Silicon Valley Bank's collapse means startups and VCs face billions in losses

Silicon Valley Bank was shut down Friday by regulators. Getty Images

• SVB's startup and VC customers are staring down huge losses after its failure.
• Up to a fifth of the bank's uninsured deposits may not be recovered, according to Moody's estimates.
• A buyer is being sought for the failed bank by Monday to avoid more calamity for startups. 

The collapse of Silicon Valley Bank could leave startups and tech firms with losses that total billions of dollars. 

The Federal Deposit Insurance Corporation (FDIC) took control of America's 16th-largest bank on Friday. Customers at the failed lender have only the first $250,000 of deposits insured by the FDIC, meaning anything deposited at SVB above that amount is now at risk. 

The $250,000 sum is small change for many startups, founders, and tech firms dealing in tens of millions of dollars.

SVB customers stare down big losses

In a report on Friday, the ratings agency Moody's said it expected a recovery rate of 80% to 90% for uninsured depositors.

"The key drivers of SVB's failure was significant interest rate and asset liability management risks and weak governance," Moody's wrote in its downgrade of the stock. "The significant deterioration in SVB's funding and profitability profile reflects high risk in its financial strategy and risk management."

At the end of last year SVB had uninsured deposits in its US offices of $151.5 billion, equal to 88% of its total deposits of $173 billion, per its annual report filed with the SEC on February 24. While there were likely billions in deposits withdrawn prior to SVB's closure, there's still likely to be many billions left at risk.

For example, just one company – the streaming outfit Roku – said in an SEC filing that it held $487 million at SVB, meaning it stood to lose as much as a fifth, or almost $100 million, as per Moody's estimates.

SVB's deposits soared in recent years as it became the go-to lender in the VC ecosystem. According to its website, SVB banked close to half of all US venture-backed startups by December.

However, the sharp rise in interest rates in the past year hit its bond portfolio. A failed attempt at a $2.3 billion stock sale to raise capital to offset losses on bonds led to a collapse in its shares last week.

The scramble among investors to sell the stock in the wake of its failed equity raise added to unease about SVB.

Meanwhile, major customers like Peter Thiel's Founders Fund moved in recent days to pull their funds from SVB, per Bloomberg. Some encouraged the startups they back to do the same, fueling fears of a bank run.

Race to avoid "extinction-level event"

The window for SVB to avert catastrophic losses for its customers is narrowing.

The bank tried but failed to find a buyer before the regulators closed the bank, and receivers continue to look for buyers before markets reopen on Monday. Big banks such as JPMorgan as well as smaller lenders including Citizens Bank have been mooted as potential buyers.

"The FDIC will love to have the bank bought off their hands, and I am sure they will work furiously over the weekend to arrange a shotgun marriage," said Sandeep Dahiya, associate professor of finance at Georgetown University's McDonough School of Business, told my colleague Hayley Cuccinello. 

In an interview with The Information, Kristine Dickson, CFO of community lender Lead Bank, said it was would be "2,000 times better" if a buyer was found for SVB versus it being dissolved.

If a deal can't be struck, the potential consequences for its startup and VC borrowers are dire. 

Garry Tan of startup accelerator Y Combinator told CNBC that startups were facing an "extinction-level event" if the situation wasn't resolved. 

He said nerves were mounting over how startups will pay staff at the end of the month, and cover other expenses.

Major investors including Mark Cuban of "Shark Tank" have called for the Federal Reserve to step in and buy SVB's debt, while billionaire investor Bill Ackman has urged the US government to pursue a "highly dilutive" buyout of the bank.