As news of Silicon Valley Bank's impending collapse began to spread last week, Early Charm Ventures CEO Ken Malone realized he would need to act fast so he could still pay his staff.
Malone’s payroll provider took money from Baltimore-based Early Charm and put it into a Silicon Valley Bank account before paying his employees. He stopped using the payroll provider on Friday, just two hours after the federal government announced the closure of the California bank.
"If this had happened two days later, our money would have been trapped," Malone said.
Many companies were not as lucky as Early Charm, with their bank deposits getting temporarily trapped inside the failing bank. The technology industry breathed a sigh of relief this weekend when the federal government announced that all depositors of Silicon Valley Bank would have access to their accounts with their deposits fully guaranteed. Local technology leaders say Baltimore-area startups were relatively insulated from the collapse, but could still feel the ripple effects and can take away some important lessons from the situation.
For Malone, those ripple effects meant going through all the venture studio's customers to see which ones were backed by venture capital. He tried to get those customers to pay Early Charm right away, because he worried they might lose access to their finances following the collapse of SVB.
The bank became insolvent on Friday after a sell-off of its parent company's stock on Thursday. Investors dumped the stock after CEO Greg Becker announced that the bank lost $2 billion selling assets to shore up its balance sheet, and planned to sell $2.25 billion in stock. The bank had over $209 billion in total assets as of December.
A massive bank run followed, with investors and depositors taking out $42 billion on Thursday. McKeever Conwell of Baltimore VC firm RareBreed Ventures believes that the bank was trying to stay alive through the asset sale, but that a mob mentality caused the bank to collapse.
“They were just trying to do what they could to stay healthy, but once fear sets and the mob starts moving, it doesn't matter,” Conwell said.
Paycheck Protection Program data shows that 54 Maryland companies took out loans with Silicon Valley through the pandemic-era program. Many venture capital firms have cash deposits at SVB so there could be a national impact on fundraising, UpSurge CEO Jamie McDonald said.
"The ripple effects of uncertainty always drive caution," McDonald said. "It causes investors and others that are vital to the startup community to take a wait-and-see attitude."
She added that the crisis demonstrates the importance of having multiple bank accounts to preserve assets in case of a crisis. The technology ecosystem builder put together a list of alternative banks and financing resources for startups impacted by the SVB collapse. McDonald hopes the new collaborations across professions spurred by people reaching out to startup founders after the bank failure will continue after the bank failure.
The collapse of the bank also shows how more companies will need to focus on achieving profitability in an era of declining venture capital, said Jeff Cherry founder of Baltimore-based Conscious Venture Lab, a startup accelerator and Conscious Venture Partners, its venture capital arm. Many companies are focused solely on growth without being prudent about saving money. Companies without cash reserves fell apart when the venture capital market dried up and they couldn’t rely on new funding rounds to generate income.
“We have to focus on building real businesses that generate cash and get a product out that people want,” Cherry said. “We tell our companies that the best form of venture capital is a new customer.”
Cherry is concerned that the fear that caused the SVB bank run could spread to other regional banks. For example, the stock of San Francisco bank, First Republic has declined by 60% since Monday morning as of press time. New York's Signature Bank failed on Sunday with $110 billion in assets. There is a fear from some experts that the collapse of the SVB could cause more mainstream banks to become weary of working with venture capital firms and startups during a time when the industry is already struggling to access funding.
“It's clear that this might be not an isolated incident,” Cherry said.
