Venture Capitalists Urge Startups for Fund Withdrawal from Troubled Silicon Valley Bank

Key Points:

• Many venture capital funds are advising the companies in their portfolios to move their money out of Silicon Valley Bank in order to lessen the likelihood that they will be impacted by the institution’s probable closure.
• Pear VC, an early-stage venture capital firm with offices in San Francisco, requested via email on Thursday that its portfolio network withdraw money from SVB.
• The London-based VC firm Hoxton Ventures is advising the founders of SVB to withdraw two months’ worth of “burn,” or venture capital they would need to pay overhead.

As venture capital firms on both sides of the Atlantic have been instructing their portfolio companies to withdraw money from ailing lender Silicon Valley Bank, fears of a run on the technology-focused bank have intensified.

Shares of Silicon Valley Bank fell 60% on Thursday after the company revealed that it needs to raise $2.25 billion in stock from investors, including General Atlantic, to strengthen its capital. Friday morning premarket trading saw a further 60% decline in the company’s stock.

SVB is a significant bank in the startup technology industry and has developed relationships with the VC community over the course of its forty years in business. It supports digital ventures while providing traditional banking services, which makes it the backbone of the venture capital industry in the United States.

Many venture capital funds, including well-known firms like Founders Fund, Union Square Ventures, and Coatue Management, have advised companies in their portfolios to withdraw their funds from SVB in order to reduce the chance of being affected by the bank’s possible demise. According to founders with accounts at the bank who spoke to CNBC under the condition of anonymity, having assets frozen at SVB may be fatal for a cash-sucking firm.

Pear VC, a San Francisco-based early-stage venture capital firm, requested on Thursday that its portfolio network stop supporting SVB. Gusto, a platform for managing payroll, and Edge DB, an open-source database, are also part of Pear’s portfolio. According to a Gusto spokeswoman, the company “does not use Silicon Valley Bank to fund customer payroll services and operations” and as a result, its clients are unaffected.

In an email to founders obtained by CNBC, Anna Nitschke, the chief financial officer of Pear said, “In light of the situation with Silicon Valley Bank that we are sure all of you are watching unfold, we wanted to reach out and recommend that you move any cash deposits you may have with SVB to another banking platform,”

In this market, a major money center bank is ideally suited (have a look at Citi Bank, JP Morgan Chase, and Bank of America), but if time is of the essence, you might be able to open temporary accounts with smaller banking platforms like PacWest, Mercury, or First Republic Bank more quickly.

When reached by CNBC, Pear was unavailable to comment right away.

SVB didn’t respond straight away either when asked by CNBC if it had enough assets on hand to cover startup withdrawals.

For some of the company’s founders, this week’s pressure on Silicon Valley Bank and the closing of cryptocurrency-focused Silvergate Bank served as a reminder of the 2008 financial crisis, when banks collapsed due to the mortgage bust.

SVB is finding it difficult to raise money for technology as the IPO market continues to be icy and VCs remain cautious against the backdrop of a deteriorating macroeconomic environment and rising interest rates.

As a result of historically low-interest rates in the years 2020 and 2021, it was significantly simpler for companies to raise money.

Rates have increased, causing a sort of reset in company valuations, and venture-backed companies are feeling the pain as the VC investment market slows. Even while investment rounds have slowed, entrepreneurs have still had to use money from earlier rounds to pay their overhead expenses.

This is terrible news for SVB since it implies companies have been forced to withdraw deposits at a time when the bank is losing money on additional funds invested in US debt securities, which have suddenly decreased in value due to the Fed’s rate hikes.

The founders of SVB are being advised to withdraw two months’ worth of “burn,” or venture money they would need to pay overhead, by Hoxton Ventures, a VC firm with offices in London.

In an email to founders on Thursday, Hussein Kanji, the founding partner of Hoxton, stated:

“We have seen some funds passing on a view that they remain confident in SVB. We are seeing other funds encouraging companies to withdraw their funds from SVB. It remains to be seen how this will all play out.

“If the self-fulfilling prophecy occurs, the risks to you are asymmetric.”

Additionally, Kanji stated to CNBC: “The big danger for startups is that their accounts will be frozen while the mess is being sorted.”

Kanji believes that SVB might either be acquired by another company or receive a bailout from the US Federal Reserve.

According to sources speaking to CNBC’s David Faber on Friday, the bank hired experts to look into the prospect of a sale after its attempts to raise money failed.