Emily Tsitrian: The collapse of Silicon Valley Bank has implications for Chicago’s startup ecosystem

For Chicagoans, business activity in California’s Silicon Valley can seem like a world away — both in miles and in impact. As such, we might be wondering, should last week’s collapse of the Silicon Valley Bank worry us here in the Windy City? After all, as the name suggests, isn’t this bank’s failure some regional and industry-specific issue?

Sadly, SVB’s rapid implosion over the past several days could have some concerning implications for Chicago’s burgeoning startup, venture capital and tech ecosystem that should worry all of us who are rooting for Chicago to become a hub of such activities.

[ Editorial: Why it’s not such a wonderful life when real-time panic causes bank runs ]

SVB, in addition to being the 16th-largest bank in the United States, was the default banking partner in the startup and technology ecosystem. It was unique in that its team had a deep understanding of how capital investments and business banking work in the startup economy.

For example, unlike typically small to medium businesses, most technology startups are Delaware-C corporations. They raise money from angel investors and venture capitalists and compensate their workers with a combination of salary plus equity. Because of the unique nature of these companies, they tend to attract founders, employees and investors who see opportunities to take big risks for the potential to upend how an entire industry works.

The nature of the beast: Many of these companies go to zero, many continue operating as midmarket firms for decades and a small few become “unicorns” — Silicon Valley’s term for the startups that explode and fundamentally change how the world works. Early employees and founders then typically become startup investors and advisers themselves and will probably continue to prefer banking partners that fundamentally “get” how this ecosystem and its unique cash movement patterns work.

SVB was a bank uniquely positioned to facilitate such a pocket of the economy and, as such, became the default banking partner of many startups and their employees, founders and investors. It’s easy to imagine how, in such a fast-paced corner of the economy, a banking institution that is familiar with these financing norms would work well. In fact, SVB was the banking partner for nearly half of U.S. venture-backed technology and health care companies that listed on stock markets last year. When the bank collapsed in a matter of 48 hours, it sent tidal waves of panic through thousands of companies that banked there, as well as their employees.

Much has been written about how this happened in the first place. On the outset, it appears to be an idiosyncratic event tied to SVB’s overexposure on interest rate risk, too much depositor concentration by a population made cash-rich by monetary policy and a good old-fashioned run on the bank.

It’s hard not to have liquidity issues when experiencing a whopping $42 billion in withdrawals in one day, aggravated by panicked venture capitalists and startup founders on Twitter who can apparently spread fear faster than the financial supply chain can wire funds.

On Friday alone, many startup companies did not make payroll and began putting contingency plans to lay off or furlough employees, given the uncertainty of accessing their operating funds. Nonprofits with grants tied up in SVB accounts are facing an uncertain future.

Northern California wine country, which frequently banks with SVB, faced a potential cash flow crisis. Fintech companies with financial products such as Automated Clearing House payouts, which built onto SVB’s banking rails, screeched to a halt. Several publicly traded companies like Roblox and Roku filed required paperwork with the Securities and Exchange Commission about their cash exposure to SVB.

Thankfully, on Sunday, the Federal Reserve, the Federal Deposit Insurance Corp. and the Treasury Department announced a backstop plan to make depositors whole, while continuing to sort out the details of an asset sale. This was a huge sigh of relief in terms of business continuity, but we are not out of the woods, as uncertainty looms with regards to the cash positions of other regional banks that may have large unrealized losses similar to SVB’s and whose equity holders will probably not be bailed out, as the Fed and President Joe Biden made very clear in a statement Monday morning.

Regardless of the wobbliness of the banking sector at large, for Chicago, the loss of SVB — a critical banking partner that greases the infrastructure to help enable this sector to innovate — is unfortunate. And for a city that prides itself on being a center of financial innovation, with a history as the capital of the derivatives industry, we should be thoughtful and bold as we consider what response is the right one.

We won’t know for a few weeks or months how deep the ripple effects will be felt or whether the crisis has been fully contained by the Fed’s swift weekend action, but one thing is clear: The sudden loss of SVB was a tough moment for startup companies and regional banks everywhere, and those who root for them.

Chicagoans can and should rally together to support our startup founders and regional banking infrastructure through this crisis and come together to rebuild the underlying technology and financial ecosystem so critical to their success.

Emily Tsitrian lives in Chicago with her husband and dog. She has worked for several tech companies and is the author of “Make Me the Boss: Surviving as A Millennial Manager in the Corporate World.”

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