How Silicon Valley Bank imploded

• After a bank run of $42 billion in withdrawals, Silicon Valley Bank was shut down by regulators on Friday.
• The failure of Silicon Valley’s beloved bank sent shockwaves through the tech industry. 
• Startup founders have been locked out of their SVB accounts without access to their funds. 

In December of 2022, a New York banker at a large financial institution started getting calls from startup founders asking to open accounts. The founders were banking at Silicon Valley Bank and wanted to switch banks  immediately after being told by their venture investors that the bank was suffering from “liquidity issues.” 

Those secret warnings finally came to light this week as SVB was abruptly shutdown by federal regulators Friday. The failure of Silicon Valley’s beloved bank sent shockwaves through the tech industry and generated a mix of sadness, bewilderment and anger about how such a trusted institution could unravel so quickly and who was to blame for the stunning collapse.

Some blamed top venture investors and competitors for creating unnecessary panic and hysteria on Twitter.

"If you are in a movie theater and it's not on fire and you yell fire, and then you congratulate yourself for being out first while other people are laying on the floor, do you sleep well tonight?" asked Mark Suster, a manager partner at Upfront Ventures, told Insider. 

"I'd like to formally thank my peers in the venture community whose stellar leadership over the past 48 hours triggered a run on deposits at Silicon Valley Bank, ultimately toppling one of the most important institutions in our ecosystem," wrote Brad Svrluga, a VC at Primary, on LinkedIn. "The ultimate failure was from the hysterical urging on social media of VCs who undermined our shared ecosystem. It has been a stunning failure of leadership."

But others said SVB executives had no one but themselves to blame for making imprudent bets with depositors money and relying too heavily on inherently risky startups as the cornerstone for their entire business.

"They should have never gotten themselves into this situation in the first place," said Jamie Montgomery,  co-founder and managing partner of March Capital. "The bank had an exposed position in last the few years and was trying to take more risk than they understood they were taking. The leadership has be accountable."

The go-to bank of Silicon Valley

Silicon Valley Bank has been a pillar of the startup of ecosystem for four decades, acting as the go-to financial institution for VC fundraising and building strong ties with founders and investors alike. The bank was a crucial source of stability during the 2001 dot-com bust and the 2008 great financial crisis. 

Over the years, SVB has worked hard to foster cozy relationships with founders and investors throughout the startup ecosystem, sponsoring lavish events, inviting VCs to its ski chalet, and perhaps most importantly taking chances on unproven companies when more traditional banks may have walked away. 

And many in Silicon Valley say SVB has no equal – doing everything from providing venture debt to personal mortgages to founders who have little banking history and would likely not be approved by other institutions.

"They worked with VCs for 40 years and they knew who to trust and who not to trust," Suster said. 

As a result SVB had a relatively small, highly committed group of depositors. About 37,000 customers accounted for nearly $157 billion or 74% of the bank's assets with an average account size of over $4 million. This helped bolster SVB's reputation as the go-to bank of Silicon Valley in the good times, but exacerbated the crisis when it hit Thursday and Friday. FDIC insurance only protects $250,000 per account, which meant that at the end of 2022, 87% of the bank's $173 billion in deposits were uninsured. 

A disastrous decision to appease Wall Street

In 2021, SVB executives had a problem that would seem to be the envy of most banks: It had a crush of deposits from startups who had raised large funding rounds and needed a safe place to park the cash. Unsurprisingly, SVB saw a massive runup in its assets during the VC feeding frenzy of 2021 as startups closed deals at a dizzying pace and deposited the proceeds with the bank. 

The problem was that the bank couldn't lend out the money fast enough to keep up with the explosive growth in deposits to meet what banks refer to as their "net margin goals."

So, executives searched for yield elsewhere and ended up betting big on mortgage-backed securities, locking in more than $80 billion at a 10-year-rate of 1.56%. 

The decision was "idiotic," according to a former SVB executive who said executives should have not bet on mortgage-backed securities and just accepted a lower yield on shorter-term securities. "They should have told the Street to pound sand and they should have just continued to match the balance sheet investments with the realities of their business, which fortunately changes quickly with startups."

Making matters worse, the board of directors is dominated by venture investors, consultants, and startup founders.

"They didn't have people with banking experience on the board," Montgomery said. "If you're given responsibility to run this iconic Silicon Valley company, you need some humility."

Although the panic that doomed SVB seemed to come on suddenly, there were also apparent lapses in corporate governance for months leading up to the collapse. 

The company's Chief Risk Officer Laura Izurieta, who would have been responsible for preventing the type of crisis that ultimately doomed SVB, stepped down from the role in April 2022 shortly after selling nearly $4 million worth of company stock. For the better part of a year the company was without a chief risk officer and the position wasn't filled until January of 2023. 

When the Federal Reserve hiked rates aggressively to fight inflation, and yields on government bonds crept above 2%, the market value of SVB's mortgage bonds plummeted. This led to the company racking up billions in paper losses, making the bank technically insolvent. Of course they were only paper losses, and SVB could have ridden out the situation without much trouble.

Meanwhile as VC funding dried up and startups strained to extend runway, many of them began pulling money out of their accounts. Deposits at SVB fell from $198 billion in March of 2022 to $165 billion at the end of February 2023. 

A Twitter-enabled bank run

Based on the worry that startups would hasten withdrawals later this year as the tech pullback continued, the bank announced Wednesday it was selling off $21 billion in securities and sought to raise billions more in equity, an announcement that would normally be greeted with little more than a slight drop in the stock price.

"That's not a crisis," said Suster. "They had $500 million already lined up from General Atlantic and they were doing a public offering to raise up to 2.25 billion."

But founders and executives were already rattled by the collapse of crypto exchange FTX and the shutdown of crypto-focused bank Silvergate. The panic only intensified after CEO Greg Becker held a phone call with customers, reportedly warning than the bank had "ample liquidity to support our clients with one exception: If everyone is telling each other SVB is in trouble." 

"The problem is that when they announced that public offering, they were then in a quiet period, there was very little they could say and they just didn't anticipate that a bunch of VCs would suddenly all at once tell all their portfolio companies to get their money out," said Suster. "The problem is that we're in a state of social media where everyone is hearing at the same time, 'oh my God, this bank's going down."

"This was a Twitter-enabled bank run, which wasn't part of the system before," said Tyler Griffin, managing partner at VC firm Restive. 

On Thursday afternoon, some of the technology industry's most high-profile VCs advised their portfolio to move their assets from SVB, including Peter Thiel's Founders Fund, Coatue Management, and Union Square Ventures, as reported by Bloomberg.

"We're telling portfolio companies to look at big banks because they're safer," said Eugene Malobrodsky, an investor at One Way Ventures, which pulled out their funds from SVB on Thursday. "The government will never allow JPMorgan or Bank of America to fail."

Some big banks were quick to jump on the opportunity to finally woo Silicon Valley, which has for decades shunned Wall Street banks in favor of the hometown institution. At least one rival bank, JP Morgan, was calling VCs Thursday urging them to pull their money from the bank, according to multiple sources.

Later Thursday evening, Suster joined an emergency call of what he described as the top 15 technology VCs with the aim of brainstorming ways to save SVB, but by that point it was too late. A few notable ones were excluded, the ones he did not want to name who loudly encouraged their founders to get their money out of SVB. 

On Friday, it was revealed in public filings that Silicon Valley Bank experienced $42 billion in withdrawals at the close of business on Thursday, which is roughly 25% the bank's $161 billion in deposits. 

Ripples throughout tech

On Friday, withdrawals were halted from SVB and the assets of the bank are under the control of federal government, which says it plans to sell down the assets of the bank and work to return money to depositors. In the meantime, many startups were left struggling to pay bills or access the capital they need to run their businesses. 

Ashley Tyrner, founder and CEO of food box delivery startup FarmboxRx, was on vacation with her family in Costa Rica on Thursday when she started to catch wind of trouble at SVB, where her company has millions of dollars in deposits. 

She didn't hear about the impending bank run from her banker or from a customer service rep. Instead, she got a frantic text from her COO, who had read about the panic on TechCrunch. 

"We found out when the media found out," she told Insider. 

Tyrner immediately tried to transfer her company's balance, which totals in the eight figures, out of SVB but was locked out of her online account. Frantic calls to her account representative went unanswered. As of Friday morning Tyrner, like thousands of other depositors, was still trying to pull her money when the FDIC announced it would be stepping in to take over the troubled bank, ushering in the biggest bank failure since the 2008 financial crisis. 

Still without answers or access to the millions of dollars in her account, Tyrner says she's shocked and furious.

"This is ridiculous, I have not come this far to lose eight figures because a CEO made bad decisions about where the bank invests their money," she said. 

VCs expressed regret on Friday for the apparent demise of the storied institution. "SVB was a great partner for many VCs, startups and investors and SVB deserved more support," said VC Spiros Margaris.  "The 'loyalty litmus test' failed, and it will hurt the VC and startup community in many ways for a long time...once the dust settles, we realize what we lost."

Suster agrees. 

"It's going to be harder to bank as a startup going forward," Suster said. "Our industry has shot itself in the foot."