Have you ever noticed how quickly our world is evolving right now? It is impossible to ignore the advancement in technology. This trend of modern startups and new businesses holds great credit for this tech revolution. A prominent example of this revolution can be none other than, Bitcoin. Bitcoin idealizes the future for many new ventures. Who would have thought that there can be an intangible and completely-digital payment and investment method? Moreover, these startups give opportunities to other businesses as well. For example, with the sudden boom in the trend of blockchain technologies or crypto-currencies, many netizens visit platforms to learn how to buy Bitcoin and how to trade in cryptocurrencies.
According to research done by Startup Ranking, the USA leads the startup trend in the world with the most active institutions, followed by India and UK.
The most crucial element for these new ventures is their funding. Funding for Startups is like the blood of the human body. Funds allow them to circulate daily operations and deal to perform smooth functioning.
These institutions are sometimes funded by some banks. Banks like Silicon Valley Bank, emphasize funding startups. But how are these banks different from other banks? We will discuss this in the next section.
Silicon Valley Bank and Its Collapse
Silicon Valley Bank was founded in 1983 in Santa Carla, California. Banks like SVB are more flexible to lend money to new ventures as the majority of the account holders in the bank were venture-capitalist and investors. However, the SVB eventually fell on March 10, 2023. Prior to the fiasco, it was a go-to option for ventures for raising the funds.
The bank got so big that it made the list of America’s Greatest banks and held the 16th rank before its collapse. The portfolio of SVB had a number of popular and influential institutions. Some of their biggest clients are:
- Circle: $3.3 Billion
- Roku: $487 Million
- Block-Fi: $227 Million
- Roblox: $150 Million
- iRythm Technologies: $54.5 Million
Moving on with the article, we will discuss the reason and causes of how the bank caved in.
Items that Caused Fiasco
In this section of the article, we will roughly discuss the elements that crumbled the whole bank and its functioning.
- The Cash Crunch: On March 8, 2023, the bank finally declared that there is a cash crunch happening within the bank. To tackle that, SVB decided to sell its shares and bonds.
This generated panic among the account holders and gradually more and more holders started to withdraw their funds from the bank.
- VC Falloff: Since 2022, there is a noticeable fallout in the venture capitalist industry. For a few years, the startup trend that was on boom has seen a recession.
Because of this the startups were unable to carry out their operations and were losing their confidence. Venture capitalists and startups are correlated with each other, which caused a sudden fall in the fund collection of the bank.
- High-Interest Rates on Loans: For some time, there has been a rise in the Federal Interest Rates on Loans and Bonds that can be clearly seen. This rise has made loans and bonds more and more expensive.
Since the loans are getting expensive, there has been a drop in the demand for loans. This fall in demand for loans led to difficult money-making for the banks.
As you can see in the picture, the interest rate has touched the sky from 0.5% to 4.75% in just a year. Therefore, lesser people are claiming loans and banks are unable to multiply their money.
These were the main contributors to the episode that led to the fall of Silicon Valley Bank. Before this event happen, the bank was ranked as the 16th biggest bank in the United States of America. Further, we will discuss the aftermath that can be caused by this demise of the bank.
The Great Domino of 2023: Led by Silicon Valley Bank
According to the experts, the fall of Silicon Valley Bank will affect not only the startups linked with it but also a major chunk of the population that is associated with those startups.
Some of the aftermaths that can occur from this event are:
- Stuck Deposits in the Bank: Apparently, a huge panic occur among the account holders when the bank declared itself failed. The US Banking Institutions took control over the bank, which means there will be a price cap on the withdrawal of deposits. The amount will get limited that a person can withdraw at a time.
Many Venture-capitalist and startups’ money got stuck in the bank. Florian Simmendinger, founder and CEO of Soundbrenner, showed their frustration about this issue in recent times.
- Mass Furlough or Bank Shutdown: The kind of misery that both the bank are its account holders are facing right now, it is not much surprised if there would be news of mass layoffs and companies shutting down. No organization or venture can operate for long without funds.
“I think either California or the Treasury Department should backstop Silicon Valley Bank – thousands of companies will fold or lay people off next week because of lack of access to accounts through no fault of their own,” ~ Yang thinks.
- Stock Market Bear: The event of SVB collapse is gradually playing a role of a bear for the stock markets all across the world. Since the fall of the bank, a number of investors are withdrawing their invested money across the globe.
Silicon Valley alone has resulted in a major drop in the stock market around the globe. For example, Indian Nifty Bank Index suffered by 850 points on the same day of March 10, 2023. As of this fall, one of India’s major banks PNB (Punjab National Bank) came down by around 2.6%.
- Further Collapse in Banks: It is much easy to notice how there is a clear domino effect of this event. The bank is ruining the economy like a fish in a clear pond. Following Silicon Valley Bank, the Signature Bank of the USA has joined the path.
Just like Silicon Valley Bank, the account holders of the Signature Banks also started withdrawing their deposits due to the high amount of uninsured deposits and exposure to crypto lending. To avoid another fall of the giant, New York’s Community Bank has decided to buy a large chunk of the Signature Bank.
The Final Analysis
In the end, we can get to the conclusion that no matter how big or rich an organization is, if not managed perfectly, the fallout is confirmed.
Moreover, it is not only SVB’s concern. There are Investment Research firms like Hindenburg that could have predicted this event if they worked the right way. Hindenburg was primarily active a few months back about some foreign issues but they could have prioritized more on domestic issues.
Building a startup or investing in a startup is a risky and courageous task. Their hard-earned money should be respected and should be kept safe as their first priority.