The unexpected collapse of Silicon Valley Bank has resulted in the freezing of tens of billions of dollars belonging to startups and their private equity supporters. The situation has sparked concerns about a potential ripple effect throughout the tech sector. The bank, which claims to be “the financial partner of the innovation economy,” was taken over by the US Federal Deposit Insurance Corporation (FDIC) on Friday to avoid further damage.
Joseph DeSimone, a professor at Stanford University and founder of several startups, expressed his disappointment in the bank’s demise, stating that SVB was familiar with the entrepreneurial community, provided assistance with securing mortgages, gave financial advice to new executives, and even helped with recruitment.
With “nearly half” of all US-funded technology and life science firms banking with SVB, many are worried about the potential consequences of its collapse. FDIC-insured banks guarantee only $250,000 per account. However, according to SVB’s latest annual report, 96% of its $173 billion total deposits were uninsured.
Although the FDIC announced on Friday that all accounts would immediately gain access to the insured portions of their deposits, the rest would depend on how much could be recovered from the sale of the bank’s assets, a process that can take a long time.
Garry Tan, head of the prominent incubator Y Combinator, tweeted that “the actual victims of the SVB fallout are the depositors,” referring to startups with 10 to 100 employees who will be unable to pay their employees and will be forced to furlough or shut down workers as soon as Monday.
There are growing concerns that the collapse of SVB may lead to the destruction of an entire generation of American startups. Activist investor Bill Ackman echoed these fears on Twitter, stating that the bank’s collapse “could destroy an important long-term driver of the economy.”
SVB discussed a possible buyout with several banks on Thursday and Friday, according to several US media outlets, but was unable to find a solution quickly enough.
The fate of other banks favored by the tech sector, including California’s First Republic, whose stock price fell by 30% in two days, is also a concern.