Venture capital firms on both sides of the Atlantic are urging their portfolio companies to pull money out of embattled Silicon Valley Bank, deepening fears of a flight from the tech-focused bank.
Shares of Silicon Valley Bank fell 60% on Thursday after it said it needed to shore up its capital by raising $2.25 billion in capital from investors including General Atlantic. The company’s shares fell another 60% in premarket trading on Friday.
SVB is a major technology startup bank that has built relationships with the venture capital community over its four decades of existence. Providing traditional banking services as well as financing technology projects, it is considered the backbone of the venture capital industry in the US
Many venture capital funds, including major players such as Founders Fund, Union Square Ventures and Coatue Management, have advised their portfolio companies to transfer their funds from SVB to avoid the risk of being involved in a potential bankruptcy of the bank. According to founders with bank accounts who spoke to CNBC on condition of anonymity, a fund freeze at SVB could be fatal for a cash-burning startup.
Pear VC, an early-stage venture capital firm based in San Francisco, called on its portfolio network to withdraw funds from SVB on Thursday. The Pear portfolio includes the open source Edge DB database and the Gusto payroll management platform.
“In light of the situation with Silicon Valley Bank that you are all watching, we wanted to reach out and recommend that you move any cash deposits you may have with SVB to another banking platform,” said Pear’s Anna Nitschke. CFO, in an email to the founders obtained by CNBC.
“In this market, a larger money center bank (such as Citi Bank, JP Morgan Chase, Bank of America) is best, but in the interest of time, you may want to open bridging accounts faster with smaller banking platforms such as PacWest. , Mercury or First Republic Bank.”
Pear was not immediately available for comment when contacted by CNBC.
SVB did not immediately respond to CNBC’s question on whether it has enough assets to handle startup withdrawals.
Refusal of cryptocentrism Silvergate The bank and the pressure on Silicon Valley Bank this week reminded some of the founders of the 2008 financial crisis, when banks collapsed during the subprime meltdown.
SVB is grappling with a challenging technology funding environment as the IPO market remains cold and VCs remain cautious amid a weakening macroeconomic environment and rising interest rates.
During the tech boom of 2020 and 2021, ultra-low interest rates meant it was much easier for startups to raise capital.
As rates have risen, company valuations have reset and venture capital firms are struggling as the venture capital market slows. Even when funding rounds slow down, startups have to keep burning through the money raised in previous rounds to cover their overhead costs.
That’s bad news for SVB, as it means companies have had to drain deposits from the bank at a time when it is losing money on excess cash invested in US debt securities, which have fallen in price since the Fed raised rates.
Hoxton Ventures, a London-based venture capital firm, is advising the founders to withdraw two months of “burn”, or venture capital, from SVB, which they would have used to fund overhead costs.
In a note to founders on Thursday, Hussain Kanji, founding partner of Hoxton, said: “We have seen some funds convey the view that they remain confident in SVB. We see other funds encouraging companies to withdraw their funds from SVB. let’s see how it will all happen.
“If a self-fulfilling prophecy happens, the risks to you are asymmetrical.”
Speaking separately to CNBC, Kanji said, “The big danger for startups is that their accounts will be frozen while the mess is being sorted out.”
Kanji suggests that SVB could be bailed out by the US Federal Reserve or bought by another firm.
The company hired advisers to explore a potential sale after the bank’s efforts to raise capital failed, sources told CNBC’s David Faber on Friday.