A Louisville-based startup was in the process of transferring a majority of its funds out of Silicon Valley Bank when federal regulators took over the bank Friday morning.
"I think the scary part here is it's only $250,000 that it's insured by the FDIC," the company's founder and CEO told me in a phone interview Monday.
The founder shared their experience on the condition of anonymity, given the fluidity of the situation. While U.S. officials recently announced customers with deposits at Silicon Valley Bank could access all of their funds Monday morning, the founder confirmed the local company could not get past the log-in screen as of about 1:30 p.m.
"We've got millions of dollars sitting in this account that we can't touch," the founder said, noting that the transfer of funds from Friday has still not made it to the company's new banking partner. "Credit cards stopped working over the weekend, and while they appear to be working again, we cannot see the balances or pay them off. We have very low visibility into what's happening."
There are still a lot of unknowns, so the long-term impact is yet to be seen, but the founder said many startups in similar situations are all grappling with the same, immediate challenge: How to pay their employees.
"It's do whatever you do to make payroll — whether that's revenue from customers, whether that's a convertible note or a promissory note, whether that's a line of credit," they said. "[The Fed] announced that everyone will get their cash back, but it's not clear on what that process is, who has access and when, and so having those alternative plans in place has become a very real scenario for a lot of companies and just how to make the payroll this week.
"It's been incredibly disruptive."
Jackson Andrews, founding managing director of Endeavor KY, IN, OH, said the region is better off than other parts of the country.
"In that regard, from a very direct impact, [locally] it's a handful of companies that are banked by SVB, Signature and First Republic, as opposed to the fallout on the coasts," he said. "The reality is though, regardless of whether you bank with some of these affected organizations or not, it's just going to accelerate the cash squeeze that is occurring in the startup world. So it will heighten the cash concentration and the more-conservative market."
Many venture capital firms will be prioritizing their portfolio companies, Andrews added, noting that it would be a bad time to launch a fundraising round, especially for the local startups that will seek investment from the coasts, where a lot of companies and investors were affected.
"Many companies were reminded about the importance of diversification and contingency planning for services from outside providers and disaster recovery (particularly for tech companies with payment systems and processes wired or integrated with those providers)," said Kelby Price, managing partner of Keyhorse Capital, one of the most active investment firms in the commonwealth. "We are glad it wasn’t as bad as it could have been, but we hope the reminder stays fresh, strengthens startups, and keeps company communications with key stakeholders top of mind."
While GoWild wasn't affected by any of the bank collapses, several of third-party vendors it uses like Dropbox were, said Brad Luttrell, the co-founder and CEO of the Louisville-based startup. He said he and his team spent much of Sunday planning for alternative solutions if the platforms it uses everyday to do business were forced to shut down operations due to the inability to access funds.
Luttrell said the Silicon Valley Bank failure has a wide-reaching impact on the startup ecosystem, specifically, because it had venture debt offerings. For example, a startup that raises at least $4 million in a VC funding round could access an additional $800,000 through a SVB loan.
About half of all venture-backed startups in the U.S. banked there, according to SVB's website.
"That's what's really going to hurt, completely losing that option," he said. "Regional banks, especially here in Kentucky, are not going to give a company that's losing money a line of credit."
Most tech companies are not generating revenue fast enough to fund scaling operations. That's why venture capital exists — but even that's in short supply these days.
As we reported last week, venture capital investment in Kentucky startups fell by more than 60% between 2021 and 2022.
According to Pitchbook, a firm that tracks venture funding totals across the country, Kentucky companies garnered just $86 million last year, compared to nearly $238 million in 2021. That's a drop of over $150 million, or almost 64%, decrease.
GoWild has raised about $6 million since its founding in 2017.
"The investment landscape changed overnight in the fall," Luttrell said. "And this is going to make it just more competitive for startups. You need to be raising much sooner than you thought you needed to. You need to raise six months or a year more runway than you think you need, just to be able to ride it out."
