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Silicon Valley Bank failure sparks startup concerns, ‘bailout’ pushback 

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The collapse of the Silicon Valley Bank late last week is creating significant challenges for the tech industry, which is interwoven with the bank through multiple companies and connected venture capital firms. 

The failure, the first major bank collapse in 15 years, spurred immediate concerns Friday by impacting companies’ day-to-day operations like making payroll. Government action to protect uninsured deposits mitigated some of those risks, but the collapse — coupled with the fall of Signature Bank over the weekend — is still posing concerns for the industry. 

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The impact could be felt most aggressively by startups, which have already faced headwinds over rising interest rates and now may face a more hostile front from banks hesitant to take their business. 

The issues are underscored by the fact that Silicon Valley may receive little empathy over the failure of the bank, with critics already sounding the alarm over the aid for Silicon Valley Bank. 

Silicon Valley Bank collapse could shake the startup world 

The collapse of Silicon Valley Bank is likely to shake up the startup ecosystem that was rooted in the bank. 

“The fear is that this will stymie startup activity, innovation, entrepreneurship for a bit longer than we would like. And that’s not good,” said Shyam Kumar, a professor of management at Rensselaer Polytechnic Institute. 

Silicon Valley Bank was “viewed as a key artery for the Silicon Valley tech ecosystem and played an integral role in the surge of successful tech startups in the post doc.com bubble,” Wedbush analysts Dan Ives, Taz Koujalgi, John Katsingris, and Steven Wahrhaftig said in a report. 

Biden, Democrats applaud ‘decisive action’ to protect Silicon Valley Bank depositors

The Wedbush analysts said that while the government action “backstops the SVB funds and takes uncertainty off the table, the impact from this past week will have major ripple impacts across the tech landscape and Silicon Valley for years to come in our opinion.”

The near-term impact should be minimal, but “the hurdle for bank loans and other forms of debt financing will be a different world going forward,” they said. 

“With a tighter overall funding environment this will increase pressure on many start-ups to cut costs with a brighter spotlight on various credit lines for unproven tech start-ups with high cash burn from a banking sector post SVB collapse,” they said. 

Ilya Volkov, CEO of YouHodler, a Swiss-based fintech platform, said that the tech sector will face “challenges in the next days, weeks and maybe even years.”

“Short term challenges are mainly related to funds locked on accounts and issues with operational payments,” Volkov said. “Mid-term challenges are mostly about limited access to funding,” he said, adding that California-based startups will be mostly affected by the crash. 

Where will startups go to bank now?

Even as the government action mitigated some of the short-term concerns, like payrolls delays, there are a “number of messy things to work out,” said Kumar, the management professor. 

“Things are still in flux. Things are still definitely very much uncertain. But at least there is relief that the money is there,” he said. 

Kumar said questions remain, such as: what banks companies should go to, how quickly the transition can happen, and how comfortable they’ll feel with a new institution. 

Biden stresses that Silicon Valley Bank is not getting a bailout

Another question posed by the collapse of Silicon Valley Bank is whether other banks will be more wary of accepting startups going forward, said Patricia A. McCoy, a professor at Boston College Law. She previously worked at the Department of Treasury and helped form the Consumer Financial Protection Bureau (CFPB). 

“Between their cash needs and the possibility that their venture capital financing spigots may be turned off, startup customers are in a position where they may need to suddenly yank all their money out of their bank, or a great deal of it. And that is a volatile business model for a bank to run,” McCoy said.  

“We saw that with SVB, so banks may be a little more cautious about accepting startup companies as customers and may be putting in certain safeguards to protect themselves against a future bank run by startups in the future,” she added. 

Pushback over government aid 

The tech industry’s woes over the collapse may not be saved by a government bailout of Silicon Valley Bank, akin to the financial support to rescue companies in 2008 after the Great Recession hit. 

Treasury Secretary Janet Yellen and President Biden have stressed that the bank will not get a “bailout.”

So far action taken by the government has sought to rescue uninsured depositors but has not helped the banks’ shareholders or directors, McCoy said. 

Here’s who is paying to restore Silicon Valley, Signature Bank deposits

“We saw coming out of 2008, a Main Street versus Wall Street narrative, and that likely will rear its head again now,” McCoy said. 

Even that decision to protect the uninsured depositors is getting slammed by some critics. 

Matt Stoller, research director at the left-leaning American Economic Liberties Project, said there is “no need to bail out the bank or the uninsured depositors due to SVB’s unnecessary risk-taking and self-dealing, as well as the wealthy venture capitalists who were complicit.”

“Without clear evidence that there is contagion, there are no legal grounds for a systematic risk determination for SVB. SVB is a uniquely unhedged and badly run institution; most other banks have higher capital levels and more insured deposits,” Stoller said in a statement. 

There’s also plenty of finger pointing that will go around Washington. Sen. Elizabeth Warren (D-Mass.) penned an op-ed published Monday in The New York Times that blamed Congress for passing a law to ease bank regulations in 2018. 

Collapse caused immediate issues 

The quick collapse of Silicon Valley Bank shook the tech world Friday, leading companies to have impacts even on general day-to-day operations like making payroll. 

Those concerns have been mitigated by the actions taken by the government in the days since, but several companies, including Etsy and Roblox, have publicly stated how the bank’s collapse has impacted their businesses.  

Roblox, an online game platform, said in a securities filing on Friday that about 5 percent of its $3 billion in cash and securities was held at the bank as of Feb. 28.

Roblox’s chief financial officer said in the filing that regardless of the outcome, the crash “will have no impact on the day to day operations of the company.”

An Etsy spokesperson told The Hill in an email that the company “experienced a delay in issuing payments to a small group of sellers related to the unexpected collapse of Silicon Valley Bank.” 

The spokesperson added that as of Monday morning the company started processing payments using their other payment partners. 

Copyright 2023 Nexstar Media Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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