- The pandemic hit and the money printer went wild.
- Interest rates were kept low and inflation went thru the roof.
- Remember AMC & Gamestop? What about crypto and rock Nfts? oh, we can’t forget about them SPACS!
- But, that was for retail investors… VCs were also handing checks left and right. Where did most of that money go? Silicon Valley Bank.
- It was a sad situation, Garry Tan CEO of Y Combinator said “this is an extinction-level event and will set startups and innovation back by 10 years or more.”
Explain it to me like I’m five
SVB experienced a bank run.
Wait… So what’s a bank run?
- Do you remember piggy banks? When you put your money in…it will stay there, until you decide to crack it open.
- Banks on the other hand… lend money and invest, so when all the clients come running for their money, not all of it will be there. And at that moment a bank run starts.
The crazy thing is, SVB kept billions of VCs and startup funds. $210 billion to be exact.
Last Friday Silicon Valley Bank was forced to shut down…
- This was insane! 50% of all US venture-backed tech companies used SVB to hold their funds.
- Around $175B of customer deposits were seized by the Federal Deposit Insurance Corporation (FDIC). Why? We already gave hints about what happened, but let us explain…
- SVB was facing a liquidity crush… you know how the SEC told us they had the economy under control, well everybody was played…
- SVB bought treasury bonds when the interest rate was around 1.5%, and now we are at 4.5%.
- Because of the liquidity crush, they decided to default on the treasury bonds… it was a big hit for them, and they announced later that day about the circumstances. Bad timing if you ask us.
Startups and VCs got worried… maybe FTX was in the back of their mind.
- Everybody started to take their funds out… here is the problem, most of the money in the bank is lent off or invested.
- When some clients want their money back the bank can handle it, but when everybody wants to take the money out, it’s not a piggy bank… the money is not there.
Well, the SEC & FDIC made a statement Sunday
1/ The Federal Reserve is guaranteeing the deposits of all SVB customers, granting them full access to their funds since yesterday, effectively preventing a crisis.
2/ Currently, there are no known agreements to sell any portion of SVB.
3/ Signature Bank was also closed, but the Fed, FDIC, and Treasury have given them some kind of pass. They might also cover people who have money in other banks, but we’re not totally sure yet.
It looks like the chance of the problem spreading to other banks has gone down a lot, but there’s still a bit of a risk.
For the LatAm startup scene, it was painful this is why we decided to write today…we talked to some founders and many of them had their funds with SVB.
What can we learn?
After Sunday’s statement looks like everybody is now in the clear…
But still, here’s the lesson:
Don’t keep all your eggs in one basket. Easy to say hard to execute.
Now you know what happened, you can keep going with your day!