Bloomberg Línea — Famous for being used by VC funds and technology companies, SVB (Silicon Valley Bank) was the bank in which many Brazilian startups with global investors kept their incoming funds.
The bank, which collapsed last week in the United States, was founded 40 years ago to serve Silicon Valley companies. Much of tech companies have somehow gone through SVB.
But there was a breakdown in confidence on Wednesday after the bank announced it needed to raise $2.25 billion to rebuild its capital base.
SVB has made losses on long-term bonds, purchased during the period of rapid deposit growth in the era of record VC investments, particularly in 2020 and 2021.
As the Federal Reserve raised interest rates, the bank had unrealized mark-to-market losses of more than $15 billion at the end of 2022 for held-to-maturity securities, almost equivalent to SVB’s entire $16.2 billion equity base.
To replenish its capital, SVB decided to announce a share sale, which sparked a bank run from its hitherto loyal - but undiversified - client base of startups and VC funds. Bailout requests that reached $42 billion on Thursday alone sealed its fate.
“At a certain point, the bank realized that it might run short of cash to meet its commitments and when it put out the notice that it would raise money, everyone ran out. There was a word of mouth from customers saying ‘it’s going to break down’ and when everyone tried to bail it out at the same time, it actually broke down,” said Roberto Kanter, an economist, and professor of MBAs at Fundação Getulio Vargas.
It was one of the biggest bank runs in the United States in more than a decade, according to a regulatory document released on Friday, reported by Bloomberg News.
Why SVB was chosen by startups and VCs
SVB was a key institution for the venture capital ecosystem for decades. The Silicon Valley bank was chosen by venture capital investors to transact company investments because of its suitable operating structure for the funds.
Startups from Latin America usually need a legal structure that includes a company in the Cayman Islands and another in Delaware, in the United States, to receive investments from foreign funds.
Opening an account in a US bank is not simple, considering that foreign startups are usually from founders without a Social Security Number.
The challenge for Brazilian startups lies in the holding company incorporated in the Cayman Islands since many US banks decide not to work with this type of structure.
The industry estimates that 90% of Brazilian startups that have offshore companies had money in SVB, as it was the bank that the VCs themselves indicated when making investments, since it was where they had money too.
VC funds from different countries - such as Peter Thiel’s Founders Fund and Brazilians Canary and Upload - advised founders of startups in their respective portfolios to withdraw, sources told Bloomberg News and Bloomberg Línea. Canary and Upload declined to comment.
Early Friday afternoon in New York time, the California Department of Financial Protection and Innovation shut down SVB and appointed the Federal Deposit Insurance Corp (FDIC) as liquidator, after 44 frantic hours in which the customer base of startups and funds withdrew their deposits while they could.
“Seeing that there was not going to be any left, the FDIC had to step in to do an intervention,” Kanter said.
Late Sunday, the US Treasury, the Federal Reserve, and the FDIC announced they would cover all customer deposits in SVB, not just the insured $250,000 limit, preventing a contagion on the US financial system.