Entrepreneurs and venture capitalists are accustomed to dealing with a dozen types of risk daily, from a key employee defecting to a flagship drug flunking clinical trials, to not being able to show sufficient progress to unlock the next round of funding.
One risk they weren’t used to planning for? Their bank deposits going poof.
For those who live in startup land, the events of the last four days felt a little like a replay of March 2020 and the emergence of COVID. When Silicon Valley Bank’s stock started plunging on Thursday after it announced it was selling long-term assets and stock to shore up its balance sheet, local entrepreneurs and their backers who had accounts with the bank started buzzing about what to do. Sit tight, or get out? (Disclosure: a nonprofit the author helped start had an account at SVB, and SVB had been a donor to that nonprofit in 2022.)
“The likelihood that SVB will ‘collapse’ is extremely low,” wrote one Boston VC, Bob Mason, in an e-mail sent to his entrepreneurs at 5:46 p.m. on Thursday. He decided to sit tight. Another, Semyon Dukach of One Way Ventures, was trying to extract almost $6 million that was in his firm’s account. After lots of “clicking and trying and reloading pages” on the bank’s website, he says, he succeeded around 5:30 p.m.
Even Friday morning, “there were communications from the bank that said ‘hang in there — don’t take your money out,’” says Maia Heymann, cofounder and general partner at Cambridge VC firm Converge.
Susan Hunt Stevens, chief executive of Boston startup WeSpire, says her contact at the bank said Friday morning a wire transfer “would be fine” and that they’d “keep an eye on it.” Hunt Stevens went to the Wellesley office of the bank to make sure the transfer would happen — and was in line outside when police and representatives of the Federal Deposit Insurance Corporation showed up to lock the doors.
Hunt Stevens ended the week like many other Boston entrepreneurs and venture capitalists — not knowing whether they’d get any more than the $250,000 the FDIC insurance covered.
By Sunday evening, when I brought together a group of entrepreneurs, VCs, and an attorney for an online conversation (hosted on LinkedIn) about the potential impact on the local ecosystem, there was a sense that businesses might be able to get their hands on 50 percent or 60 percent of their deposits sometime this week, if SVB was either acquired or its assets were sold off. But many had already assembled a list of cuts they’d have to make. And good luck to anyone in the midst of trying to raise a new round of venture capital, said Michael Greeley, cofounder of the Boston VC firm Flare Capital Partners.
The discussion ran on Sunday from 5 p.m. to 6:30 p.m., and throughout it, everyone was checking their phones to see if an alert had popped up. Might another bank purchase SVB? Might it be a tech player trying to get into financial services, like Apple or Google?
By 6:15 p.m., the FDIC, Treasury Department, and Federal Reserve put out a statement that they’d ensure access to all of the funds depositors had stashed with SVB. Suddenly, it felt like everyone had just woken up from a shared nightmare; all of that planning for what to do in the event of a cash crunch this week was moot. Was this whole thing just an intense stress test of everyone’s nerves?
“For venture funds, I think you will see a marked increase in risk analysis, to be better prepared for these shocks,” Greeley said. “And for portfolio companies, they have to be diversified” in terms of where they keep their money. “It’s a teachable moment,” he said.
Late Sunday, Ben Hron, a partner at the law firm Brown Rudnick, followed up with an e-mail noting the government’s decision to backstop all of the deposits at SVB “only solves the immediate liquidity crisis; it does nothing to address how to replace all the services SVB provided that greased the gears of the startup ecosystem.”
Ric Fulop, chuef executive of 3-D printing company Desktop Metal, noted that while no one has emerged as a buyer for SVB, “they had lots of good people” who suffered because of bad investment decisions made by the bank’s treasurer. “I think we’ll see them starting smaller banks to serve startups, and that’s a good thing,” he said.
“The lesson for VCs is to operate more independently of each other and less collectively,” says Eric Janszen, a serial entrepreneur in Lexington. He notes that many investors had both encouraged their startups to bank with SVB, and then recommended en masse that startups consider withdrawing their money on Thursday. “No one wants to buy SVB for the same reason no one wanted to buy [Boston law firm] Testa, Hurwitz & Thibeault after the 2000 tech bubble collapsed. The firm was too narrowly focused on a single client segment, a segment in decline. SVB is similarly dependent on a segment — VCs and VC-funded companies — for depositors that is in a period of decline.”
Mason e-mailed me Monday morning to say everyone in his network was suddenly getting up to speed on ICS — insured cash sweep, a program offered by banks that automatically distributes cash across multiple banks so that it is covered by the $250,000 in FDIC insurance.
All in all, this was a new risk for startups to factor in. “A company should attempt to remove all single points of failure,” or dependencies on one specific provider, Mason wrote. “Now we know this should extend to our banking services.”
Scott Kirsner can be reached at firstname.lastname@example.org. Follow him on Twitter @ScottKirsner.