(CTN News) – A run on the embattled Silicon Valley Bank has deepened fears of a run on venture capital firms on both sides of the Atlantic.
Stocks of Silicon Valley Bank plunged 60% Thursday after the company revealed that it needed to raise $2.25 billion from investors, including General Atlantic. Stocks of the company fell another 60% in premarket trading Friday.
It has cultivated relationships with the VC community over the past four decades of its existence, making it a major bank in the technology startup space. It provides banking services as well as funding for tech projects, making it an essential part of the U.S. venture capital industry.
A number of VC funds, including major players like Founders Fund, Union Square Ventures and Coatue Management, have advised their portfolio companies to move their funds out of SVB. A frozen account at SVB could be deadly for a money-burning startup, according to founders with accounts at the bank who spoke anonymously to CNBC.
The San Francisco-based early-stage VC firm Pear VC urged its portfolio network to withdraw money from SVB on Thursday. Pear’s portfolio includes open-source databases Edge DB and Gusto, a payroll management platform.
Based on the Silicon Valley Bank situation, which we are sure you are all watching, we want to reach out and ask you to move your cash deposits to another banking platform,” wrote Anna Nitschke, Pear’s chief financial officer, in an email to founders obtained by .
There are a few smaller banking platforms that might be able to provide interim accounts faster, such as PacWest, Mercury, and First Republic Bank. Large money center banks (examples: Citibank, JP Morgan Chase, Bank of America) are the best fit for this market, but smaller banking platforms could provide interim accounts sooner.
Asked whether Silicon Valley Bank has enough assets on hand for startup withdrawals, SVB did not respond immediately.
This week’s wind-down of crypto-centric Silvergate Bank and pressure on Silicon Valley Bank reminded some founders of the 2008 financial crisis, when banks collapsed due to the mortgage crisis.
Technology funding remains a challenge as IPOs remain chilly and venture capitalists remain cautious against the backdrop of weaker macroeconomic conditions.
A low interest rate environment in 2020 and 2021 made raising capital easier for startups.
With rates rising, VC funding has experienced a slowdown for venture-backed firms. Startups are struggling to cover overhead even as funding rounds slow.
The Fed’s rate hikes have resulted in falls in the value of U.S. debt securities, which SVB invested in excess.
To cover overhead costs, founders should withdraw two months’ worth of “burn” from SVB, according to Hoxton Ventures.
Hudsein Kanji, Hoxton’s founder partner, said in a note to founders Thursday: “Some funds are expressing confidence in Silicon Valley Bank. Other funds are encouraging companies to withdraw funds from SVB.
A self-fulfilling prophecy puts you at an asymmetrical risk.