Silicon Valley Bank: A Cautionary Tale of Risk and Recklessness

 

Silicon Valley Bank: A Cautionary Tale of Risk and Recklessness

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Introduction

With its headquarters in Santa Clara, California, Silicon Valley Bank (SVB) is a financial organization that offers banking services and funding to start-ups, VCs, and innovative businesses throughout. SVB has been instrumental in fostering the expansion and development of Silicon Valley's startup and technology ecosystems since its foundation in 1983. We will examine Silicon Valley Bank's past, present, and future in this blog post, as well as provide an estimate of its size.

History of Silicon Valley Bank

Roger Smith and Bill Biggerstaff, two bankers who identified an opportunity to support Silicon Valley's developing technology sector, formed Silicon Valley Bank in 1983. It was hard for entrepreneurs to find funding at the time since traditional banks were reluctant to provide money to startups and early-stage businesses. Smith and Biggerstaff saw the need for a specialist bank that could comprehend the particular requirements of technology companies and give them the funding they required to expand.

Silicon Valley Bank: How Big Is It?

Since its establishment in 1983, Silicon Valley Bank has expanded tremendously. By 2021, the bank will employ over 4,000 people and operate in more than 30 countries.

• According to the 2020 report:

• Assets (2020): $89.4 billion

• Loans Outstanding (2020): $8.4 billion

• Net Income (2020): $762 million

What went wrong at Silicon Valley Bank?

The Federal Reserve's aggressive intention to raise interest rates to fight inflation and the recent decline in technology stock prices both had a significant negative impact on Silicon Valley Bank. Using customer deposits as it would normally do, the bank purchased bonds worth billions of dollars over the last couple of years. Although the value of these investments decreased, they were generally secure investments that paid lower interest rates than a comparable bond would have if it had been issued in the current environment of higher interest rates.

The majority of the time, there is not a problem because banks keep those for a long time – until they must sell them in an emergency.

Nonetheless, the majority of Silicon Valley's clients were start-ups and other technologically oriented businesses that began to require more funding during the previous year. Companies were forced to use their existing cash, which was frequently placed with Silicon Valley Bank, which was located in the heart of the tech startup universe, as venture capital funding was drying up and they were unable to obtain fresh rounds of investment for underperforming ventures.

Therefore, clients in Silicon Valley began taking their deposits out. That wasn't a big deal at first, but as the withdrawals increased, the bank had to start selling its own assets to accommodate client withdrawal requests. Customers in Silicon Valley were mostly rich firms, therefore they were probably more concerned about a bank failure because their savings were higher than the $250,000 cap on deposit insurance set by the government.

Because of the losses incurred by having to sell the bonds—which were normally safe—at a loss, Silicon Valley Bank was virtually forced into insolvency. Outside investors were sought after by the bank but they could not be located. The most traditional problem in banking—the good ol' run on the bank—destroyed the posh, tech-focused bank. In order to safeguard the assets and deposits that were still held by the bank, bank regulators were forced to take Silicon Valley Bank's assets.

Its impact on the Indian Economy?

• The tech sector is SVB's largest client, with many Indian start-ups, particularly in the SaaS (software as a service) market that caters to US clients, having bank accounts.

• In addition to being a banking partner, SVB had also played a significant role as a lender to a number of Indian start-ups as the industry in India began to take shape in 2010–2011.
  
  
  

• This could prove to be a significant obstacle, especially for young enterprises, during a financing winter when the amount of money available for start-ups is decreasing.
  
  
  

• One97 Communications, the business that owns Paytm, was one of the recipients of one of its most prominent investments, amounting to $1.7 million in total. Bluestone and Carwale are two more start-ups that have benefited from SVB investment.

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