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Silicon Valley Bank Collapse Explainer

blocks representing the Silicon Valley Bank failure impact

It’s been a few years since a major banking collapse made headlines. In fact, one would have to go back to the 2008 financial crisis to truly recall such an event. But recently, the big banking news involves the sudden failure of Silicon Valley Bank. While many factors played a role in these events, shifts in venture capital funding and interest rates were most notable, and there is concern that other bank collapses may follow. This has not only investors worried but startups dependent on their savings deposits worried.

The Silicon Valley Bank failure impact leaves sign untouched
The Silicon Valley Bank failure impact will be felt throughout the startup world–and beyond.

Naturally, the recent Silicon Valley Bank history is not reflective of all financial transactions and trends. The bank itself services a selective industry that mostly involved technology startups and venture capitalists. But it is worth noting that the venture capital environment itself played a significant role in the bank’s vulnerabilities. Therefore, a major Silicon Valley Bank failure impact may well be on how banks manage startup funding in the future. This may occur as a result of self-interest, or it may eventually be imposed via regulations. Either way, it’s worth reviewing how Silicon Valley Bank got into this situation in the first place.

“The [Silicon Valley bank’s] owners prospered by deeply immersing themselves into that [Venture Capital] culture but that narrow focus made it vulnerable to outside economic factors.” – Dan Walters, Tech Journalist, Cal Matters

Recent Silicon Valley Bank History

Silicon Valley Bank was founded 40 years ago, and over time, it gained quite a reputation in the tech sector. Tailoring to the technology startup industry, the bank focused on providing financial services to these clients. Naturally, this also meant catering to the venture capitalists that backed these startups. Therefore, it shouldn’t be surprising that Silicon Valley Bank had over 2,500 venture capitalist accounts in its portfolio. It also boasted about half of all VC-backed technology startups as well. As a result, these entities were the ones that felt the Silicon Valley Bank failure impact the most.

(Dig into this snapshot of the evolving startup world and the investments that fuel it–courtesy of Bold.)

By asset standards, Silicon Valley Bank would not be considered a major one at a national level. Its assets of $209 billion pale in comparison to the trillions of dollars at these other banks. Regardless, the Silicon Valley Bank history within the tech sector made it a well-recognized leader within this segment. Like most banks, it received despots and leveraged most of these funds to purchase Treasury bonds. The steady yet modest returns offered a relatively safe approach. But the lack of diversification outside the technology and VC-culture did not. This is what ultimately made the bank vulnerable with the narrow Silicon Valley Bank failure impact that followed.

Someone reading about the Silicon Valley Bank failure impact on their phone
If you’re an entrepreneur with a startup, that $250,000 insurance coverage by the FDIC doesn’t sound so good right now.

The Impact of Venture Capital Shifts

Given the Silicon Valley Bank history in the tech sector, many of its deposits came from venture capitalist funds. Startups with VC-backed capital would deposit into the bank and periodically withdraw amounts for growth. During the pandemic when the tech industry was booming, everything operated smoothly. VC funding was ample, deposits large, and growth substantial. But in the aftermath of the pandemic, everything shifted and became ugly. Tech stocks declined, venture capitalist interest subsided, and startups began making larger withdrawals. All of a sudden, Silicon Valley Bank found itself in trouble and on the brink of collapse.

(Capital raising for startups has been getting ugly for a while–read more in this Bold story.)

Notably, a change in venture capital funding of tech startups wasn’t the only factor involved in terms of Silicon Valley Banks demise. As inflationary pressures loomed, the Fed raised interest rates, which made the bank’s lower interest rate T-bills less attractive. Then, as startups began withdrawing larger sums, the bank had to sell existing assets at low yields. Once the bank announced losses, the potential Silicon Valley Bank failure impact was felt by all. This created a panic that escalated withdrawals even further. It was then that the FDIC had to step in and take over control. With many of the bank’s deposits federally uninsured, the situation was dire. And it all resulted from the Silicon Valley Bank history linked to VC-backed tech startups.

“Tech is going through a painful period. There is no way to construe what is happening as a crisis.” – Russell Hancock, President of Joint Venture Silicon Valley

A Broader Financial Market View

An entrance to the Silicon Valley Bank
There’s a lot of blame to go around when it comes to the bank’s failure, but most of it rests on the shoulders of the startup/VC ecosystem itself.

The sudden collapse of Silicon Valley Bank was certainly disturbing among tech companies. The potential to lose access to key growth funding could be catastrophic for some. But among other investors, there has been worry that the Silicon Valley Bank history may be repeated with other banks. In fact, there was some hint of this in the days that followed. Other similar size banks like First Republic in San Francisco  and Signature Bank in New York saw stocks fall 20%. But despite this, the Silicon Valley Bank failure impact has been seemingly contained. Though many suggest a lack of regulations may be a primary cause, this does not appear to be the case currently.

The wider financial and banking industry has faired just fine in the recent days despite the Silicon Valley Bank history. There has been no noticeable Silicon Valley Bank failure impact on the nation’s largest banks. JP Morgan Chase, Wells Fargo and Citigroup actually saw an increase in their share prices during this time. Thus, while some suggest relaxation of prior regulations initiated after the 2008 crisis may be a root cause, little evidence supports this. Because other industries and sectors are fairing better amidst inflationary pressures, diversification seems to be working. This is a strategy that Silicon Valley Bank should have considered.

Venture Capital and Volatility

Based on information from the recent Silicon Valley Bank history, their collapse appears to be linked to its narrow focus. Startups rely on venture capital funding to survive and prosper. And as markets and economies shift, venture capitalists can certainly be fickle. As technology stocks declined after the pandemic, it was inevitable that Silicon Valley Bank would take a hit. With all of its eggs in one basket (or at least a select few), it became vulnerable to the VC backers just like their startup clients. While interest rates and inflation did not help, it was a lack of client diversification that ultimately put Silicon Valley Bank at risk.

 

Companies are laying off lots of employees lately–what should you do to safeguard your future? Read this Bold story to find out!

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