“SVB’s Downfall: A Cautionary Tale for Banks Serving the Tech Industry”

Silicon Valley Bank (SVB) is a well-known name in the banking world, especially when it comes to startups and entrepreneurs. The bank is known for providing banking services to businesses and individuals who are focused on innovation and technology. However, the bank recently made headlines for all the wrong reasons. In this article, we’ll take a look at the history of SVB, what led to the bank’s downfall, and what it means for the future.

SVB was founded in 1983 by Bill Biggerstaff, who had a vision to provide banking services to the emerging technology industry in Silicon Valley. The bank started small, with just $3 million in assets, but grew rapidly as the technology industry took off. In the 1990s, SVB became the go-to bank for technology startups and venture capitalists, and the bank’s assets grew to over $1 billion by 1999.

SVB’s success was due in part to its close relationships with venture capitalists, who often used SVB to hold funds that they invested in startups. This made SVB an attractive option for startups as well, who saw the bank as a partner in their growth.

However, things took a turn for the worse in 2021. The market was soaring, and startups were flush with cash. SVB was holding billions of dollars in deposits, but it couldn’t loan out the money fast enough. Instead, it bought a bunch of long-term investments, hoping to earn a profit when the investments matured. This strategy worked well until the Fed started raising interest rates.

When interest rates rose, the value of SVB’s long-term investments fell sharply. At the same time, startups and venture capitalists started to withdraw their funds from SVB more quickly, causing concern that the bank would be forced to sell its long-term investments at a loss to cover the withdrawals.

To avoid this scenario, SVB announced a fire sale, selling more liquid investments to raise cash and protect its long-term assets. Investors and venture capitalists were shocked and concerned about why the bank had to do this and why it had to do it now. Some VCs even told their startups to pull their money out of SVB or to keep no more than $250,000 in the bank (which is how much is insured by the FDIC).

This sparked concerns of a bank run, and SVB was eventually ordered to close by regulators. Shareholders will get nothing, and companies that banked with SVB are struggling to pay their employees. Rippling, a company that manages payroll and HR services for other companies, has said that their payments flow through SVB, so any company that uses Rippling will probably have a delay in payment.

So, what does this mean for the future of banking, especially for startups and entrepreneurs? It’s hard to say. SVB’s downfall was due in part to its reliance on long-term investments, which didn’t pay off when interest rates rose. It’s possible that other banks that use a similar strategy could be at risk as well.

However, it’s important to remember that SVB was a unique case. The bank was heavily focused on the technology industry, and its close relationships with venture capitalists made it vulnerable to market swings. Most larger banks have relatively smaller amounts of unrealized losses, but smaller regional banks may be at risk, which is why the ETF of regional banks has dropped so much.

In conclusion, the downfall of SVB is a cautionary tale for banks that rely heavily on long-term investments. It’s also a reminder that even the most successful banks can fail if they don’t adapt to changing market conditions. As for the startups and entrepreneurs who relied on SVB, they will have to find new banking partners to help them grow their businesses.

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