SVB’s Failure Exposes Lurking Systemic Risk of Tech’s Money Machine

SVB billed itself as a one-stop shop for tech visionaries — more than just a bank, a financial partner across loans, currency management, even personal mortgages. Its tactics to bundle client services were deemed aggressive by some, but it was hard to argue with the results: business with 44% of venture-backed technology and health-care companies that went public last year, and overall explosive growth during boom times.

In so doing, it created massive counterparty risk — a single point of failure that could imperil the sprawling financial ecosystem that backs America’s next big ideas.

Private equity firms including Vista Equity Partners, Insight Partners and Thoma Bravo have dozens of portfolio companies that banked with SVB. It was the institution of choice for startups backed by the region’s most prominent venture firms, like Sequoia Capital and Andreessen Horowitz. And it provided services to Roku Inc. and other public companies long after their IPOs. 

It’s a startling wake-up call to regulators after largely standing by as the shadow banking system ballooned in the wake of the global financial crisis. Private equity firms invested more than $6 trillion in the US economy in the 10 years through 2021 and employ more than 11.7 million Americans. Venture capital money more than quadrupled from 2007 to 2021, to about $1 trillion, and VC-backed companies have 3.8 million workers — a 960% increase from 1990.  

After days of frenetic contingency planning in the venture capital world, US financial regulators laid out a plan on Sunday to protect depositors’ funds after SVB’s demise. The Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. jointly announced the efforts, which include a bank funding program invoked under the Fed’s emergency authority.

The program allows banks to place Treasuries, which have declined sharply in over the past year, at the Fed and receive face back in the form of a one-year loan. It was large unrealized losses on such securities, combined with unstable deposits, that doomed SVB. 

For now, US private equity and venture capital firms are breathing a cautious sigh of relief, though questions remain about how SVB will ultimately be wound down. There was a similar sentiment in the UK on Monday after HSBC Holdings Plc said it was buying SVB’s British arm for £1 ($1.21), the culmination of a hectic weekend where ministers and bankers explored various ways to avert its collapse.

“Glad we didn’t have to learn the hard way, but this is still a reminder of the dangers when we become too dependent on a single point of failure,” said Darren Eng, a venture capital adviser and executive director of Los Angeles’s venture association. “The ecosystem shouldn’t be beholden to just one bank.”  

‘Dialing for Dollars’

Venture capitalists, founders and executives spent the weekend developing plans for startups with tied-up funds. Some deep-pocketed firms, including General Catalyst and Khosla Ventures, offered to help portfolio companies cover payroll.

Ari Newman, co-founder of Massive Capital Partners, was “dialing for dollars” to help his portfolio companies find the funds to make payroll. On Sunday evening, after the government's announcement, he said he had no regrets.

“I did the right thing to protect and support my portfolio and I’d do it again,” Newman said. “Waiting to see what happens was not the responsible perch for me as an investor."

SVB’s vast reach was laid bare to Joshua Frost, Treasury’s assistant secretary for financial markets, as he addressed a virtual audience of almost 1,000 venture capitalists and their portfolio companies on Friday evening.