SEATTLE — Seattle-area tech startups are scrambling to assess the damage after Silicon Valley Bank, a fabled California bank with many Seattle-area tech connections, was shuttered Friday by regulators.
Some local startups reported being locked out of their SVB accounts, raising questions about their ability to pay bills or meet payroll, industry insiders said.
“It’s going to be rough for a few weeks to a few months” for startups that had their operating funds deposited at SVB, said Dave Parker, a veteran Seattle-area founder and investor currently serving as board chair for startups at the Washington Technology Industry Association.
Others worried about the loss of a 40-year-old bank that has been a key player in the Seattle-area startup and tech community.
“They are the banker to technology companies,” said Derrick Morton, chief executive officer at Seattle gaming company FlowPlay and a SVB customer. For Seattle-area startups especially, SVB is “one of the main companies you go to,” said Morton, who estimated that 30% to 50% of Seattle-area startups have worked with SVB at one time or another.
The closure of SVB, the biggest U.S. bank failure since the 2008 collapse of Seattle-based Washington Mutual, could also affect the Washington wine industry, where SVB was a key player.
Many wineries will be locked out of their bank accounts, according to media reports. And 10% to 20% of Washington wineries also relied on SVB to finance inventory, supplies and other expenses, said Erik McLaughlin, CEO of Metis, which advises Pacific Northwest wineries.
“The immediate impact will be a short-term credit crunch where people are unable to access credit for that,” he said.
Phone messages left for the Seattle branch of SVB, in the 901 Fifth building downtown, were not returned.
California regulators closed SVB, the 16th largest bank in the U.S., after tech workers, venture capital-backed startups and other depositors began pulling funds from the bank amid rumors of insolvency that surfaced earlier in the week.
SVB has branches in California, Washington and 13 other states, and provides banking services to “nearly half” of venture-backed U.S. technology and life science companies, according to its website. On Wednesday, SVB had said it was trying to raise capital in part to cover higher-than-expected withdrawals by startups during a broader tech sector slump.
The state appointed the Federal Deposit Insurance Corporation to oversee returning SVB funds to depositors, according to an FDIC statement.
Silicon Valley Bank had around $175.4 billion in total deposits as of Dec. 31, according to the FDIC. But the federal government only insures bank deposits up to $250,000, and the FDIC said on Friday it didn’t know the percentage of uninsured deposits at SVB.
Insured depositors will be able to access deposits on Monday morning, the FDIC said. But uninsured depositors will receive partial payments within the next week and may see additional money as SVB’s assets are sold off, the agency said.
That suggests an uncertain outcome for SVB depositors whose balances exceeded $250,000, which likely includes many of its startup customers in Seattle and elsewhere.
The bank was often where startups deposited funding from venture capital firms and other backers, said Parker. The typical startup’s account might have funds for 12 to 18 months of “runway,” or day-to-day operations, Parker said — funds that are now frozen.
Companies “who had a year-plus of runway in the bank … all of a sudden, you have $250,000, until the FDIC figures it out,” said Parker, who works with five startups that banked with SVB. “And if your payroll next week is $200,000, you better find some alternative financing options.”
That stress could be fatal for startups that were already struggling.
“Some of the [firms] that were already on the bubble just won’t make it,” Parker said.
At a Thursday meeting of a Seattle-area tech networking group, four of 10 tech CEOs “were getting calls from investors and board members to get their money out [of SVB] ASAP,” said R. Joe Ottinger, a tech founder and CEO of Innovate Leadership Network. “Two were successful. If that statistic holds up, it is a disaster for companies in the ecosystem.”
Finding alternative financing options seems to have been a top priority for venture capital firms whose “portfolio” startups were using SVB.
“The investors and our team spent considerable time yesterday helping our founders get through this situation and we are continuing to focus on this today,” said Erika Shaffer, a spokesperson for Madrona Venture Group, a Seattle- and Silicon Valley-based VC firm with a large tech portfolio.
Shaffer said that Madrona banks with SVB but “we keep low balances there.” She also confirmed that some of Madrona’s clients also bank with SVB and noted that two calls Madrona has had with founders and financial leaders since the closure each drew more than 100 people.
The FDIC is reportedly looking for a buyer to take over SVB and restore operations.
In the meantime, other banks are picking up the slack. According to CNBC, Brex, a fintech startup, received “billions of dollars in deposits from SVB customers” on Thursday after major venture capital firms advised their startup clients to abandon SVB.
Other more traditional banks, including JPMorgan Chase, Morgan Stanley and First Republic, also saw “heightened inflows” Thursday, CNBC said.
But SVB’s role in the startup community went well beyond banking services, some industry insiders say.
The company was a source of so-called venture debt, or loans for startups that had already secured some venture capital, said Morton and others. “A bank like Silicon Valley Bank will see that you have … the confidence of investors to go raise money, and will give you a loan based on that,” Morton said.
SVB also used its relationships with VC firms to help startups attract funding.
“If you’re a startup using Silicon Valley Bank, it gives the investor a high degree of confidence, because they know it’s a good reputable bank they’re dealing with and that the startup is genuine,” said a local tech executive whose company has been a SVB customer.
The executive asked to remain anonymous because they weren’t authorized by their employer to speak on a subject regarded as sensitive.
That role may not be filled quickly, said FlowPlay’s Morton.
“I’m not aware of anybody else that was filling that niche in Seattle,” he said. “It will be mostly Bay Area companies.”
Parker is more optimistic, noting that other banks, including WaMu-inheritor JPMorgan Chase, have also been developing expertise in startup finance. But for years, he says, SVB was “the only game in town.”
McLaughlin, with Metis, sees a similar impact among former SVB customers in the wine sector. “There’s plenty of lending available,” he said. But “there are few lenders with the level of expertise that SVB has, so that’s the real loss.”
