How Silicon Valley Bank Failed – An Epic 48 Hour Collapse

It seemed like the perfect place to deposit your startup's newly raised Series A financing - Silicon Valley Bank (SVB). After all, they had been in business for over 40 years and their clientele consisted of founders, startups, and microcap companies in sectors like tech and biotech. Everyone was doing it, and deposits at SVB had grown from $60 billion to $190 billion between 2019 and 2023.

But then, things started to go awry. Interest rates had dropped to near zero percent during the pandemic, and SVB decided to invest their customer deposits in long-term bonds. They bought $80 billion in Mortgage Backed Securities with an average yield of 1.5%. It seemed like a safe bet at the time, but as the pandemic winded down, inflation began to skyrocket, and central banks started raising interest rates.

When interest rates go up, the value of the underlying bond goes down. Which sounds weird but is quite logical. Think about it. Would you rather buy a bond that pays 5% or 1.5%? Obviously 5%. Since there was less demand for the 1.5% bond, their price went down. That’s basic economics.

This meant that the $80 billion in Mortgage Backed Securities SVB had purchased was now worth significantly less. The combination of higher interest rates and the war in Ukraine caused stocks to fall, and private companies saw their valuations tumble. It became harder for startups to raise money, and many decided to withdraw their funds from SVB to pay the bills.

SVB realized they had a problem on their balance sheet - money wasn't flowing in fast enough. Since their bond prices had dropped too much, they couldn’t sell those to cover the shortfall. They decided to explore a capital raise by printing more shares in the company, which caused serious initial panic. Venture capitalists realized that if SVB failed to raise money, they might not be able to cover all their withdrawals. They began advising their startups to withdraw their money immediately.

This triggered a massive run on the bank. The stock price dropped 60% on Thursday March 9th, 2023, and people were lined up around the block trying to take their money out of the bank. SVB couldn’t find any backers to buy their shares and scrapped the plan. They said they would instead explore a sale of the company.

On Friday, the stock was halted before the market opened at 9:30AM, and by noon, the FDIC had shut the company down and taken control of customer deposits.

What had started as a seemingly safe haven for startups had turned into an epic 48-hour firestorm. SVB's decision to invest in long-term bonds had backfired, and the combination of higher interest rates and a war in Ukraine had caused a domino effect that ultimately led to the bank's downfall.

Unless someone bails them out, then for many startups and microcap companies, the collapse of Silicon Valley Bank means the loss of their hard-earned capital. It is a stark reminder that even the most established financial institutions can fail, and that startups must always be vigilant and aware of the risks they face in the financial market.