Startup founders, venture capitalists and aspirational entrepreneurs descended on Austin on Friday for the annual South by Southwest conference as they do every year. But as the day wore on, a sense of fear and confusion began to take hold amid the usual energy and buzz in the Texas capital.
Silicon Valley Bank (SVB), a financial institution that had become the go-to bank for nearly half of all venture-backed tech startups and many in the healthcare sector, was collapsing. Major venture capital firms and startup incubators including Y Combinator and Founders Fund had advised their founders to reduce exposure to SVB. The industry began to panic.
In the hours and days that followed, the situation amplified. Federal regulators took over SVB and shut it down by the afternoon, followed by an intervention by the Biden administration to protect depositors over the weekend. The financial reverberations spread around the globe and by Tuesday, the justice department was reportedly investigating.
Neal Mody, a Seattle-based venture capitalist and founder of Zoic Capital, said he faced a barrage of questions about the bank while speaking at a SXSW panel on Friday and spent the rest of the evening on the phone trying to assuage panicked business partners.
“You saw a lot of confusion,” said Mody, adding the topic ended up “dominating” much of the conference.
The largest bank collapse since the 2008 crisis has sent shockwaves around the world. But in Silicon Valley, it’s also had a more nuanced effect on the regional industries that boomed around the bank. SVB funded a wide range of clients in Silicon Valley. Its demise affects not only tech companies but others that blossomed alongside the startup scene – including non-profits, small businesses, Etsy sellers, Buzzfeed employees and California wineries.
“[Silicon Valley Bank] was really the heart and lungs of the tech startup community in Silicon Valley – and worldwide,” said Dan Ives, an analyst at Los Angeles-based investment firm Wedbush Securities. “The ripple effect will be felt for years to come.”
With SVB’s purported commitment to progressive causes, more than 1,500 climate technology startups have been imperiled by its plight and affordable housing plans relying on SVB funds have been put on hold.
Mercy Housing, one of the largest affordable housing non-profits in the country, was in the middle of securing a loan from SVB for a housing development in the heart of San Francisco that would offer 112 homes, an effort that has “now been delayed” as the group seeks out alternative financing options, Kate Peterson, the senior vice-president of communications at Mercy Housing, told the Guardian in a statement. She added the organization was “confident” the project would still move ahead.
A number of local businesses and non-profits are likely to be affected, said Scott Wiener, a California state senator representing San Francisco and parts of San Mateo county. “Losing Silicon Valley Bank is harmful because it is absolutely enmeshed in the Bay Area ecosystem around tech and some other industries,” he said. “It would be the same as if there were a bank focused on farmers in Nebraska that folded. That would be really harmful to that local community.”
As they do for tech startups, regional banks with industry expertise play an important role for non-profits, Wiener added. In the 90s, when he was on the board of the LGBT Community Center – a San Francisco non-profit organization serving the local lesbian, gay, bisexual, transgender and queer community – “none of the big banks would even talk to us because we were just some small non-profit”. Regional banks, on the other hand, gave them a chance.
In the days after SVB began to collapse, Wiener said he also heard from small businesses across San Francisco including a bike shop and several restaurants that were unable to process their payroll because the payroll company they worked with banked with SVB.
“If tech companies start not making payroll and tech startups start evaporating, that’s bad for the economy, that’s bad for a ton of just regular people trying to live their lives,” he said. “I think because of the name [SVB] there was this perception that it would only impact tech, and it’s not the case.”
The SVB collapse stands to accelerate ongoing crises faced by the tech industry in recent years, including funding issues, waves of layoffs, and regulatory pressure from Washington. It may add fuel to the argument that Silicon Valley needs stricter guardrails – one that has intensified with the collapse of high-profile firms like WeWork and Theranos and public grillings of tech executives in Congress.
The question now is how Silicon Valley will adapt to these new realities. Amid a broader economic downturn and rising interest rates, the industry has far less cashflow than it once did – and without SVB the space will be even shorter on financing.
“SVB was really the core foundation of the tech surge we’ve seen over the last decade,” Ives said. “This is going to tighten up the spigot on cash coming into startups in the Valley. With SVB – which was really the Godfather in the space – down, they are facing a very arduous path.”
