in 2022 the VC fundraising climate soured, with valuations dropping 50%+
rather than fundraise and take a huge dilution hit, founders of well-performing companies cut their expenditures, invested in top-line growth, and opened a line of credit (usually at SVB)
Why SVB? They specialize in debt products for early and growth stage companies
the line of credit’s (LoC) role is to be an emergency injection of cash in case startups have a bad quarter
SVB *required* startups consolidate all of their deposits and credit cards to SVB in order to get the LoC
This deposits requirement is typical because an LoC is a lien on receivables
if deposits are transferred out of SVB, the LoC is cancelled and there is likely a 1% cancelation penalty. So a $10M LoC comes with a $100k penalty
As panic settled, founders had to quickly determine if SVB would survive. If they panic and transfer money, but SVB survived, the LoC is cancelled and the $100k cancelation penalty kicks in. If they underestimate the situation all deposits could be frozen and part of it lost
because SVB required deposits consolidation, many companies did not have another corporate bank account open, so when founders decided to pull their deposits Wednesday or Thursday, they had to first open up a bank account, which can take 24-36 hours due to KYC checks
by the time new accounts were open Friday AM, California had stepped in and taken over the bank, shutting down all wires
So last weekend founders were unsure how to make payroll, which must be run by Monday. If they miss payroll a company will face heavy fines and employees get screwed (Eg furloughs, layoffs, etc)
VC’s were scrambling to provide emergency loans to their portfolio companies to make payroll, with the hope that the SVB deposits would be accessible next week. This assumes the VC’s are not effected by SVB themselves, and that loans can be approved and wired in record time
Note: there have been 565 bank runs since 2000. Depositors were made whole (or nearly whole) in all of them. So the question was how long it would take for deposits to unfreeze and how to minimize payroll impact
Many regional businesses depended on SVB as their payroll account. Agriculture workers, small & midsized businesses, construction projects, and yes, tech companies were at risk of missing payroll
For @Horizon3ai , I was lucky to have acces to cash and immediately loaned $1M of my personal money Friday AM to make payroll while we waited for the FDIC to sort out our deposits. No furlough and no missed mortgage payments by my teammates
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