The Rise and Fall of Silicon Valley Bank: What Went Wrong?

Silicon Valley Bank (SVB) was a renowned bank that specialized in serving technology companies and startups. It was founded in 1983 by two entrepreneurs over a poker game and grew rapidly to become one of the largest banks in the US. However, on March 10, 2023, SVB collapsed due to a combination of factors that led to a run on its deposits and a liquidity crisis, causing the biggest bank failure since 2008.

According to some reports, SVB’s collapse was caused by a rise in interest rates by the Federal Reserve that increased its borrowing costs, a decline in tech stocks that reduced its collateral value, a wave of defaults and bankruptcies by its clients who were affected by the Covid-19 pandemic and its variants, and a lack of adequate capital reserves and risk management.

The Federal Deposit Insurance Corporation (FDIC) seized SVB’s assets and transferred them to another bank, leaving many startups that relied on SVB for banking services, loans, venture capital, and connections to other investors and partners facing financial difficulties and uncertainty. Some had to scramble to meet payroll, pay bills, or find alternative funding sources, while others lost access to their deposits or assets that were held by SVB. Some even had to shut down or lay off employees due to cash flow problems.

SVB’s failure also had a global impact, especially in China where it had a strong presence since the late 1990s. Many Chinese tech startups relied on SVB for banking services and cross-border transactions, and they also faced challenges in finding new banking partners who understood their needs.

SVB got involved in venture capital through its subsidiary, SVB Capital, which was established in 1999. SVB Capital invested in various venture capital funds and portfolio companies that focused on technology, life sciences, and other innovation sectors. It also offered direct lending to startups and growth-stage companies through its venture debt program.

SVB was one of the largest and most active investors in the venture capital industry, with over $209 billion in assets under management as of 2022. It had invested in some of the most successful fund managers and portfolio companies in Silicon Valley and beyond, such as Accel Partners, Andreessen Horowitz, Sequoia Capital, Airbnb, Stripe, Uber, and Zoom.

However, SVB Capital’s fate was tied to that of its parent company. When SVB collapsed, SVB Capital also ceased operations, leaving many venture capitalists and startups without access to their funds or loans. Some investors feared a bank run and advised their portfolio companies to move money out of SVB accounts. Some startups had to look for alternative sources of financing or face liquidity problems.

SVB Capital had different investment criteria for its fund of funds and direct investments. For its fund of funds, SVB Capital invested predominantly in top brand firms with a small allocation to smaller VC firms. It leveraged its deep industry relationships, unique knowledge of venture capital, disciplined analysis, and unrivaled access to proprietary deal flow to identify the best opportunities in the venture class. SVB Capital also offered a direct equity investment in some of its portfolio funds through its fund of funds.

For its direct investments, SVB Capital focused on companies that had strong growth potential, experienced management teams, differentiated products or services, large market opportunities, and clear exit strategies. It also provided flexible financing solutions that matched the needs and goals of each company.

SVB expanded its global presence by providing banking, lending, and investment solutions to technology and innovation-focused companies in different countries and currencies. It also established partnerships with local banks, accelerators, incubators, venture capitalists, and other ecosystem players to support its clients’ international expansion. SVB had a presence in over 30 cities worldwide.