The closure of Silicon Valley Bank, the 16th largest US bank on Friday, March 10, 2023 reverberated all over the startups and innovation world. Silicon Valley might be a physical location, but for decades has been the most revered global innovation center, a place that gave us the likes of Google, Apple, Facebook, YouTube and many more, a place where many still aspire to live work and play.

SVB was no ordinary bank. It was The Bank for and of startups: small, medium, unicorns and their respective VC’s. Their clientele and business were certainly different, in terms of risk, margins, modeling, as that meant a symbiotic relationship with the tech startup community.

How has this happened within 48 hours? It was not exactly that fast, the signs were there. SVB is a 40-year-old bank, built on a responsible reputation of working with one of the most sophisticated innovation companies. The bank invested in a $21 bn bond portfolio while the interest rates were zero or near zero, yielding an average of 1.79%, while the current 10-year Treasury yield is approximately 3.9%. Meanwhile the FED has continued to raise the rates in an attempt to curb the staggering inflation and the venture capital has dried up, forcing the startup companies to withdraw more from their SVB accounts.

That left Silicon Valley Bank with a big number of underperforming bonds while their clients kept withdrawing leading to the 48 hours of mass panic transfers, shortly after the bank announced losses and the stock began rapidly dropping in value.

Although not a bank that might produce the same ripple effect as the collapse of Lehman or Washington Mutual in 2008, this is an event that affects the innovation startup ecosystem for years to come. Garry Tan, the Y Combinator President/CEO and one of the most vocal tech VC’s on SVB collapse referred to the event as ‘extinction level event’ for startups and will set startups and innovation back by 10 years or more’.

The facts are sobering for the Silicon Valley, but also national and international tech startups who were heavily dependent on the SVB funds, many of them having an exclusive relation with the bank. About 2,500 venture capital firms and over 3,000 tech startups were among SVB depositories. 1,000 out of these startups are in immediate danger of not being able to honor their payrolls. Assuming they can find bridge loans to solve this problem temporarily, they still face an eventual closure.

Other SVB depositories startups might be in a different impasse: delayed M&A’s, product launching, and an inevitable devaluation.

The bank’s collapse reverberations extend beyond the San Francisco Bay area. SVB had branched not only in the US, but also in Canada, UK, Ireland, Denmark, Sweden, Germany, India, China and Hong Kong.

The bank’s UK arm was shut down by the bank of England and it will be put into insolvency this Sunday evening. An estimated 30% of UK tech startups have ties to SVB and potentially 10% are facing challenges.

Over 60 Y Combinator – backed companies are Indian startups, some registered in Delaware and some in California and more than 24 of them have more than $1 million deposits with Silicon Valley Bank.

The Bay Area is home to a good number of Israeli startups and SVB had a branch in Tel Aviv as well. Approximately 500 Israeli tech startups are linked to SVB, which prompted Israel Prime Minister, Benjamin Netanyahu to declare Saturday in Rome that “we will take steps to assist the Israeli companies, whose center of activity is in Israel, to weather the cash-flow crisis that has been created for then due to the turmoil”.

Aside of an anticipated government intervention, or SVB being acquired by another financial institution, what are the immediate solutions to raise the much-needed payroll and basic companies operating funds?

For one thing we have a variety of fund-raising platforms, some even built on blockchain, with the technical possibility of instant transfers and dispersing in different coins: FIAT, stablecoins or crypto.

Brex, a fintech platform focusing on spend management, with offers for startups, initiated an ambitious campaign to raise $1.3 billion for an Emergency Bridge Credit Line over the weekend. The emergency credit line can help making payrolls for over 500 applicant companies, who collectively have a $10 billion in aggregate deposits at SVB.

Since the last financial crisis in 2008 a few things have changed: the birth of cryptocurrencies and blockchain applications and an increasing number of startups and larger companies backed by major venture capital, who innovate and operate in the DeFi and Web 3.0 space. Coincidentally, Satoshi Nakamoto introduced the Bitcoin whitepaper soon after the start of 2008 crisis.

In theory this is exactly what web 3.0 platforms are designed to do: ensure the functionality of a decentralized financial system, liquidity, flow and a safe, validated transactional process. They are the promise of an alternative to traditional commercial and central banking system and national currencies.

There are also more financial regulatory tools to prevent and address such crisis and intermediary platforms between the traditional finance and the expanding Defi ecosystem.

Some of the blockchain and crypto companies are no exception when it comes to liquidity problem posed by the SVB insolvability.

Circle, the company behind USDC stablecoin declared that it will “cover any shortfall” caused as a result of $3.3 billion being held by SVB.

The USDC , which is a digital stablecoin pegged to the US dollar fell to 87 cents to the US dollar, but according to Circle it will be honored at a 1:1 ratio with the US dollar.

Stablecoins such as USDC are cryptocurrencies and pegged by real assets and currencies and designed to be a reliable intermediary between the traditional finance and the volatile crypto markets.

The question is how and where to keep your liquidity? In a traditional bank where the deposits are insured only up to $250,000, in a highly volatile cryptocurrency or in a stablecoin that could depeg?

While some urge for more regulations and central banks interventions, the DeFi evangelists propose even more autonomy, self-validated and ultimately self-repairing financing platforms.

Although we are all awaiting nervously to find out how the SVB and its depositories’ situation will be addressed, we have to keep things in perspective. It is true, Silicon Valley Bank was a well-capitalized bank, at a level of a small or developing country GDP, but in the big scheme of the US banking world, we are talking about $30.2 trillion, with the 15 largest US banks holding a combined total of $13.4 trillion in assets as of December 31, 2022, according to FDIC.

Alina Aeby, PhD

Founder/President- SV Proptech