Behind the collapse of the venture tech industry’s favorite bank 🏦

Silicon Valley Bank was made for start-ups. It was their go-to bank and flourished during the COVID tech boom, riding on the recommendations of VC firms.

Money from IPOs and SPACs and other sources was flowing in to the tune of $130bn. SVB invested these deposits mostly in longer-dated, fixed rate bonds—perhaps because they promised a few extra tenths of a % in interest compared to short-term or variable rate. It made sense to do so, assuming interest rates would stay low for a few years.

Then, in 2022, the Fed started hiking interest rates dramatically.

This hurt badly, because a bond yielding 2% interest just doesn’t look so hot next to a bond yielding 5%. To hide these upsetting but (theoretically) temporary dips in the value of their bonds, SVB characterized most of them as “held to maturity”. This is sort of like taking your house off the market knowing that prices will eventually recover. In the meantime, you can pretend it’s worth what you bought it for.

It’s legal and not a bad strategy, if you can survive until then.

But on March 8th, SVB announced it had sold virtually everything it had that wasn’t “held to maturity” for a $1.8bn loss, because it needed the cash. And more investor money. Likely because the environment had changed—start-ups were withdrawing cash now, not bringing it in. The announcement caught everyone’s attention.

There’s stories of a staring contest between CFOs. As one put it, “I’m fine if they don’t draw their money, and they’re fine if I don’t draw mine.”

But then there were the alleged technical difficulties.

No one likes it when their bank has technical difficulties, much less financial problems. One could sort of understand why Peter Thiel might decide to withdraw his fund’s deposits from SVB and advise others to get out. There was a mad rush for the exit, and by the morning of March 10th, SVB had seen withdrawal requests adding up to whopping 25% of its total deposits.

It couldn’t make good on them.

(Now, fortunately, the Fed and FDIC have stepped in to make depositors 100% whole. But is there ever just one roach in the kitchen?)