by Jeff Domansky
The canaries were singing loudly in the financial industry coal mine long before SVB collapsed. Who knew? Who acted in advance? And who caused the prominent fintech banker and lender to topple?
To answer those questions – short-sellers knew, as did some VCs. Several VCs and their clients started moving money out before the Friday shutdown. Social media chatter and speculation on Twitter mushroomed. And, it looks like SVB itself caused the run on the bank with a poorly executed strategy to dispose of poor-performing assets matched with an ill-conceived communication strategy.
The dominoes were lined up and simply needed a shove to cause a firestorm of actions, reactions and SVB’s closure on Friday.
Actions before reaction
Analysis by S3 Partners showed by March 3, a week before the collapse, short-sellers had pushed bearish interest to a peak of 78% of shares outstanding, its highest in a year.
A downgrade by Moody’s loomed. With advice from Goldman Sachs, SVB planned to sell $21 billion in poor-performing bonds at a $1.8 billion loss and raise new venture capital from General Atlantic as well as a planned public sale of a new convertible bond.
The resulting communications by SVB did not ease concerns but instead amplified and escalated them. The message shifted from selling some assets and raising new capital to the possibility of selling itself to a better-capitalized buyer.
Several VCs pushed concerns publicly and privately
VCs and startups grew concerned and, in a near-panic, account holders began withdrawing deposits so fast, the bank had no option but to shut down operations.
SVB competitors such as Mercury, Series, Brex, and Arc reported hundreds of millions of dollars flowing into their coffers overnight, with phones ringing off the hook with new account opening applications from concerned VCs and fintechs.
Bloomberg reported Peter Thiel’s Founders Fund advised companies to pull funds from SVB over concerns about financial stability.
Fintechs will struggle to meet payments and payroll
When it moved into bankruptcy Friday, accounts were frozen temporarily. Some founders were lucky to move some funds elsewhere before assets were frozen, while others are in limbo as the FDIC takes over Monday to manage operations and figure out the next steps for SVB and its customers.
Depositors are covered up to $250,000 by FDIC, but many fintechs spend that much on cloud services monthly, let alone payroll and benefits for thousands of employees. As a result, some startups with large cash positions from last year’s “easy money” now find themselves stuck until government regulators sort out SVB.
Unicorns and smaller startups alike have a cash flow problem and an even bigger challenge trying to find short-term bridge financing among so much uncertainty.
Those startups able to move deposits before the shutdown will feel very fortunate, while others still with deposits at SVB struggle with a challenging Monday start to the week.
The early warning signs were there long before SVB collapsed. Let’s hope other canaries singing in the fintech coal mine don’t turn into a murder of crows. Meanwhile, the asset-hunting vultures are circling overhead.
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