For many of us, one phrase brings the entire Silicon Valley Bank debacle home: making payroll.
Of course this impacts the salaried workers wanting to make sure they can pay rent, the daycare bill, groceries. But for a smaller subset who actually run businesses, making payroll is basically everything, the barometer of whether you get to exist another week. In this uncertain 2023 especially, against layoffs, rising interest rates, and tighter spending, payroll remains that fixed number on the back of the envelope. Divided into cash reserves to see how many weeks you can go on. Multiplied by a certain number of weeks to set, say, a sales goal. Circled, as if to say, you just need to get this far this week.
Making payroll is the least-talked-about miracle on Main Street. So as founders who bank with Silicon Valley Bank panicked this weekend over whether or not they would make this payroll cycle (or any subsequently), I felt real sympathy, especially as a startup founder myself. This was not simply a case of tech bros looking out for themselves (although some of that behavior got us here). It was a crisis that underscores just how deeply connected our financial systems and businesses, big and small, continue to be.
Much of the coverage of Silicon Valley Bank has confused and perplexed me, so I turned to a couple of experts to better understand both what happened and what businesses need to do right now: Hemant Taneja, the CEO and managing director at venture-capital firm General Catalyst, who has topped many people’s lists as a voice of reason in Silicon Valley over the last few days; and Meredith Wilson Parfet, CEO of the crisis-management consultancy Ravenyard Group, and a startup adviser and active investor.
Here, in their own words, are their insights:
What happened?
Taneja: Silicon Valley Bank was rebalancing their portfolio and took some losses because of the decisions they made around investing the capital before interest rates shot up. This forced them to raise capital, and the communication made by the bank raised speculation about the health of the bank. A few VCs indicated to their companies that, while the risk of failure of SVB was low, they might want to take out their deposits. Panic set in, and within a day tens of billions of dollars left the bank and put the bank in a precarious enough position for the FDIC to take over.
Why is Silicon Valley Bank special? What does it mean to startups and how does it operate differently from a traditional bank?
Taneja: SVB was built to support the needs of our technology startup ecosystem. Their underwriting process for lending to companies takes into account the viability of its investor base and the fact that these companies are building in immature markets. Even though they are a bank with conservative credit standards, [the people at SVB] took the time to understand the ecosystem and startups, and so SVB was more willing to provide loans to help fund growth, ensure liquidity for working capital, or bridge between funding rounds. While many of their clients had $500 million-plus on deposit, they were always willing to grow with them from the time they only had $250,000 from their first angel check.
The collapse has rippled beyond the tech sector. My business relies on a payroll service that banks with Silicon Valley Bank; we don’t bank with SVB, but some of our transactions were uncertain because our vendors or intermediaries do. (In the end, we are fine.) Is this common? What’s the effect on Main Street?
Taneja: When one of the 20 largest banks fails, it’s hard to assess the impact. Payroll for companies that bank there is an obvious one, but there are thousands of other companies that rely on payment services through SVB for them to generate revenue that then allows them to pay their employees, suppliers, etc. I suspect we’ll see more of this over the course of the week.
Parfet: Each crisis is somewhat different, and the required response is different. In SVB, some of the groups we’ve worked with over the last few days are focused on the impact to short-term liquidity. Their most pressing crisis is operational survival: payroll, utilities, vendor payments. Other groups, like VC fund managers, are facing investor panic and portfolio company shortfalls. Their most pressing crisis is one of careful communication and long-term investment performance. One non-tech sector client impacted by the bank failure was preparing for an upcoming major capital expenditure. Their crisis is potential project disruption and liability with downstream service providers. In each case there is a deep trickle-down effect to Main Street, where small businesses who have never heard of Silicon Valley Bank have payments on hold or families whose paychecks are at risk.
What do startups and small businesses need to do now?
Taneja: Diversification is important. I do believe that maintaining relationships with two to three banks depending on the size of the cash balance is prudent and doing it across a mix of large and regional banks is a good idea to best manage the risk.
Parfet: We talked to a company whose entire banking portfolio is housed at SVB. They were in a panic trying to raise funds to cover the entire balance. Information is changing quickly. The next right thing is to buy time and focus on short-term cash needs. We encouraged them to think in smaller chunks about what cash they needed to get through the next few weeks. Then we advised them to pick up the phone and call vendors, talk to employees, and reach out to customers. They were worried about what to say when they didn’t have information. Our advice was to keep it simple and keep it human. ‘This is a terrible situation. We don’t have a lot of information. We know this impacts you too. We’ll keep you posted every step of the way. Let’s keep lines of communication open.’
What changes should we consider going forward?
Parfet: The organizations that survive crises intact are ruthlessly focused on what matters most to them and are willing to let the extraneous fall by the wayside. After SVB, you ask, ‘Is it reasonable to expect those of us with more than $250,000 in deposits to keep that cash among so many sources?’ I would advise people to make a list of questions like that, so they don’t forget them, and then go back to essential priorities for this immediate phase of acute crisis. One of the priorities for SVB account holders is to look at their outstanding loans. Review your loan documents for default provisions and repayment terms, talk to financial advisors and lawyers about your debt situation, and stay on top of how outstanding debt and future draws will work.
An entrepreneur friend once told me he had more in common with the hot-dog vendor down the street than his former colleagues in big-technology companies. He was referring to the risk, the fortitude, the mental and mathematical gymnastics, yet also the simplicity of the north-star question: Is more money coming in than going out?
It dawns on me that the last few days have been filled with squabbling over how many people really are affected by Silicon Valley Bank, and whether companies relying so greatly on venture funding deserve to be supported over those who rely on sales and revenue, like the hot-dog vendor. Further, the decision to honor deposits at the bank has led some to ponder why we cannot take such swift action on forgiving student loans or offering rent relief.
Arguably, though, all of these issues are interconnected. We bailed out a bank so we could pay our employees, who in turn use that money to pay off mortgages and debt incurred to get the degrees that allowed them to get their jobs in the first place. Many companies drew down on their deposits from the bank because they couldn’t raise more cash—and seemingly lacked a steady or significant revenue stream. This raises an existential question about their viability, no matter how many bailouts are coming. At some point, we need to ask more about the house of cards our entire livelihoods rest upon.
Correction: This article originally identified General Catalyst as a private-equity firm.