On March 10, Silicon Valley Bank, the bank for startups, became one the biggest failures of a U.S. bank, since the financial crisis of 2008.
The collapse of SVB is a thunderclap in the innovation economy. It leaves many uncertainties about the ability of many startups to be able to operate in the coming weeks since their funds are locked up.
The Federal Deposit Insurance Corporation (FDIC), which took control of the bank and created a new entity, indicated that unsecured depositors, that is to say SVB customers with more than $250,000 in their accounts, will not for the moment have access to their money.
SVB's failure was accelerated by a run on the bank by its many clients. Venture capital firm LaunchPad Capital was among the clients who managed to withdraw their funds before the disaster.
Its founder, Ryan Gilbert, indicates in an interview, that the failure of the bank is a "big loss" for tech and hopes that the federal government will step in to help impacted startups, particularly in terms of cash flow.
Gilbert spoke with TheStreet; his remarks were edited for clarity.
What do you believe went wrong with SVB?
Gilbert: They had assets that made sense at the time, but when the Fed raised interest rates, the existing loans became less valuable. And what the government effectively did by raising interest rates, was to raise the cost of being a bank. So when clients who had deposits at SVB moved their money to other banks, SVB had to liquidate loans that were less valuable, and that created a big gap in its balance sheet, a gap of about $1.8 billion.
The result then, was that the institution had to raise more capital and that created a lack of confidence and in essence, a run on the bank.
Is this what prompted LaunchPad Capital to withdraw its money?
Gilbert: Exactly and everyone did the same.
We successfully withdrew our funds but after much delay. We were able to withdraw funds yesterday [Mar. 9]. It took about five hours, which is a lot longer than usual. Typically, wires go out in minutes, and that was clearly a sign that something wasn't normal.
Can you walk us through the interaction you had with the bank?
Gilbert: We set up the wires electronically, as we do regularly in order to fund our companies and when the wires aren't going out, you recognize that there is a reason for that.
It could be that the system was overwhelmed, or perhaps that there were certain delays that may have been put in. I'm not sure.
Were you able to withdraw all your funds?
Gilbert: We were able to do many of the transactions we wanted.
Have you been contacted in the past few hours by worried startups?
Gilbert: Everyone's been reaching out to us. My phones have been burning up. And other folks have been trying to understand what happens next. If you're a customer of Silicon Valley Bank, you got to wait till Monday [Mar. 13]. On Monday, it will be operating as a new entity under the control of FDIC. They're going to tell you what happens next.
So what are people asking you today?
Gilbert: They're asking: "How can we get our money out today?"
How about the startups you've invested into?
Gilbert: I think together with other investors, we're going to look at a lot of companies and be sure that they have got what it takes to get out and to sort of continue to survive and execute on their plans.
But we have to do it in the context of understanding what it means to get what's known as 'receivership certificate' for the remaining amount of the unsecured deposits. That's a big question. We have to understand what that means. Are these negotiable instruments? Can you get credit against them? How do they work?
What did SVB mean for you?
Gilbert: I used to be a customer. SVB was a very important bank in the venture capital ecosystem. It's a bank that we worked with significantly. They held our deposits when we had deposits with them, and they extended lines of credit and other loans to many companies. They understood startups, they probably understood startups better than any other bank. So it's a big loss, that they no longer going to be in business.
There's a lot of unknowns. If you're running a startup or a business, and you're at Silicon Valley Bank, you want to be in a position where you are able to run your business and have heavy reliance on your institution, especially if you have to pay payroll or make insurance payments or contributions to retirement funds.
And if your money is locked up, you cannot do that.
So, how is this going to play out?
Gilbert: I think the federal government will have to step in and show that they are in a position to support the banking system. That's what it comes down to, because otherwise there's going to be a no end growing run on banks.
Which firm is going to fill the void left by SVB?
Gilbert: I don't have an answer for that. I think it's a big gap that has to be filled, but I do not have the answer. I don't think it will be Goldman Sachs and I don't think it will be [JPMorgan] Chase because they already are very big and they have a lot going on.
