‘If bank crisis isn’t sorted in days, some startups won’t make payroll’
Silicon Valley Bank, which was closed by U.S. regulators Friday after massive withdrawals and the collapse of its share price, was the bank of choice for the Israeli high-tech sector. The California-based bank, which in 2008 opened an Israeli branch on Tel Aviv’s Ha’arba’a Street, held billions of dollars in deposits of Israeli high-tech companies, invested in many local startups and – no less important – extended credit to dozens of Israeli technology companies.
The U.S. Federal Deposit Insurance Corporation seized $175 million of the bank’s deposits, making this the biggest bank failure since the global financial crisis in 2008. The bank’s overall assets are valued at $209 billion.
The FDIC announced on Friday that clients with deposit insurance will be able to access their funds no later than Sunday morning.
For many small- and medium-sized Israeli startups, especially, SVB was their primary or only U.S. bank.
Israeli startups always keep some of their money in Israel, in shekels, in order to pay salaries here – usually enough for the next month or two, or even the next quarter or two, but these are relatively small amounts.
Most of their money, which comes from investors and customers, is held in dollars and parked in the United States. The amounts deposited in the United States have increased in the past two months as the new Israeli government’s moves to overhaul the judiciary have caused uncertainty and led companies to take money out of Israel.
Large so-called unicorns – privately held startups valued at $1 billion and up – and publicly held companies presumably divided their money among several U.S. banks. But for companies with capital in the single- or even double-digit millions of dollars, a single U.S. account was sufficient. If that single account was with SVB, the decision may turn out to have been a terrible mistake.
In the wake of SVB’s collapse, the bank’s Israeli customers are now divided into two groups: those who managed to withdraw most of their money when it was still possible and those who did not. This second group has a serious problem in the immediate term. The size of this group is not yet known.
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Some Israeli company founders withdrew funds from SVB in a timely fashion, in part thanks to warnings about the bank’s failing health and tips on what action to take that were posted in industry WhatsApp groups whose members are mainly in the United States.
“At the beginning of the event, American investors advised startups not to take money out of SVB, but Israeli entrepreneurs did, luckily for them,” says an entrepreneur in the industry who, like all the Israelis interviewed for this story, requested anonymity. “When the American investors started recommending withdrawing the money, it was already too late.”
Israeli banks, such as Leumi and Hapoalim, set up a war room that operated around the clock to help Israeli companies extract their money from SVB – and transfer it to them.
Still, not everyone was successful. Apart from those who did not act quickly enough, there were Israeli startups with money in interest-bearing deposits that cannot be withdrawn immediately. In other cases, the money in the accounts served as collateral for loans given by SVB to the companies.
“I have entrepreneur friends who were unable to withdraw the money, and now they are terribly anxious,” says the entrepreneur. “They sit at the computer and refresh the page every second, to see if maybe somehow the transfer left the account.”
The Deposit Insurance Bank of Santa Clara, the new bank that was created after the FDIC closed SVC and seized its assets, is to open Monday and begin paying out the bank’s insured deposits. The FDIC insures deposits up to $250,000 per depositor in the bank, but that is a small percentage of the more than $175 billion deposited in SVB as of the end of 2022.
The FDIC promised to return part of the uninsured amount to customers last week, but it is not clear how much will be paid out or when the bank’s customers will receive the rest of their money. It is entirely possible that it will take months to sell SVB’s assets and distribute the money.
But many startups need money immediately. In the United States, salaries are generally paid twice a month, in the middle and at the end of each month, so employers have only a few days to make payroll there.
Garry Tan, the CEO of Y Combinator, estimated that nearly one-third of the startups in his company’s startup incubator will not be able to make payroll at some point in the next month if they cannot access their money. The Israeli startups may benefit from having some money in shekels to pay salaries in Israel, but those whose money is stuck in SVB will struggle to pay salaries in the United States, especially if they have a large operation there.
In addition to deposits, SVB was a major provider of venture debt, loans that supplement the money startups raise from venture capital investors in exchange for shares. Here, too, there are two groups in the context of the SVB crash: companies that used their credit limit from the bank and those that had not.
Startups borrowed from SVB in order to delay their next funding round during periods of crisis, when it’s harder to raise capital. Those who did not take advantage of their credit line are now stuck without one.
“From what I’ve seen, most of the Israeli startups managed to get their money out of SVB,” says a knowledgeable financial technology entrepreneur. “Their big problem will not be the immediate cash, but the money they were counting on for the medium term.”
This means that the affected startups will have to move up their next funding round significantly, and it will be held under less favorable conditions. Other options include cutting expenses by dismissing employees or trying to find an alternative source of credit. That presumably will not be easy. “It will be much more difficult and expensive for startups to obtain credit,” says one tech investor.
The venture capital funds that invested in the startups will have to step in to help companies caught without cash on hand or money for the medium term. In recent months, these funds have not always been willing to help startups that have run into difficulties; they may have to choose which to help, and save only some of them.
Still optimistic
Beyond the immediate fallout, SVB’s failure could snowball and affect the entire industry. “The bank’s closure crushes the confidence that still remains in the startup and technology industry, and we are probably entering a long technological winter,” the investor says.
“The investors behind the venture capital funds, the limited partners, will become stressed, the capital the funds distribute to startups will slow down even more, and customers will be afraid to buy from small startups, which might collapse,” the investor says. He adds that even startups that were not exposed to SVB will have to react very quickly, enter survival mode and reduce expenses in order to guarantee that they will survive the winter.
People in the industry believe that an immediate solution will be found, in the form of a buyer who will purchase SVB as a going concern or a federal bailout that will quickly get money to affected depositors.
“If somehow the crisis ends at the end of the week, the entire event could be small and insignificant,” says an experienced entrepreneur. “But if not, we are going into a long receivership, and next week there will already be companies without money to pay salaries or caught without credit lines. There will be chaos in the global and Israeli high-tech market.”