What the collapse of Silicon Valley Bank means to you
Over the last week, both Silicon Valley Bank (a bank specializing in startups) and Silvergate (a bank specializing in crypto) collapsed. And, to put it mildly, that’s bad. Banks don’t usually collapse. We think of them as safe places to store our money. And, a bank failing brings back very scary memories of Lehman Brothers, Washington Mutual, and 2008.
The obvious first question is ‘is my money safe at my bank?’ and it probably is. The FDIC (and NCUA for credit unions) insures up to $250,000 per depositor, per bank, (and per ownership category, but that’s getting into the weeds). If your bank fails, the FDIC will step in and make sure you’re made whole, up to $250,000. For smaller businesses (like yours and mine), that’s plenty because you probably don’t casually have $250,000+ sitting at a single bank.
And, if you do, mazel tov. Consider speaking with a financial professional (like, an accountant, banker, or financial advisor) about diversifying your cash reserves and spreading funds across multiple banks to stack FDIC insurance on multiple accounts. The sky isn’t falling quite yet, but playing it safe couldn’t hurt, and stacking FDIC insurance is easier than it’s ever been.
Now, the rest of the situation is still developing. It seems like both banks failed because of poor investment decisions, rising interest rates (which made their bonds with lower interest rates worth less and harder to sell), and above average withdrawals. These factors created profit and liquidity issues that made it difficult for these banks to return deposits. While all banks need to deal with rising interest rates, most banks aren’t ultra-specialized in sectors that’re slowing down (like venture capital and crypto are) and, hopefully, made better investment decisions.
My initial – I’m an accountant, not an economist or financial commentator – opinion is that we shouldn’t panic (yet). Your money is safe, this doesn’t appear to be a systemic meltdown, and we don’t actually know how much money has been lost. The FDIC just stepped in and took receivership yesterday. We’ll have a better idea of how much was deposited with Silicon Valley Bank compared to what their investment and bond portfolio is worth over the next week. And, we’ll also have a better idea of any other intervention by the federal government or emergency loans and liquidity provided to startups by other banks.
There will probably be a further startup slowdown and economic impact as this ripples thru the economy. But, it’s a little premature to suggest every startup is about to collapse, there’ll be mass layoffs, and we’re entering another dot com bubble or global financial crisis.
The shockwave :
While I don’t think this is the start of another financial collapse, there will be a shockwave as businesses with exposure to Silicon Valley Bank (and to a lesser extent Silvergate) figure out how much money they lost and funds in transit are sorted out. That sudden cash crunch will have a downstream impact. Exposed businesses will have a hard time paying bills, may layoff employees, and will be distracted from work.
As I write this, the most notable shockwaves are via Rippling (the payroll software company) and Patriot Software (also a payroll software company). They were using Silicon Valley Bank for their payroll services and payroll run in the last few days is missing. If you ran payroll via Rippling or Patriot Software this week, please check in with your employees. Make sure their paychecks cleared and, if needed, find alternative ways to pay them.
Rippling’s CEO claims they’re switching to a system run by JP Morgan Chase and future payruns will be processed thru JP Morgan Chase. Can we trust him? I don’t know. A regular newsletter reader pointed out the CEO has been previously fined by the SEC for misleading statements and omissions, which is pretty damning.
Other major payroll software companies and services (specifically, Gusto, JustWorks, and TriNet) claim not to have exposure to Silicon Valley Bank. Can we trust them? I also don’t know.
I’ll be updating my LinkedIn post as we learn about more impacted payroll companies.
(Note: there may also be shockwave via payment processors that used Silicon Valley Bank as an intermediary. Bill.com claimed they have limited exposure, stopped using the bank, plan to honor payments, and exposed customer funds may be covered by FDIC pass-through coverage. So far, other major processors like Stripe, Paypal, and Quickbooks Payments haven’t announced anything one way or the other. But, smaller processors or platforms mayyy be impacted.)
Concentration risk and the downside to niching :
Part of the problem with these bank collapses was their extreme specialization which contributed to their insolvency. And, that’s one of the downsides to niching. As you niche down and further specialize in an industry, you expose yourself to ‘what if this industry implodes’ risk. For example, if you specialized in hospitality or retail businesses, you had a veryyy bad time during early COVID as your clients battened down the hatches, cut costs, or worse, went out of business entirely. We’ll delve a little further into that in a future email tho.
For now, if you work with a lot of venture-backed startups or something tangential, review your client list. Pull together a list of all your current clients, current prospects in your pipeline, and how much revenue they contribute to your business. If it’s significant, calculate the worst-case scenario (ie, if every startup client disappeared tomorrow and didn’t pay their outstanding bills, how much of a shortfall would you have?). Then, compare that number to your emergency funds and credit lines. If you can keep making payroll, fantastic. If you can’t, consider applying for a credit line justtt in case.
The worst-case scenario probably won’t happen (because, not all startups banked at Silicon Valley Bank, the FDIC will start paying out advanced dividends, and startups will search for alternative funding). But, we don’t know which startups will go out of business, slash expenses, or how long it will take them to pay their outstanding bills. And, we don’t want their money problem to become your money problem.
This is a big deal and there will be very real repercussions. But, panic never made a bad situation better. Don’t switch from Rippling to Gusto. Don’t withdraw all your deposits into cash. Don’t swear off the tech startup niche forever, like they’re some bad ex-boyfriend. Take a big ol breath, go for a walk, chat with your accountant (and other trusted advisors), and then make your move.
Twitter and LinkedIn are currently full of hot takes (and a fair amount of sensationalist bullshit). But, remember, startups are more that venture capitalists and unicorn exits. Real people working at startups are worried they won’t have a job by next Friday and real people not working at startups have had their payroll interrupted. I’m not gonna defend the ultra wealthy that have spare cash to make speculative investments. But, there’s plenty of normal people getting swept up in this mess. And, we’re worried but they’re terrified.
- If you work with startups, review your exposure.
- If you have a lot of cash on hand, consider moving reserves and emergency funds to stack FDIC coverage.
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