SVB Collapse: Why Customers Are Keeping Money At Bank

Some customers are keeping their deposits at Silicon Valley Bank since the FDIC took control of the failed California bank.

Allie Egan was in Los Angeles last week when the lead investor of her New York-based hormonal health wellness platform company, Veracity Selfcare, told her about the potential collapse of Silicon Valley Bank.

On March 9, a day before the FDIC shut down the California bank and took it over, Egan was in a ride share when she attempted to transfer funds out of the bank.

DON'T MISS: New Silicon Valley Bank CEO Asks Customers to Come Back

But SVB, despite its work with countless of tech companies over nearly four decades, does not have a user friendly platform.

"Their tech is horrible and their checking account banking is so archaic," she told TheStreet.

Even sending a wire, where money is transferred from one bank to another, was impossible to do on an app via a smartphone. Egan, the founder and CEO of Veracity, attempted to move the money again on a laptop, but it failed to work on March 10 or even the following Monday, three days after the FDIC closed it.

Initially, Egan was wary of the idea of transferring the money over to another bank because her company has a line of credit with SVB and part of the agrement included keeping deposits at the bank.

But the warning from the investor, who attended a town hall with the bank on March 9, and numerous calls and texts from other investors, prompted her to make the decision.

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Like many other founders of startups, who make up the bulk of SVB's customers, Egan was unable to transfer her funds.

But many other startup CEOs and venture capitalists were successful, resulting in a massive bank run.

The first time Egan heard from a SVB banker was on March 13. She chose to keep her funds with SVB because of the line of credit that requires companies to keep "almost 100% of deposits" at the bank.

Egan, who said she experienced various emotions, including anger and frustration over the past week, said she does not plan to transfer the funds right now and was fortunate that her company pays employees monthly and was not facing a payroll  deadline unlike other founders last week.

“It is probably the safest place to put your money in for the next 12 months or until something gets announced and it gives us access to the capital," she said.

Veracity, which has an all-female team, has raised just under $7 million in two major rounds from Global Founders Capital, Meridian Street, L Catterton, Great Oaks, Silas and FAB Ventures.

SVB's CEO Asks Customers to Return

The new chief executive of the new Silicon Valley Bank, Tim Mayopoulos, asked its customers on March 14 to keep their deposits with the new company, which is called Silicon Valley Bridge Bank NA.

"We are open for business and are hard at work bringing all systems and solutions back online to support you," he wrote in a LinkedIn post.

He said the bank is issuing new loans and honoring existing credit facilities. Mayopoulos asked customers to either leave their money at the bank or wire their money back.

The parent company, SVB Financial, filed for bankruptcy protection on March 17. The bank's assets were not included in the filing. The chapter 11 filing is the largest bankruptcy for a bank since Washington Mutual filed in 2008.

The FDIC and the Federal Reserve said on March 12 they would ensure that all depositors would receive their money, even the ones that had balances over the $250,000 FDIC-insured threshold.

SVB was the second-largest bank failure in U.S. history and has shaken many investors. It was the result of a bank run, caused by the firm’s announcement that it failed to raise the additional capital to increase liquidity.

The bank made investments into long-dated government securities, including Treasury securities. When depositors demanded their funds, the bank sold the securities, taking a $1.8 billion loss. The Santa Clara, Calif., bank then attempted to raise $2.25 billion in capital by issuing new common and convertible preferred shares to cover the shortfall.

Depositors made a run on the bank, withdrawing their cash and transferring it into other banks.

SVB Customers Want to See 'Where Dust Settles'

Josh Abady, co-founder and CEO of Manna, who has been a customer of SVB since 2021, said he only found out about the bank's closure from the media when he read several articles on Apple News. 

SVB did not communicate with its customers before it was closed by state and federal regulators.

He plans to keep his money at SVB since he is willing to "give them the benefit of the doubt," he told TheStreet. 

“Up until this point, SVB was the best banking experience I had," Abady said. "They understand startups and the struggles they go through and offered institutionalized support and free wires."

While Abady originally was planning to withdrawl money immediately, he is willing to wait since he "wants to see where the dust settles."

Abady also has a concern that is common among many startup founders. Finding another finanncial instituation that will bank with startups is a "laborious process and takes time away" from running his company, a New York-based app that allows recipes to be customized to any diet. Customers can shop for ingredients with Amazon Fresh and Whole Foods. 

Manna has raised over $600,000 from equity crowdfunding, angel investors and institutional angel funds.

Why Some Founders Will Never Return to SVB

Alyse Dunn, founder and CEO of CareCopilot, a New York-based early-stage startup that rewards people for taking care of their aging parents, said she was one of the fortunate ones because she always had two bank accounts.

Dunn was less concered than other CEOs because her startup, funded partly by Fearless Fund, was founded in 2021 and currently has three employees with a "few hundred" users. Her balance was under the FDIC insured limit.

"All things considered I'm really lucky," she told TheStreet. "I knew I would get my money back and my only worry was I didn't know when. I could have run a few payrolls."

Dunn heard from her investors, including Visible Hands, which runs an accelerator and a fund for diverse founders, who reached out several times with different resources for loans.

She attempted to transfer the funds on March 10. Even though she was able to log into SVB, the transfer did not occur. 

Dunn tried again at 9:30 a.m. E.T. on March 13 and the transfer was finally completed on March 14.

“I definitely moved all of my money out of SVB and will not be moving it back," she said.

Dunn does not plan to give SVB another chance despite her past good relationship with the bank. Her relationship with the bankers was positive - they previewed her pitch deck and introduced founders to potential investors at its parties.

Matt Michaelson, founder of Smalls, a New York-based human-grade cat food company, said he transferred his funds out of SVB the morning of March 13.

He began banking with SVB in the spring of 2020 after receiving his series A fund and had a $3 million four-year term loan with the bank. His company, which sells fresh cat food directly to consumers, raised a total of $35 million in pre-seed and series A funding.

Michaelson said he started receiving text messages from investors at 10 a.m. on March 9, inquiring if he had money with SVB. After repeated attempts to reach the bank, a SVB banker called to reassure him that his money was safe.

Since the company had a venture loan with SVB, Smalls was "required to keep 100% of deposits with them," and did not have another bank account, he told TheStreet.

After multiple conversations with his investors, which include Left Lane Capital, Founder Collective, Companion Fund and Lakehouse Ventures, and his lawyers, he attempted to wire his funds out on March 9, but the website was frozen.

Despite having a loan with SVB, "we decided the risk was worth it," he said.

With "tens of millions" of dollars in the account, Michaelson wired everything except for the loan amount. 

After a "race against the clock" since he had to open a second bank account quickly, Michaelson said there are no plans to move money back to SVB.

“We had a great relationship with SVB and they uniquely understand high growth venture-backed businesses," he said. "We were really happy with them and disappointed and sad to see them do this. It's a big loss to the entrepreneurial ecosystem."

The tech community was extremely supportive during the collapse of SVB.

"The community is really tight knit and info travels fast,"  Michaelson said. "Everybody really came together and it is really lovely that founders asked about each other and investors offered support. The support came from out of the woodwork."