Silicon Valley Bank collapse leaves startups scrambling to pay workers

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SAN FRANCISCO — Employees at start-up Flow Health didn’t get their paychecks Friday morning.

When deposits didn’t go out, those in human resources were confused. But Alex Meshkin, the CEO of Flow Health, said he immediately knew what had gone wrong.

The company uses another start-up called Rippling to run its payroll process. “I said, ‘I guarantee you they’re in Silicon Valley Bank. We’re screwed,’” he said.

Silicon Valley Bank, lender to some of the biggest names in the tech industry, collapsed on March 10. Regulators moved quickly to avert a meltdown. (Video: Reuters)

Flow Health employees were just a fraction of the thousands of people likely to be affected by the stunning collapse of Silicon Valley Bank on Friday, marking the second-largest bank failure in U.S. history and sending shock waves through the tech and finance worlds.

While the government took over the bank, which is known for lending to start-ups but also does private banking providing mortgages and other services, deposits are only insured up to $250,000. The bank’s assets totaled more than $200 billion. Around $42 billion was withdrawn from the bank on Thursday alone, according to California’s Department of Financial Protection and Innovation.

Start-up founders worried they’d be forced to lay off workers if money held by the bank was frozen or lost. Large companies such as connected TV provider Roku and video game maker Roblox warned investors that they had hundreds of millions in cash deposited with Silicon Valley Bank that may be in jeopardy. And venture investors canceled planned meetings with start-ups, unsure of the knock-on effects for the industry. Other start-ups publicly assured customers they weren’t exposed.

Silicon Valley Bank had relationships with more than half of the venture-backed companies in the United States, according to its website.

If there isn’t a quick rescue of the bank, the consequences could be dire for many start-ups and the broader tech scene, said Garry Tan, chief executive of Y Combinator, one of the most important Silicon Valley start-up incubators.

“This is an extinction-level event for start-ups and will set start-ups and innovation back by 10 years or more,” Tan said.

Silicon Valley Bank did not respond to a request for comment. The Federal Deposit Insurance Corporation, which took over the bank Friday, said Silicon Valley Bank had about $209 billion in total assets and about $175.4 billion in total deposits as of the end of December, but that it was unclear how much the bank had on its balance sheet now.

Deposit holders would be able to withdraw up to $250,000 on Monday, the FDIC said. For those with more than that deposited, it provided a hotline number to call.

The collapse of Silicon Valley Bank adds to a challenging period for tech companies, following months of plummeting stock prices and tens of thousands of layoffs. After years of rapid growth, things have slowed and become less stable — an apparent disconnect with the broader U.S. economy.

The sudden collapse of one of the industry’s key institutions is stoking fears that the sector’s economic situation may be worse than suspected and sending tech leaders scrambling to deal with the aftermath of losing a key part of the financial plumbing the industry relies on.

“There’s a bunch of companies that can’t make payroll because their money is locked up in SVB,” said Brad Hargreaves, who co-founded the coding boot camp General Assembly and sits on several start-up boards. “I think there will be layoffs coming from this.”

Founded in 1983, Silicon Valley Bank has served the tech industry during the ups and downs of the past four decades. During the start-up boom that came after the 2008 financial crisis, the bank grew rapidly, trading on its reputation as catering to the needs of fast-growing, ambitious start-ups. Companies that raised money from venture capitalists deposited it with the bank. Venture capitalists themselves banked with the firm too, loaning money to fund investments in new start-ups. And tech workers and executives used the bank for their own personal wealth management and to fund mortgages.

“They view themselves as a community lender for the entire ecosystem,” Hargreaves said. “The best analogy would almost be a credit union in a small town, except way bigger than that and imagine the small town is tech.”

The bank required some clients to work exclusively with it to access loans, further centralizing its role within the tech ecosystem. One founder who spoke on the condition of anonymity to preserve his relationship with the bank said he had previously spread his money across multiple banks until a deal with Silicon Valley Bank forced his company to put all its cash there.

Concerns about the bank’s collapse spreading to other firms and the broader economy reverberated around Wall Street and Washington on Friday. Treasury Secretary Janet L. Yellen said she was monitoring the situation and Cecilia Rouse, chair of the White House Council of Economic Advisers, said that bank stress tests instituted in the wake of the 2008 crisis meant the financial system was prepared to “withstand these kinds of shocks.”

Shares in other regional banks fell, including First Republic Bank, which also serves the Bay Area and caters to start-ups and wealthy tech employees.

One Bay Area start-up founder anxious about the fallout from Silicon Valley Bank went on Friday to First Republic Bank to transfer his money to Chase, a much bigger firm, to beat what he feared could be a run on deposits. The founder, who spoke on the condition of anonymity to avoid jeopardizing his relationship with the bank, tried to visit a more obscure location in Oakland but said there was still a line outside the door of customers requesting wires.

“I just raised a lot of money, and I can’t believe it could just evaporate,” he said in a text message sent from a conference room at the bank, waiting for the wire to process. Some of his friends who are start-up founders and banked with Silicon Valley Bank “think they’ve lost everything but $250,000,” he wrote. His transfer ultimately went through before the cutoff.

Because Silicon Valley Bank served start-ups and wealthy individuals, the majority of its deposits were above the $250,000 that is federally insured, raising the prospect that billions of dollars worth of money might not be recovered. In the past, the government has paid out sums larger than $250,000, but it’s unclear whether that will be the case here.

On Friday, Rep. Matt Gaetz (R-Fla.) said he opposed a “taxpayer bailout” of the bank.

The potential financial toll became apparent Friday, as publicly traded companies were forced to warn investors about the risk.

Roblox told investors that about $150 million of its $3 billion in cash was deposited at Silicon Valley Bank. Roku said $487 million of its $1.9 billion of cash was held by the bank. Medical equipment maker iRhythm Technologies said in a filing that $54.5 million of its $213 million in cash and short-term investments was there.

Other companies said they faced serious consequences, without disclosing details. Pharmaceutical company Axsome Therapeutics said it had “material” cash deposits at Silicon Valley Bank and at another bank, but that it believed the second bank’s account and an existing loan would be enough for it to keep funding operations.

One entrepreneur based in San Francisco said he withdrew $250,000 after investors urged him to remove at least some money Thursday, but attempts to wire out the rest of the money failed. The company now has $2 million in funds frozen.

With about 90 percent of his company’s reserves frozen, it is at risk of bankruptcy within weeks. But he knew other start-ups with all of their cash and credit lines now frozen who could fail much sooner.

“That’s my bigger fear right now,” said the start-up founder, who spoke on the condition of anonymity over concerns about revealing the company’s finances. “I’m really hoping investors can bail us out.”

“Everyone I know has their money in SVB,” he added.

Many start-up CEOs are at a loss for how they will pay their employees and run their businesses.

Parker Conrad, CEO of the payroll company Rippling, tweeted Friday that the company was switching its processing bank to JPMorgan Chase and would get money to employees by Monday at the latest. He apologized to employees who didn’t get paid on time.

“You rely on us, and we didn’t deliver. Although payroll is in flight, I know delays of any length have a real impact, particularly for anyone living paycheck to paycheck,” he posted.

Meshkin, the health tech start-up CEO, said before Rippling’s latest update that if the funds don’t make it to workers early next week, the company will need to figure out a way to manually pay their more than 1,000 employees in the United States and Canada, something they don’t currently have infrastructure for.

“We have a lot of angry employees,” Meshkin said.

Shondra Washington, who works as a part-time chief financial officer with multiple companies, said one of her clients worked with Rippling and was waiting for payroll. Other clients used Silicon Valley Bank for their own funds and can’t access their accounts at all.

“We don’t even know where the money is. It’s somewhere in the ether,” she said. “We don’t really know where it is or when it’s coming.”

They’re trying to move their money to other banks, but aren’t able to access it. Some of her clients have been unable to pay vendors. “We’re panicking,” she said.

Michael Coren, Aaron Gregg, Lisa Bonos and Joseph Menn contributed to this report.