Troubles at Silicon Valley Bank ripple across Boston tech scene
Silicon Valley Bank #SiliconValleyBank
The abrupt failure of Silicon Valley Bank and its takeover by federal regulators Friday sent a shock wave through the Boston technology and biotech communities, with companies and depositors unable to withdraw funds and facing the prospect of not being able to pay bills or make payroll.
One of the largest and most influential bankers to the Boston-area startup community, SVB was taken over by the Federal Deposit Insurance Corp. on Friday and all accounts were frozen until Monday at the latest, when withdrawals will be limited to $250,000 per account.
“I am getting texts and e-mails from all over. We are getting bombarded,” Adrian Mendoza, founder and general partner of Mendoza Ventures in Boston, said of his firm’s companies that have accounts at SVB. “This is going to be tough on a lot of founders and startups, a lesson to be learned.”
The sudden failure, the second-largest in US history, was triggered by SVB’s disclosure on Wednesday of growing losses on government bonds due to rising interest rates. The announcement prompted a run on the bank. As depositors withdrew their savings this week, the bank had to sell Treasury bonds it owned at a loss, eroding its capital.
Customers will get receivership certificates for balances above $250,000 and won’t have immediate access to the funds unless the bank is quickly acquired by a healthy rival.
Silicon Valley Bank referred requests for comment to the FDIC.
All of this means a potentially large swath of local companies — mostly privately held firms backed by venture capital — could have trouble funding their operations or making payroll.
“This hit like a ton of bricks,” said Michael Benezra, managing partner at Boston VC firm Erez Capital. “The way I describe it is a ‘black swan’ event. . . . I called a friend of mine on the West Coast. . . . People [were] waking up to their accounts basically being frozen and their bank going under.”
Benezra said two of his firm’s seven portfolio companies banked with SVB but were able to switch over to Brex, a San Francisco-based financial company, before the FDIC seizure. He declined to name the two startups, but said they are not located in the Boston area.
On Friday, some local firms started disclosing their exposure to the bank.
In filings with federal regulators, Ginkgo Bioworks said one of its subsidiaries had $74 million, or 6 percent of the company’s total cash and cash equivalents, at the bank. X4 Pharmaceuticals said it had 2.5 percent of its cash with SVB.
Cryptocurrency firm Circle Internet Financial told the Globe that SVB was one of six banks it has used to hold the $11 billion of cash reserves for its USDC stablecoin, in addition to $32 billion kept in US Treasuries, according to its filing. Other companies, including Flywire and AirSculpt Technologies, filed disclosures indicating they have loans from the bank.
SVB has a large office in downtown Boston and often hosts events on behalf of startups and venture capital firms. When the office opened in 2020, SVB said it had more than 250 employees in Boston and Newton working on tech and health care banking and related services. In 2021, SVB acquired Boston Private Bank & Trust, which caters to wealthy individuals and has branches in Boston, Cambridge, Wellesley, and Beverly.
The bank ranked 11th largest in Massachusetts, with $5.5 billion of deposits as of June 30, according to FDIC data.
The Wellesley branch was closed on Friday, with the FDIC notice of seizure taped to the door. Guy Morris, who lives in Newton, tried to get access to his deposits on Friday afternoon but was thwarted. He said he kept his accounts below the FDIC insurance maximum but was worried about whether he would get access to his money for upcoming bills.
“If I had known about this, I would have taken all my money out yesterday,” Morris said.
Venture capitalists said they had been reluctantly urging their startups to pare back deposits at SVB in case the bank’s downturn spiraled into a full-blown crisis. The advice came despite the bank’s heavy involvement in supporting startups and after SVB chief executive Greg Becker on Thursday asked customers to remain loyal.
“Startups need to make sure they have backup plans and are planning for the worst-case scenario,” Fady Saad, founder and general partner at Cybernetix Ventures in Boston, said he advised his portfolio companies. “At the same time, we wanted to avoid a domino effect. Silicon Valley Bank has been so supportive of our startups.”
Mendoza, for one, lived through prior financial crises and had his firm’s deposits spread among several banks, he said. But other companies were overreliant on SVB.
As the troubles became more evident at SVB on Thursday, a number of traditional banks began receiving inquiries from business customers about switching their accounts. Among them was Salem Five Bank, according to chief marketing officer Joe Bartolotta, who said his bank heard from a handful of SVB customers.
“They were commercial customers looking for a safe place to store their money,” Bartolotta said.
Many smaller publicly traded banks, including some in the Boston area, got sucked into the downdraft as SVB’s shares plunged amid investor concerns about the sector.
Shares in Eastern Bank fell 9.9 percent from its Wednesday closing price to Friday’s close, while Berkshire Bank shed 7.3 percent and Rockland Trust dropped 6.8 percent. Shares in First Republic Bank, a San Francisco-based bank with a big deposit base in Massachusetts, fell much further, in large part because its business model is more similar to SVB’s than the others. Its shares were down nearly 29 percent over the two days.
The trouble started this week after SVB said it had lost $1.8 billion on bond investments and was raising a $2.25 billion capital infusion. The bank’s assets ballooned during the previous years’ runup in the tech market as startups raised billions of dollars and deposited it at the bank.
In addition to making loans, SVB invested much of its money in Treasury bonds that don’t mature for years. With the Federal Reserve raising interest rates, prices of the bonds have fallen. The bank paid about $120 billion for debt securities on its balance sheet, but those securities had a current market value of only $102 billion as of Dec. 31, 2022, the bank revealed in February in a filing with the FDIC.
If SVB could have held the bonds until maturity, that wouldn’t matter. But the recent downturn in tech had customers withdrawing more funds, forcing the bank to sell its Treasuries at a loss. As fears about the bank’s stability spread, more customers had withdrawn funds, triggering a vicious downward cycle that ended in SVB’s takeover.
Now, the bank’s failure might further accelerate the tech downturn. That’s because SVB not only holds deposits for many startups, but also loans them money and provides services such as helping fund-raise and publishing research on the tech market.
“It’s obviously ridiculously important to have a banking partner that understands the needs of startups,” said David Chang, a fixture of the Boston tech scene who worked with the bank on his prior startup and is now a general manager at recruiting firm Hunt Club. “They’re going above and beyond the menu of things you pay for to respond to one-off requests startups make. You don’t find that amount of agility at more established banks.”