Silicon Valley Bank and the Strain on Startups

By John Pennett

Silicon Valley Bank has long been a stalwart of the technology industry eco-system, supporting entrepreneurs on a global basis. Their support was much more than banking; they were omnipresent at tech meet-ups and events, playing the role of master connector and content provider. Most everyone was envious of the depth of their relationships with VC and private equity firms.

The events of the past few days are alarming to say the least. News of Peter Thiel’s venture capital Fund Founders Firm advising clients to withdraw their deposits from Silicon Valley Bank has hit the main street press; therefore the possibility of a run on the bank’s cash is front and center of the technology community and the funders that support that community. We have had numerous conversations over the past few days with clients and friends – asking about whether to withdraw cash, increase or decrease borrowings against the SVB credit facility and opening of other banks accounts.

Diversification is always a good idea (regardless of current market conditions); however, it is not always so simple:

• For many companies the intertwining of the lending and banking relationships makes any movement difficult.
• Lending agreements and lines of credit often contain restrictions and covenants that need careful attention.
• Getting new banking relationships takes time to complete the KYC process.
• Companies are seeking guidance from board members, accountants, attorneys, etc. -- and that takes time to discuss and analyze options.
• So many international companies have a single bank account in their non-home country, so the only option is to return cash back home – and that may have significant tax implications.

It has been reported the SVB is seeking a buyer and its deposits are now under the protection of the Federal Deposit Insurance Corp. (FDIC).

So an already tenuous capital market environment for start-ups just got more difficult. Boards of directors have already been suggesting cash conservation, and we expect this to approach to continue.

We encourage companies to have the communications with stakeholders that can provide insights and useful information, including your advisors, who can help you think about the financial statement disclosures (credit risks and concentrations, FDIC insurance, etc.) and reporting to the Board.