SVB collapse affects not only the coastal tech elite but also small businesses
SVB Bank Collapse: Impact on Small Businesses and Entrepreneurs Across America, Including Strongsuit Founder Lindsey Michaelides.
The collapse of Silicon Valley Bank has sent shockwaves through the tech industry. Silicon Valley Bank (SVB) experienced a bank run on March 10, 2023, which resulted in the second-largest bank failure in American history and the biggest since the 2007–2008 financial crisis. Most of the bank's clients were large corporations and affluent individuals with large deposit balances; at the end of 2022, 89 percent of the bank's US$175 billion in deposit liabilities would exceed the maximum amount that the Federal Deposit Insurance Corporation could insure.
SVB was a commercial bank established in 1983 with its headquarters in Santa Clara, California, and a strong focus on serving clients in the technology sector. SVB provided funding to nearly half of the U.S. venture-backed healthcare and technology firms, and its clients included Block, Inc., Cisco, Fitbit, Fitbit, Fitbit, and Airbnb. In addition, SVB offered tech entrepreneurs private banking, unsecured credit lines, and mortgages.
According to the California Department of Financial Protection and Innovation, SVB was in "sound financial condition" as of March 9, 2023. However, earlier in the year, more short sellers focused on SVB. The COVID-19 pandemic's effects on science and technology were a significant factor in the bank's deposits rising from $62 billion in March 2020 to $124 billion in March 2021. As the bank sought a higher return on investment than was possible with shorter-term bonds, most of these deposits were invested in long-term Treasury bonds.
As interest rates increased during the 2021–2023 inflation spike, the value of these long-term bonds decreased, making them less desirable as investments. As a result, Mark-to-market accounting unrealized losses for securities held to maturity at SVB as of December 31, 2022, exceeded $15 billion.
Companies like video game maker Roblox Corp RBLX.N and streaming device maker Roku Inc ROKU.O reported having hundreds of millions of dollars in deposits at the bank
As private financing became more complex, startup businesses withdrew deposits from the bank to fund their operations. As a result, the bank sold all of its securities that were up for sale to raise the money required to pay for the withdrawals, incurring a $1.8 billion loss in the process.
According to some banking experts, if not for the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was passed in 2018 and reduced the frequency and number of required stress testing scenarios for banks with under $250 billion in assets, the bank would have managed its risks more effectively.
According to reports, Moody's Investors Service warned SVB Financial, the bank's holding company, the week before the collapse that its unrealized losses could result in a downgrade of its credit rating. SVB declared on March 8, 2023, that it had borrowed $15 billion, sold investments valued at over $21 billion, and would hold an urgent stock sale to raise $2.25 billion. The bank took action, but on March 8, Moody's downgraded SVB. Many venture capital firms received requests from investors for their portfolio companies to withdraw their bank deposits.
SVB's collapse could have far-reaching consequences, as the bank had branches in several countries, including China, Denmark, Germany, India, Israel, and Sweden. Startups across the globe may be wiped out without government intervention.
By March 9, customers had taken out $42 billion, leaving the bank with a $958 million negative cash balance. SVB's share price fell precipitously until the morning of March 10 saw the implementation of a trading halt. Examiners from the Federal Reserve and the Federal Deposit Insurance Corporation arrived at the offices of SVB to assess the company's finances, and several hours later, the California Department of Financial Protection and Innovation issued an order taking possession of SVB, citing inadequate liquidity and insolvency, and appointed the FDIC as a receiver. The failure of SVB was the second-largest in American history and the most significant bank failure since the financial crisis of 2007–2008.
SVB Collapse Affects Small Businesses and Working Families Across America
The collapse of Silicon Valley Bank (SVB) may seem like a problem that only affects the wealthy coastal tech elite, but that couldn't be further from the truth. Instead, small businesses made up of hard-working people across the country are feeling the impact, including parents trying to put food on the table and make modest mortgage payments in the midwest.
One such individual affected is a woman named Lindsey Michaelides. She and her husband struggled as working parents to manage everything after their second child was born in 2017. Seeking advice from friends and mentors, they found no answers, only more stories of struggle. So, Lindsey started Strongsuit in 2018 with only an idea and lots of hustle, aiming to help working families manage all the chaos and feel present and on top of it without sacrificing their careers.
Even though Lindsey was an equal wage-earner to her husband, she quit her job and wrote the first $10K check to start Strongsuit. They could cover 18 months of no income from her, but it was a massive bet for them, and it had to work. Lindsey hustled hard, and Strongsuit had to pay customers immediately. She hired a team but didn't pay herself, and soon after, she found out she was pregnant again.
Despite a high-risk pregnancy, Lindsey grew the business and secured their first investor shortly after her twins were born. After that, she continued to raise more money and started paying herself, even though her pay was a small fraction of what she used to make. She continued growing the business while raising four kids under five, but the pandemic hit.
Lindsey's infant preemies were vulnerable, and her infant business was vulnerable too. She was scared, but she kept building, and Strongsuit pivoted its go-to-market strategy. Lindsey avoided layoffs, pinched pennies harder at work and home, and the team continually sacrificed for the vision. They continued to grow, and Lindsey sold Strongsuit's idea to a few brilliant leaders who joined the founding team. Finally, things started to click, and they couldn't keep up with demand, so they needed money to grow.
Lindsey started raising funds again in the spring of 2022, and investors were excited. She hoped to raise $3M to achieve their plan, and almost all of it would go to hiring engineers. In the most challenging market in over ten years, Lindsey raised $3M+, even though she was a female founder with no background in tech, building a company in Ohio. The odds were beyond slim, likely less than 1%, but she did it. Yet again, she made the impossible happen, and they closed the funding in late 2022.
With the new funds, Strongsuit hired a team of five brilliant engineers, all based in Ohio. They were excited to help grow the local tech ecosystem and secure the business's strong cash position during economic uncertainty. However, this week, Lindsey learned of SVB's precarious situation. As a precaution, she logged into her SVB account. She wired all their funds to a small account she maintained at a different bank, leaving only $250K to cover outstanding expenses, including payroll set to pay the team on Friday.
Unfortunately, the wires had not been processed on Friday morning, and then SVB collapsed and was taken over by the FDIC. Lindsey spent the day ensuring her team would be paid and talking with other founders in the same boat. But, unfortunately, all their money was locked up, and very little was insured. Lindsey doesn't know how this will end, but she knows that the financial future of Strongsuit, her team, and her family are at risk with the collapse of SVB.
Confirm.com among Silicon Valley Bank depositors rushing to pull funds before bank collapse
One of the depositors at Silicon Valley Bank who hurriedly withdrew their money before regulators took over the bank was Confirm.com, a San Francisco-based company that manages employee performance. David Murray, one of Confirm's co-founders, claims that the company's decision was influenced by an email from one of its venture capital investors, who urged the business to withdraw its funds "immediately" due to indications of a bank run. This caused more money to flee, ultimately contributing to the bank's failure.