lockdowns made businesses and households more reliant than ever on tech, investors poured money into start-ups, which in turn put the money with the bank. Deposits grew from $62bn in 2019 to $173bn at the end of last year.

The bank was unable to lend out these funds at the same frantic pace with which they came in. Instead, the company invested in long-term debt securities related to government bonds and US mortgages. It was a smart move in an era of rock-bottom returns, but as central banks began to raise interest rates, the value of the bank’s investments slumped. On Wednesday, it announced that it had taken a hefty loss on the sale of the bonds this year and planned to sell $2.25bn in shares to cover the deficit.

That might have been it. But the timing could not have been worse. On Thursday the US bank Silvergate, a specialist cryptocurrency lender,

‘It was a smart move in an era of rock-bottom returns but as central banks raised rates the value of investments slumped’

‘The USA funds are arguably acting rationally. But some UK funds are being hysterical and creating contagion’

collapsed after failing to recover from its exposure to the bust crypto platform FTX. That raised nerves about bank exposure to the tech industry.

Becker’s appeals for calm fell on deaf ears. Founders Fund, the venture capital investor founded by influential investor Peter Thiel, advised companies to pull their deposits, saying there was no downside. Others, such as Union Square Ventures and Bessemer Venture Partners, did the same. “It’s a prisoner’s dilemma,” said one investor, saying that while there was a collective trust in the bank, no company wanted to be the only one not to take their money out and left bearing losses. One venture capitalist said that the close-knit nature of the Silicon Valley community meant there was a greater risk of companies withdrawing money in sync.

“Clearly Silicon Valley Bank is not diversified; their customers are very concentrated, they have the same business models and communication channels, and share the same VCS invested in each other. It helps on the way up but the effect can also reverse.”

The crisis spread to Britain yesterday, despite assurances from UK executives that the British branch was ring-fenced and a separately capitalised entity, with its own assets and management. “Silicon Valley Bank UK is a standalone entity with its own balance sheet and governance structure,” said Erin Platts, the chief executive of Silicon Valley Bank UK.

“We have been so humbled with the consistent drum of support coming from our UK investor and founder community. We appreciate this is a concerning time for our clients so we are working tirelessly to support them and give more context.” Dawn Capital’s Overli says that on the whole “people are actually being really calm,” but adds: “If you have a lot of money with one bank, you should think about how to optimise that.”

Another investor says: “The USA funds are arguably acting rationally. But some UK funds are being stupid and hysterical and creating contagion.”

Yesterday afternoon, entrepreneurs were pushing major investors to publicly come out in support of the UK entity. “We need VCS to band together but everyone’s looking out for themselves,” says one.

Most UK depositors are unable to take out cash due to a 30-day withdrawal window, which gives the UK entity time to fend off a bank run.

The US parent is not so lucky. If the bank, now controlled by government officials, cannot find a buyer, deposit holders face losing billions.

Despite Becker’s pleas for calm, panic is in the air.