The Rise and Fall of Silicon Valley Bank
How a startup banking pioneer collapsed in 48 hours
1The birth of a startup banking pioneer
Founded in 1983 after a poker game discussion between a Wells Fargo executive and Stanford professor, Silicon Valley Bank pioneered venture debt for startups when no other banks would touch them. Their first office opened in San Jose with Roger Smith as CEO. After nearly failing in the early 1990s due to commercial real estate losses, SVB pivoted exclusively to serving the innovation economy, developing unique underwriting models for profitless startups.
2Dominance in venture banking
At its peak, SVB banked nearly half of all US venture-backed tech and life sciences companies. In 2021, it handled banking for 55% of venture-backed tech/healthcare IPOs. For decades, it was the go-to institution for founders' first business accounts, credit cards, and venture debt facilities. The bank understood startup economics better than anyone, never questioning why a $400K-revenue company might burn $900K per quarter.
3Explosive growth before the fall
SVB's assets ballooned from $71B in 2019 to $211B by 2021 - tripling in just two years. With deposits flooding in faster than they could be loaned out, the bank invested heavily in long-duration securities at historic rate lows. This would prove catastrophic when the Fed began raising rates nine times in one year, creating massive unrealized losses on their balance sheet.
4Critical risk management failures
The Fed's post-mortem revealed shocking lapses: SVB operated without a Chief Risk Officer for eight months leading to collapse. Their interest rate hedges were removed before the crisis. November 2022 findings showed their risk simulations were unreliable, giving false security about rising rates. The bank was positioned to protect against rate drops, not increases - a fundamental miscalculation.
5The fatal deposit concentration
SVB's deposit base was dangerously concentrated - overwhelmingly uninsured and from the interconnected tech startup world. Group chats and VC portfolio emails meant news spread instantly. When trouble emerged on March 8, 2023 with SVB's $1.8B loss announcement, clients attempted to withdraw $42B in one day on March 9, triggering the collapse.
6The 48-hour collapse
On March 10, 2023, the California DFPI closed SVB and appointed the FDIC as receiver. Forty years of building vanished in two days, marking the second-largest bank failure in US history at the time. The speed stunned observers, with tech leaders like David Sacks urgently tweeting for government intervention to prevent broader contagion.
7The $10M weekend scare
SaaStr's $10M operating cash - payroll, vendor deposits, everything - was frozen when SVB failed. This scenario played out across thousands of startups that weekend, with founders calculating if they could make payroll with just 15% of their cash. The systemic risk exception invoked on March 12 ultimately protected all depositors, but exposed flaws in the system.
8Who ultimately paid the price
Protecting uninsured depositors cost the Deposit Insurance Fund $16.3B, recouped through special assessments on 110 large banks. Shareholders and certain bondholders were wiped out. The first $5B was exempt, with banks paying 3.36 basis points quarterly for eight quarters. This solution maintained confidence but raised moral hazard questions.
9End of an era in startup finance
SVB's brand retirement in October 2023 marks the final chapter for a 43-year institution that shaped startup banking. First Citizens now operates the remnants. The collapse serves as a stark lesson in risk management, interest rate sensitivity, and deposit concentration - with lasting impacts on how startups will bank and manage cash going forward.
Original article: SaaStr — The Rise and Fall of Silicon Valley Bank