On Friday March 10th,  Silicon Valley Bank (SVB), the 16th largest bank in the US, collapsed. This has rippling effects on the start up, small business, and venture capital ecosystem.

Here, we’ll outline what happened, why it matters, and what Bags is doing to help.

How Do Businesses Access $$ To Grow?

There are two primary ways for startups to access capital to grow your businesses which are important context for why this series of bank-related events impact all business owners.

1. Debt Financing (loans, lines of credit, PO financing, etc. that are paid back over time at an interest rate) and,
2. Venture Funding (a fund that is fueled by investors grants capital to a company in exchange for a % of ownership that yields returns by venture capital funds or “VCs”).

The SVB collapse was partially caused by the perfect storm of events across both sides of the capital market, leaving startups in a lurch with frozen funds leading to increased uncertainty about their financial future.

So Who is Silicon Valley Bank (SVB)?

Silicon Valley Bank was founded in 1983 provided banking services for roughly 50% of VC-backed tech + healthcare companies at its peak.

In startup-world, SVB became the go to place to deposit investments— some VCs actively told the companies they invested in to bank there. Deposits at SVB grew to a massive $180B.

Setting The Stage: The Economic Landscape in 2022…

The world was recovering from the Covid-19 pandemic. Inflation was rising, and the Federal government starting raising interest rates to combat it. This caused long-term bond portfolio values in several banks, including SVB, to decline.

At the same time, venture funds started reducing the amount of $$ they were deploying into start ups. This was partially driven by “normal” economic factors - after several years deploying a lot of capital, the VC world was due for a pull-back on funds.

Remember how startups usually access growth capital through 1) debt financing or 2) venture capital? Well, in 2022, interest rates went up (debt got more expensive), and venture funds were investing less in startups (venture $$ got harder to come by). Going into 2023, startup founders were already starting to face a capital crunch, and SVB was getting less new money.

So What Happened With SVB?

• The big picture: Banks make money by lending out the money depositors give them to earn interest, and that works when the amount of funds they hold are steady or growing. Which brings us to what went wrong at SVB.
• SVB lent out more $$ than they should have: From 2020-2021, SVB effectively lent a large portion of depositor money to the federal government (in the form of U.S. Treasuries) and home owners (in the form of agency mortgage-backed securities). On March 8th, SVB announced that they sold some of these securities at a loss to increase cash on hand. SVB had a plan, but their financial communications strategy backfired: their announcement triggered a bank run.
• What’s that? A bank run happens when customers of a bank are scared that the bank is running out of cash…so they run to the bank to pull out their $$. This often causes a domino effect, and causes other bank customers to pull their $$ out too.
• Why it matters: Remember how people were putting less $$ into banks like SVB because they were getting less cash from venture capital? When people ran to the bank, SVB didn't actually have the funds in the bank to give people their money bank.
• By EOD on March 9th, $42 billion had been withdrawn from SVB and the company’s stock had lost over 70% of its market value. On March 10th, California regulators shut down the bank and placed under the receivership of the Federal Deposit Insurance Corporation (FDIC).
• For a few days, funds in SVB were frozen - meaning if you hadn’t gotten your $$ out of the bank before then, you couldn’t access it.
• As you can imagine, business owners panicked about how to make payroll, meet inventory needs, the list goes on.
• The good news: On Sunday, the FDIC announced that they’d guarantee every deposit at SVB, and businesses had access to ALL of their money on Monday.

What does all of this this mean for the startup ecosystem, and you?

• The startup ecosystem is at a key moment of fight or flight, and access to growth capital is tight. Debt financing interest rates are high, and venture capital funds are scared to deploy capital into risky businesses like startups.
• Understanding how to make key financial decisions for your livelihood and your business are absolutely essential to survival.
• Resource partners like Bags can help you navigate your next steps.

How Bags Can Help

We are committed to supporting founders and business leaders like you understand and plan for your financial future. When things are up in the air, we are here to support you.

We have partnerships with multiple lending institutions to ensure that businesses like you still have access to debt financing. Whether you need $$ to grow, or you have been negatively impacted by the SVB crisis,  we're offering free debt strategy calls to the Bags community to help you navigate your options and make informed decisions about business finances.

We're committed to ensuring that businesses like yours are resilient to economic changes. We believe a key avenue for that resilience is through building a financial plan, and exploring debt financing opportunities that will continue to fuel your growth towards profitability.

If you’re in NYC this weekend: Join us on March 18th for Community Meets Commerce, hosted by our partner Re/tell. Due to the current environment, the program will include a live Q&A around the capital environment for startups, and particularly how female founders can build resilience during this time.

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