Mar 29, 2023
SVB's Demise Swirled on Private VC, Founder Networks Before Hitting Twitter
(Bloomberg) -- Politicians called the dramatic collapse of Silicon Valley Bank the “first Twitter-fueled bank run.” But in the highly networked tech industry, public social media feeds didn’t actually drive the fast-growing anxiety over SVB’s financial position — that happened in private.
Channels like messaging platform WhatsApp, email chains, texts and other closed forums were full of chatter over the bank’s financial precarity well before those fears showed up Twitter. In tech, where executives’ networks can dictate whether companies have access to the best information, warnings about SVB had been simmering for a while when they boiled over into wider view online.
“It wasn’t phone calls; it wasn’t social media,” said a Silicon Valley startup founder who watched the fear escalate that week in March. “It was private chat rooms and message groups.” This person, who requested anonymity discussing private message conversations, said it was particularly alarming to hear from other founders who said they would move their money.
By the time most people figured out that a bank run was a possibility on Thursday, March 9, it was already well underway.
Gunjit Singh, the San Francisco-based co-founder of Electric Sheep Robotics, first heard chatter about Silicon Valley Bank’s financial straits in January via WhatsApp messages. Initially he dismissed it. His company, which makes robotic lawn mowers, had a line of credit and most of its cash with the bank, but the worry at that point was mostly theoretical. “There are rumors about everything,” he said.
The rumors, of course, turned out to be true. Silicon Valley Bank had liquidity issues thanks to the combination of rising interest rates and a large portfolio of long-term, low-interest assets. When it moved to shore up its financial position in early March, many people started taking the risks more seriously.
It was Wednesday, March 8, the day before the company’s stock tumbled 60%, when Alfred Chuang became aware of worries over Silicon Valley Bank’s health, mostly via email and phone calls. Chuang, an investor at VC firm Race Capital, said chief executive officers of public companies began warning him about the bank that evening. “I knew it meant one thing: They were withdrawing money,” Chuang said. Race Capital “exited out of SVB in record time.”
Entrepreneur Vijay Rayapati also started getting phone calls on Wednesday. Rayapati, co-founder and CEO of the software firm Atomicwork, was at lunch at a conference in Santa Monica, California, when he missed two calls from a friend and fellow founder. Swept up in the hubbub of the conference he didn’t think to call back right away. But the same friend dialed again twice that night, waking Rayapati in his hotel room. What, he asked, was Rayapati doing about his money at Silicon Valley Bank? The friend was already moving out his funds.
Understanding the risk, Rayapati acted quickly. He tried to pull out Atomicwork’s cash and asked his team to transfer a year’s worth of operational expenses to the startup’s subsidiaries. At 2 a.m. Thursday morning, Rayapati wrote a message to a close-knit WhatsApp group of India- and Silicon Valley-based founders of software companies called DPC, short for Daru Pe Charcha. Daru is slang for alcohol in Hindi, and daru pe charcha translates to “chat over drinks.”
“Folks, we were alerted by multiple people to secure some funds outside SVB due to their liquidity issues and ratings downgrade,” he wrote to the group. “This might cascade. Just a friendly warning.”
One of the people who saw that message was Avinash Raghava, CEO of SaasBoomi, a group of hundreds of mostly software company founders in India and the US. The danger was credible, Raghava concluded, and he shared the warning with a WhatsApp group of about 400 people. When he woke up the next morning, 265 messages awaited him on the group.
Founders were sharing everything – Sam Altman tweets, news clips from the web, their own challenges. “It was like we were all locked inside when the fire alarm went off,” said Raghava. “And nobody knew where the exit was.” The “Is Typing” blurb did not stop on the WhatsApp group for hours. Soon, Raghava said, the original warning had found its way to a larger group of 1,500 founders on a Slack-like channel called Circle.
Around the world, similar groups were circulating their own messages of warning. Large text threads lit up in the US, including among chief financial officers of big startups, according to two people familiar with the communications. On the threads, many startup founders and executives worried that a collapse of Silicon Valley Bank would affect the industry’s infrastructure. By noon on Thursday, one person said, concern in many such groups had turned to panic.
“I was in total distress”
Worries about SVB began long before that chaotic week in March. Some of the earliest inklings of trouble at the bank started back in November. That’s when Greenoaks Capital Partners warned its portfolio companies to exercise caution around deposits with SVB. Another investment firm, Jericho Capital Asset Management, also started quietly sounding the alarm that month, according to a person familiar with the matter. Jericho declined to comment on its early warning, which has not been previously reported.
There’s been plenty of debate, even within the normally friendly world of venture capital, about the morality of investors advising companies to bail on SVB — depleting its deposit base and exacerbating its cash crunch. In many cases, investors moved to warn companies in private, perhaps seeking to both safeguard their investments and avoid a larger bank run.
For founders whose companies’ survival was on the line, though, there were fewer qualms. By Thursday morning, Rayapati was racing to secure his company’s cash. “I was in total distress,” he said. His credit and debit cards were SVB-issued. On Thursday, he showed up early at JPMorgan Chase and Bank of America. The banks said they’d start the process, but it would take several days to get a new account up and running.
Meanwhile, Rayapati’s WhatsApp message was going viral in ever-larger groups of founders. One person had reposted the message with his contact details appended. The entrepreneur was flooded with calls and messages. “Many of my fellow founders were in complete shock. I was suddenly thrust into the role of a subject matter expert, when I clearly wasn’t,” he said. “People were asking me, what do I tell my board, how do I pay my employees, my credit card isn’t working, I don’t have any other banking relationship and how should I get one, should I fly to the US today?”
By Thursday, the worry was widespread. On a forum for Y Combinator startups, the accelerator’s president Garry Tan wrote, “Anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously.” In an email thread of more than 1,000 founders backed by Andreessen Horowitz, many entrepreneurs were encouraging each other to pull cash from the bank. David George, a general partner at the firm, weighed in somewhat cryptically: “Hi all, We know you have questions about how to handle the SVB situation,” he wrote. “We encourage you to pick up the phone and call your GP.”
In many cases, investors stayed off social media during these critical hours. One venture investor with dozens of investments in common with both Sequoia Capital and Andreessen Horowitz said some of their founders received personal phone calls from the two venture giants early Thursday morning.
“I've never seen phone calls be as popular as they were for those 48 hours,” Chuang said.
Matt Murphy, a partner at Menlo Ventures, said his firm alerted its startups late Thursday that a bank run was underway. By then, it had become clear to observers. The firm told all its founders to move 30% of their capital to another bank “as fast as possible,” Murphy said. “We told every partner to call every CEO. For some partners it was five calls, for others it was 14.” Murphy said the firm opted for phone calls instead of text messages or email in an attempt to have “a more calming conversation.”
Singh, the founder of Electric Sheep Robotics, decided to pull his money a little after noon on Thursday in San Francisco. It meant violating his loan agreement with SVB, which required him to keep most funds there. But, he said, “I figured if the SVB relationship was worth anything anyway, I could smooth it over the next day” — if the bank recovered. Around 2:30 Pacific, with his transfer order in, he got a call back from an investor who congratulated him on his prudent risk management. By 3 p.m., he had drafted an email to his board, informing them of his decision.
But it was too late. The wire transfer didn’t go through.
Rayapati, another founder who theoretically got an early start, spent Thursday fruitlessly trying to move his money out of SVB. On Friday morning Rayapati arrived in San Francisco, near where SVB was headquartered, hoping he would be able to move his cash in person. As he exited the plane, his WhatsApp was flooded with messages, but he didn’t have time to open them.
Rayapati jumped in a car to take him to the hotel. When he arrived, Uber declined his SVB-issued credit card. When he reached the Marriott Hotel, he was told at the lobby that his card on file was invalid. About an hour earlier, SVB had been taken over by the Federal Deposit Insurance Corp. The entrepreneur swiped his personal card for both transactions.
That day, once SVB had officially failed, the true panic spread on Twitter. VCs wondered whether startups would ever see their money again, and fiercely lobbied lawmakers to rescue depositors, in some cases sending semi-hysterical all-caps missives. And then, after an agonizing weekend, the government stepped in and said it would guarantee deposits. On Twitter, the crisis subsided almost as quickly as it began.
Murphy, the Menlo Ventures investor, still feels a little shell-shocked by SVB’s collapse. He had been relatively slow to move funds, he said, because up until the final moments it was far from clear that the decades-old institution would so swiftly implode. He had served on SVB’s venture capital advisory board for 20 years, along with a dozen other representatives from elite venture firms. The quarterly meetings typically focused on a single topic, which ranged from VC funding strategies in China to up-and-coming sectors.
“There would always be great wine and great discussions,” Murphy said of the friendly roundtable discussions, where most top firms were represented. Murphy said the group last met during the pandemic, about 18 months ago, before interest rates became a topic of interest. Prior to the event, the bank, which did extensive business with California vintners, sent out bottles of wine to investors to sample during the Zoom meeting.
But for the bank, even the best networks could take it only so far. Many of those investors — who shared real affection for SVB, as highlighted by a Sequoia Capital investor’s heartfelt elegy for the financial institution shortly after it fell — were the same ones who quietly advised startups to head for the exits.
--With assistance from Hannah Miller.
©2023 Bloomberg L.P.