SVB ARM-TWI$T
Borrowers’ ‘incentive’ to return
LESS than a week after tech-startup founders yanked their cash from Silicon Valley Bank in a panic, many are now quietly being called back, On The Money has learned.
In the days since the lender’s spectacular implosion, SVB bankers, with new CEO Tim Mayopoulos at the helm, have been emailing depositors with venture loans — and warning them if they don’t transfer the majority of their money back within 10 business days, their loans will be called.
The problem: Last year, as the window for IPOs closed and venture money dried up, SVB issued a wave of high-interest venture loans to private tech companies that needed funds but didn’t want to dilute their equity with a down round or go public.
One key condition: startups had to keep 80% to 85% of their funds at SVB, sources close to the bank told The Post.
SVB also had allowed some founders to personally borrow against their stakes in their own (oftentimes overvalued) startups, sources with knowledge of the bank’s system told The Post.
“It’s highly unusual that a bank lets an individual borrow against illiquid private stock in a brand-new startup,” one tech insider told The Post. “These people weren’t borrowing money to put back in their business.”
Instead, SVB was effectively offering a way to cash out before an IPO or sale, or just to take “some chips off the table,” the source added.
Indeed, it was these hard-to-obtain loans — not the fact Silicon Valley Bank was located down the street — that brought so many startup founders to SVB in the first place, according to insiders.
Now, many SVB clients don’t have the money to pay their loans back and aren’t in a position to get another loan quickly, sources told The Post.
Based on sky-high valuations, the loans played a key role in worsening the bank’s financial position as startup valuations collapsed, sources said.
“This was no different than the banks that lended against mortgages in 2008 that weren’t worth what they should’ve been worth,” one tech insider told The Post. “The mortgage crisis, you had a house worth $1 million and bankers gave credit lines that valued the house at $1.2 million.”
“SVB overvalued all these companies they worked with,” the source added. “And they were very creative to allow founders and CEOs to take out cash the way they did.”
Once the companies started going south, “it was a tsunami that hit them.”
“It’s ironic,” the source added. “If they’d just left the money in there, this never would’ve happened.”
The FDIC, US Treasury and the Federal Reserve promised SVB depositors their money will be returned in its entirety. Still, many in the tech community are alarmed about moving their money back.
“No one wants to keep their money in SVB now — who do you call to get your money?” one source griped. “If you have a five-year loan, is SVB going to be operating for the next five years?”
Silicon Valley Bank didn’t respond to a request for comment.
‘SVB overvalued all these companies they worked with.’ — Tech insider