On Friday 10 March 2023, Silicon Valley Bank collapsed and the US bank regulator – the Federal Deposit Insurance Corporation (FDIC) – occupied the bank’s Santa Clara, California, headquarters, declared it insolvent and took control. The bank was a key player in the US venture capital scene, and counts many start-ups and venture capital firms as clients. The scale and speed of the collapse stunned the banking and tech sectors.
Consult your business news source of choice and you are guaranteed to find a load of articles explaining in detail what happened and why. In summary, Silicon Valley Bank was brought undone by an old fashioned bank run. The heady days of the recent tech boom were good to the bank. At the end of the first quarter of 2020 it had just over US$60 billion in total deposits. Just two years later in 2022, it had just under $200 billion – an almost three fold increase. As global markets soured deposits dried up and the bank had to adjust its balance sheet, taking a significant financial loss in the process. That move shook investor confidence and they began dumping their stock. The market value of the bank plummeted to US$7 billion – down from US$44 billion just 18 months earlier.
The stock crash spooked deposit holders who began withdrawing funds. The run gained pace when some venture capital firms recommended to clients that they move their away from Silicon Valley Bank. By Thursday 9 March, bank customers had withdrawn almost US$42 billion.
What happens now?
What happens now? The whole situation is a raging dumpster fire, so no one really knows.
The FDIC guarantees bank deposits up to US$250,000, but that will be cold comfort to those whose funds on deposit have more zeroes.
There are a few scenarios from here:
- Best case – a buyer (probably a bigger bank) buys Silicon Valley Bank, repairs the balance sheet, covers the deposits, and resumes business as usual relatively quickly.
- Next best – the US government offers some kind of bail-out.
- Worst case – the FDIC sells off the bank’s assets piecemeal, recovering a much money as possible, and distributes the proceeds to deposit holders and other creditors.
Whatever happens – even if it is the best case scenario – sorting out the mess will take time. In the meantime, businesses with their funds locked inside the failed bank need to pay staff and keep the lights on. Some are already resorting to desperate measures, selling uninsured deposits to raise operating capital quickly. For the moment it seems that there are corporate finance firms willing to take on the risk, but quotes to desperate deposit holders are as low as 55 to 65 cents on the dollar.
What are the implications for Edtech?
How will the Silicon Valley Bank crisis affect Edtech companies? It depends.
If an Edtech company does not have money deposited in the bank there is probably no issue. It can stand back and watch events unfold with morbid fascination along with the rest of the tech business world. Unless of course the collapse of Silicon Valley Bank is the first domino to fall in another global financial crisis akin to 2008. Most pundits say that is unlikely, but then again it’s the 21st century and black swan, world shaking events seem to happen every other week.
If an Edtech firm does have its funds with the bank it will have to scramble now to find short term cash to meet operating costs. It then faces a nervous wait to see how the situation plays out in the longer term. If there is no prospect of the money being returned in the short term, and/or the sum recovered is significantly less than its bank balance before the meltdown, the business consequences could be very serious, and potentially catastrophic.
Venture capital firms that have poured money into edtech start-ups in recent years will also be concerned. If their invested capital is gone or substantially reduced, or a budding start-up in which the VC has invested goes under because it can’t access its cash, the losses could mount quickly.
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Source: Financial Times, WSJ