SVB Meltdown: No money for salaries, start-up group starts petition for compensation
2 min read 12 Mar 2023, 10:33 AM ISTAccording to the NVCA, Silicon Valley Bank has over 37,000 small businesses with more than $250,000 in deposits.
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In the wake of Silicon Valley Bank's collapse, many startups by Y Combinators, a startup incubator that launched Airbnb, and Dropbox and have referred multiple entrepreneurs to the bank are struggling to secure working capital.
Y Combinator was affected by SVB’s collapse as 30% of companies are exposed through SVB and are at risk of not being able to make payroll, Tan informed.
At least 40 Y Combinator-backed Indian startups have anywhere between $250,000 and $1 m each in deposits at SVB. To address this issue, Y Combinator is petitioning for urgent relief and attention to be given to small businesses, startups, and depositors.
Tan has addressed a petition to Secretary Janet Yellen, Chairman Martin J. Gruenberg, Chairman Sherrod Brown, and Chairman Patrick McHenry, requesting urgent relief and attention for small businesses, startups, and their employees who are depositors at Silicon Valley Bank.
“This is an extinction-level event for startups," said Garry Tan, CEO of Y Combinator.
After SVB was seized by regulators on Friday, Tan urged Congress to take stronger action to rescue it.
He informed that the petition has been signed by 650 founders who employ more than 22,000 people.
About 44% of them are based outside of California.
The Federal Deposit Insurance Corporation (FDIC), which usually insures deposits up to $250,000, has announced that it has taken control of approximately $175 billion in deposits held at Silicon Valley Bank. SVB was ranked as the 16th largest bank in the US before its collapse.
According to a blog by YCombinator, "We are not asking for a bailout for the bank equity holders or its management; we are asking you to save innovation in the American economy."
There are major issues that are currently impeding the resolution of Silicon Valley Bank's collapse. There is no potential buyer for the bank. Usually, regulatory authorities search for a healthier bank to acquire the assets of a struggling bank; however, no other bank has expressed interest in this case.
The YCombinator has asked that small business depositors at SVB should be made whole and regulators need to conduct a backstop of depositors.
According to the NVCA, Silicon Valley Bank has over 37,000 small businesses with more than $250,000 in deposits.
"We ask for relief and attention to an immediate critical impact on small businesses, startups, and their employees who are depositors at the bank," the statement added.
The most pressing issue at hand is the substantial deposits held by Silicon Valley Bank. While the Federal government provides insurance coverage for deposits up to $250,000, anything above this threshold is deemed uninsured.
Nonetheless, the majority of Silicon Valley Bank's deposits are uninsured, a distinctive attribute of the bank due to its customer base being primarily composed of startups and affluent tech employees.
The blog further read that SVB's failure has a real risk of systematic contagion which can trigger a bank run on every other small bank.
AngelList's CEO, Sumukh Sridhara, has revealed that the company has developed a product to provide emergency capital to startups affected by SVB.
Sridhara informed that promissory note with a standard interest rate of 7% for a short-term loan from investors lending to meet urgent needs.
Furthermore, the SVB was a sizable institution, it had a distinct identity as it catered almost exclusively to the technology industry and venture capital-backed firms. The bank was heavily involved with the sector of the economy that was significantly affected over the past year.
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