This photo shows SVB Financial Group’s TradingView stock market chart displayed on a smartphone with the SVB Financial Group logo in the background.
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Venture capital firms on both sides of the Atlantic are urging portfolio firms to move money away from beleaguered lenders Silicon Valley Bank, raising concerns about crackdowns at tech-focused banks is deepening.
Silicon Valley Bank shares plunged 60% on Thursday after revealing it needed to bolster its capital with a $2.25 billion equity raising from investors including General Atlantic. The company’s shares fell another 60% in pre-market trading on Friday.
SVB is a leading bank in the technology startup space with 40 years of relationships with the VC community. It provides traditional banking services as well as funding technology projects and is considered the backbone of the US venture capital industry.
Numerous VC funds including major players Founders Fund, Union Square Ventures, Cortu Management and others advise companies in their portfolios to move funds out of SVB to avoid the risk of being caught in a potential bank failure. According to the bank account founder, who spoke to CNBC on the condition of anonymity, having funds frozen at the SVB could be fatal for a money-burning startup.
San Francisco-based early-stage VC firm Pear VC asked its portfolio network to withdraw funds from SVB on Thursday. Pear’s portfolio includes Edge DB, an open source database, and Gusto, a payroll platform. A Gusto spokesperson said customers were not affected because the company “does not use Silicon Valley banks to fund payroll services or operations for its customers.”
Pear’s Anna Nitschke said: Chief Financial Officer, email to founder obtained by CNBC.
“In this market, large money center banks (think Citibank, JP Morgan Chase, Bank of America) are best suited, but due to time constraints, we prefer to open intermediate accounts at smaller banking platforms such as PacWest. We may be able to open more quickly: Mercury, or First Republic Bank.”
Pear was not immediately available for comment when contacted by CNBC.
Asked by CNBC if it had enough assets on hand to process withdrawals from the startup, SVB did not immediately respond.
Shrinking Crypto-Centric silver gate The pressure on banks and Silicon Valley banks this week reminded some founders of the 2008 financial crisis.
SVB is grappling with a difficult technology funding environment as the IPO market remains cool and VCs remain cautious against the backdrop of weakening macroeconomics and rising interest rates.
In the tech heyday of 2020 and 2021, ultra-low interest rates have made funding for startups much easier.
As interest rates rise, corporate valuations appear to have reset, and as the VC funding market slows, venture-backed firms are feeling the pinch. Despite the slowdown in funding rounds, the startup has had to continue to use up cash raised in previous rounds to cover overhead costs.
This is bad news for SVB. This meant that companies had to withdraw their deposits from banks while losing money on surplus funds invested in US Treasuries whose prices fell after the Fed hiked rates.
Hoxton Ventures, a London-based VC firm, advises founders to withdraw two months of “burn” or venture capital from SVB to finance overhead costs.
In a memo to the founders on Thursday, Hoxton founding partner Hussein Kanji said: See how this unfolds.
“If a self-fulfilling prophecy happens, the risks to you are asymmetric.”
Separately from CNBC, Kanji said, “The big danger for startups is having their accounts frozen while the mess is being sorted out.”
Kanji believes SVB could be bailed out by the US Federal Reserve or acquired by another company.
The company has hired advisers to explore a potential sale after bank financing attempts failed, sources told CNBC’s David Faber on Friday.