The fallout from Silicon Valley Bank is just beginning

After the collapse of Silicon Valley Bank last week, many companies and entrepreneurs have taken a flight to — at least perceived — safety. That means the biggest banks have received more deposits: JPMorgan Chase, Bank of America, Citigroup and Wells Fargo.

“Everybody’s asking, ‘Where should we bank?’ Where is it safe to bank?” said Ryan Gilbert, founder of Launchpad Capital Silicon Valley Business Journal. “When you think you’re banking with the safest bank in your ecosystem and they’re gone overnight, you realize it’s impossible to predict an earthquake.” He moved his account to Chase.

“Where should we bank? Where is it safe to bank?”

Startups like Brex, Mercury and Meow have also benefited. Brex specializes in corporate credit cards. Meow, letting people earn interest on government bonds, among other services. (Meow also accounts for people at BNY Mellon Pershing, another big bank.) “We’re inundated with inbox and working non-stop,” Meow CEO Brandon Arvanaghi told me in a phone interview. It’s not just startups or customers from SVB, although that was the initial wave, he says.

“Everyone is starting to think about counterparty risk,” says Arvanaghi, which is the risk that someone you’re making a deal with won’t hold up their end of the deal. If a bank fails, the FDIC is not obligated to honor its loan covenants, for example. In SVB’s case, the bank also said it would meet its debt obligations — not with certainty a week ago! — and even makes new loans.

Some companies put capital in multiple banks as a way of hedging their bets. But that’s not exactly ideal either. Banks tend to pay more attention to customers who keep a lot of money in their accounts, says Matt Cohen, VC at Ripple Ventures in Toronto. Additionally, it is very difficult to spread payroll across multiple accounts.

The long-term results here are difficult to sort out. SVB will likely be sold, either in whole or in parts, though probably not to a major bank. Cohen told me he worries that the losers in all this will be the regional banks, and that when the dust settles, the big banks will simply have grown.

“We don’t know how many of the big banks want startups to bring them.”

What this means for the startup economy is unclear. Startups look different from other businesses because they generally burn capital — there’s usually a big infusion of money when the account is opened that gradually dwindles. Mature companies, on the other hand, have more money. And SVB was more willing to work with start-ups than most other banks. “We don’t know how many of the big banks want startups to bring them in,” says Arjun Kapur, co-founder of Forecast Labs.

Kapur told me he expects to see more attention on startups and more belt-tightening. Startups were already cutting costs in response to the weirdness that’s been plaguing the economy for the last year — perhaps it’s reasonable to expect companies to spend less on marketing, among other things, until everyone knows what’s actually going to happen.

It could also mean more layoffs, says Tanner Hackett, CEO of Counterpart Insurance, which offers insurance to small businesses. If businesses struggle to raise new rounds of funding or access new debt in the wake of SVB’s failure, there will be greater urgency to find a path to profitability, he told me. He expects to see businesses take a conservative approach to managing their money.

Then there is the issue of the Federal Reserve. The Fed has aggressively raised interest rates to try to control inflation. The collapse of SVB, along with crypto banks Silvergate and Signature, may prevent the Fed from continuing to raise interest rates — or at least slow the speed at which they rise.

Meanwhile, the VCs are scrambling

The Fed was also the supervisor of Silicon Valley Bank, a job where it appears to have failed, former Fed Governor Daniel Tarullo said. Bloomberg. It’s unclear how much of what happened at SVB can be attributed to a 2018 rule change that loosened requirements for regional banks, though the Fed is investigating itself and will have a report in May.

“We must have humility and conduct a careful and thorough review of how we supervised and regulated this firm,” Michael Barr, who will lead the review of the Fed’s actions, said in a statement.

Meanwhile, the VCs are scrambling. A statement from 600 VC firms called the bank’s performance “deeply disappointing” and encouraged holding companies to resume banking with SVB.

Peter Thiel’s Founders Fund told its companies to pull their money, and while it wasn’t the only company encouraging the withdrawals, Founders Fund partner Trae Stephens appeared to confirm that the group had a key influence on the bank’s course. There are also rumors that Thiel deliberately bet against SVB. That’s probably why someone at Founders Fund knocked Worthy for damage control: someone — I can’t imagine who! — wanted everyone to know that Thiel was not part of that decision.

Anyway, the blame game continues apace as it wasn’t just the Founders Fund that stabbed SVB. “Further speculation is that both Sequoia and a16z followed Thiel’s lead and urged their portfolio companies to pull their money out of SVB,” William Cohan wrote at Puck. “There were also reports that as early as December, Fred Wilson, the dean of the New York venture capital industry at Union Square Ventures, began telling its portfolio companies to leave SVB.”

The volatility may not be over. Now Credit Suisse looks shaky — and while it’s not a financial institution as focused on the tech world as SVB was, it’s big enough to make waves across the world of money. Switzerland’s central bank has stepped in, saying it will provide liquidity if needed, but nerves appear to be raw in the banking world in general. A problem with the banks? They can yield more bank runs.

“I’d like to formally thank my colleagues in the venture community, whose stellar leadership over the past 48 hours has fueled a surge in deposits at Silicon Valley Bank, ultimately turning around one of the most important institutions in our ecosystem,” he said. Brad Svrluga, seed investor, on Twitter. “The ultimate failure was from hysterical social media incitement by VCs that undermined our shared ecosystem. It was a stunning failure of leadership.”

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