A Brinks armored truck stands in front of the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

on wednesday Silicon Valley Bank was a well capitalized institution looking to raise some capital.

Within 48 hours, a panic caused by the very venture capital community that SVB had served and nurtured brought the bank’s 40 years in business to a halt.

Regulators shut down SVB on Friday and seized its deposits in the largest US bank failure since the 2008 financial crisis and the second largest in history. The company’s slide began late Wednesday when it surprised investors with news that it needed to raise $2.25 billion to shore up its balance sheet. What followed was the rapid collapse of a highly respected bank that had grown with its technology clients.

Even now, as the dust begins to settle on the liquidation of the second bank announced this week, members of the venture capital community lament the role of other investors in SVB’s demise.

“It was VC-fueled hysteria,” Ryan Falvey, fintech investor at Restive Ventures, told CNBC. “This will go down as one of the best times the industry has cut its nose off out of spite.”

The episode is the latest in the Federal Reserve’s efforts to stem inflation with its most aggressive rate-raising campaign in four decades. The fallout could be far-reaching, with concerns that startups may not be able to pay employees in the coming days, venture capitalists may struggle to raise funds and an already battered sector could face deeper malaise.

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Shares of Silicon Valley Bank tumbled this week.

The roots of SVB collapse come from dislocations caused by higher rates. As startup clients withdrew deposits to keep their companies afloat in chilly conditions for IPOs and private fundraising, SVB felt short of capital. It was forced to sell all of its available-for-sale bonds at a loss of $1.8 billion, the bank said late Wednesday.

A sudden need for fresh capital following the collapse of crypto-focused bank Silvergate sparked another wave of withdrawals on Thursday as venture capitalists instructed their portfolio companies to move funds, according to people familiar with the matter. The concern: A bankruptcy at SVB could pose an existential threat to startups that can’t tap into their deposits.

SVB clients said they had lost confidence after CEO Greg Becker urged them to “keep calm” on a call that began Thursday afternoon, and the stock continued to tumble, hitting 60% by the end of regular trading. Importantly, Becker failed to assure listeners that the capital increase would be the last for the bank, the person said on the phone.

By Friday, as SVB’s shares continued to sink, the bank abandoned efforts to sell the stock, CNBC’s David Faber reported. Instead, she was looking for a buyer, he said. But the flight of deposits complicated the sale process, and that effort also failed, Faber said.

Falvey, a former SVB employee who launched his own fund in 2018, pointed to the tight-knit tech investor community as a major reason for the bank’s sudden demise. Prominent funds, including Union Square Ventures and Coatue Management, have sent emails to their entire list of startups in recent days instructing them to pull funds from SVB due to concerns about bank runs. Social networks only increased the panic, he noted.

“If you say, ‘Hey, pull out your deposits, it’s going to fail,’ that’s like yelling fire in a packed theater,” Falvey said. “It’s a self-fulfilling prophecy.”

A customer stands outside the closed headquarters of Silicon Valley Bank (SVB) on March 10, 2023 in Santa Clara, California.

Justin Sullivan | Getty Images

Falvey, who began his career in Wells Fargo and advised the bank that was seized during the financial crisis, said his analysis of SVB’s mid-quarter update gave him confidence. The bank was well capitalized and could make all depositors healthy, he said. He even advised his portfolio companies to keep their funds in SVB because of the rumours.

Now, thanks to the bank runs that ended in SVB’s confiscation, those left behind at SVB face an uncertain timetable for getting their money back. While insured deposits are expected to be available soon, the lion’s share of deposits held by SVB have been uninsured and it is unclear when they will be released.

This story is evolving. Check for updates.

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