The public and private markets are busy digesting a frenetic weekend kicked off by the failure of Silicon Valley Bank late last week.
After a run on SVB, an institution where a great many venture capitalists and startups stored their cash, the bank was taken over by the U.S. government after depositors raced to get their capital.
Concerns that thousands of startups and other companies would be unable to make payroll and cover other expenses this week led to calls for depositors at SVB to be made whole.
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There’s nuance to the call. While the Federal Deposit Insurance Corporation offers coverage up to $250,000 for business and personal accounts (think checking and savings accounts, not stocks, crypto and the like), there’s also a history of depositors being made whole during crises of this nature.
By the middle of the weekend, sentiment had coalesced around two positions: One side noted depositors needed to be made whole, fast, to allow SVB-banked companies to make payroll and prevent larger contagion. The other posited that SVB customers deserved to suffer because they concentrated their banking in a smaller institution and then yanked their cash in a panicked rush when the bank teetered.
There’s some mental scarring in the United States regarding government involvement in banking fiascoes. Not everyone is content when they look back at how the 2008 crisis went down, how money was spent, and how legal and financial liability was ultimately handled.
This explains why some folks — myself included — had a knee-jerk reaction opposing the use of government resources to resolve the situation. For what it’s worth, I wound up swapping my views when it became clear that it would be regular folks who would get crushed the hardest if SVB deposits remained locked up for an extended period of time.
If you are a crypto person, the other big news from the weekend was the government takeover of Signature Bank, the second of two crypto-friendly banks that failed in a week.
By Sunday evening, the U.S. government announced that thanks to the FDIC, SVB depositors were safe and would get their cash shortly. HSBC wound up buying SVB’s U.K. arm, and I presume that by the time you read this, other bits of the saga will have sorted themselves out.
With the dust settling on a pretty miserable, if brief, chapter in the startup world, let’s sit back and consider what we’ve learned and what’s ahead. For the sake of time and space, we’re proceeding in bullet points.
Starting with banking:
- Given the use of FDIC insurance capital (the FDIC Deposit Insurance Fund) in this case, it appears that the effective level of deposit insurance in the U.S. banking system is not really capped at $250,000. This changes the calculus of who bears banking risk (and whether there is an inherent moral hazard at play in allowing certain banks to be more aggressive than their peers but with similar backstopping).
- While the government is saying as much as it can that no public money is being used, folks who use banks — including consumers — have effectively paid into the Deposit Insurance Fund and thus contributed to SVB’s assistance (at a minimum in creating a liquidity pool; potential losses or gains are not clear at this juncture). So, sure, it’s not a bailout in the sense that U.S. taxpayers bought a broken bank, but there is regular folks’ insurance money at play here. That’s why our question regarding moral hazard matters.
- Bottom line: We could see banking regulations change in the wake of the SVB mess, and that could impact not only where startups and VCs bank but also how startups interact with the American banking system.
Now, venture capitalists:
- Some venture capitalists would do better to avoid a branding issue when they suddenly need government help. If you have a history of railing against the government for stepping in to assist others, demanding instant help when your own house catches on fire might not be the best way to get it. The government, to its credit, did what the market wanted anyway. Perhaps there will be some introspection in the aftermath.
- The VC community is not a community. Instead of banding together to prevent a bank run, VCs told their startups to pull capital and helped power a $42 billion run on SVB. It’s clear that the venture world takes an every-man-for-himself posture when there’s blood in the water.
- Some venture players simply opened their own accounts to ensure that startups in their portfolio would survive. Some did not, either due to exposure to the same banking issues (personal and fund capital at SVB), a lack of personal capital (not every venture capitalist is wealthy, especially those earlier in their careers or solo managers with lower assets under management), or because they didn’t want to. Some VCs built goodwill over the weekend; others did not. This will impact future funding activity.
- Bottom line: Concentration of capital led to a huge fustercluck among venture players and startup founders. In the future, we may see attempts at less concentration to prevent situations like this. This could change how startups and their backers bank.
Next up, fintech startups:
- While SVB-banked entities were sweating blood, fintech startups with minimal to zero exposure to the mess leaped into action. This was probably a pretty good move both in terms of driving business and fostering goodwill. The fact that deposits will become available today, undercutting how much work some fintechs will actually have to do, is beside the point.
- The question ahead of us is how much folks in the startup and venture market will want to trust any bank apart from the very largest in the world. It’s hard to overstate how insane it is that SVB, well capitalized on paper and functioning this time last week, is now a historical anecdote.
- Bottom line: While fintech startups moved fast to help during the chaos, they could find themselves less attractive as banking alternatives in the wake of the crisis.
TechCrunch is actively working to collect venture capital and founder reactions to all the latest and hunting for hints about where things are heading next. Got thoughts on that? Send ’em to alex.wilhelm@techcrunch.com.
What is clear is that this story’s first chapter is all but over. What comes next will form the rest of the novel.
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