March 25, 2023

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Will the bankruptcy of the SVB bank lead to a bloodbath among technology start-ups?

The experts fear neither more nor less than a healthy bath in the technological sector. The bankruptcy of Silicon Valley Bank has blocked tens of billions of dollars deposited by start-ups and private equity funds, to the point of raising fears of a shock wave throughout the sector.

SVB bank on the verge of bankruptcy, the biggest bank failure in the United States since 2008

“The financial partner of the innovation economy”. Thus presented SVB, placed Friday under the control of the American regulator FDIC to avoid an implosion. “They knew the business community”explains to AFP Joseph DeSimone, professor at Stanford University and founder of several start-ups.

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“They helped us to recruit, (…) advised the new leaders, (…) a real partner like I had never seen before. »

SVB prided itself on having for customers ” almost half “ tech and life science companies backed by U.S. investors. The bank’s orderly liquidation will allow them to recover up to $250,000 per customer, the maximum guaranteed by the FDIC.

166 billion evaporated?

But, according to the annual report of SVB, the portion of uninsured deposits amounted to approximately 96% of the total of 173 billion dollars entrusted to the establishment, or 166 billion!

The FDIC said Friday that the return of these funds would depend on the amounts recovered from the sale of the bank’s assets, a process often long and with uncertain proceeds.

“The real victims of the fall of SVB are the depositors: start-ups with 10 to 100 employees, who can no longer pay salaries, will have to put people on technical unemployment or lay off on Monday”reacted, on Twitter, Garry Tan, CEO of Y Combinator, incubator of young companies.

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“A generation of American start-ups wiped out”

“In a month or two, we will have wiped out a generation of American start-ups”warned the leader. “Years of American innovation are at stake.”

The disappearance of the California bank “could destroy an important long-term driver of the economy, as private equity-backed companies depended on SVB for their loans and cash flow”abounded the investor activist Bill Ackman, on Twitter.

For the financier, if no financial institution regains control, possibly by absorbing what is left of Silicon Valley Bank, “a public bailout should be considered”.

According to several American media, the establishment’s officials discussed Thursday and Friday a takeover with several local banks, without success.

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“Hard to imagine what will happen next”

Champ Bennett, co-founder of the video platform Capsule, revealed on Friday that the $5 million injected in mid-February during the company’s first fundraising was housed at SVB and inaccessible.

“It’s hard to imagine what’s next, but it’s not looking good”he wrote, on Twitter, to denounce the vision according to which a rescue of SVB would amount to coming to the aid of the “1%” the richest, wealthy entrepreneurs and investors, or “Big Tech”.

He mentioned his contacts, during the last hours, with hundreds of start-up bosses. “They struggle. They are people like you and me. They work hard (…) and many have below-market wages. » According to the information site Semafor, alternative investment companies (hedge funds) are offering to replace the bank and immediately disburse funds to SVB client companies.

To do this, the latter must nevertheless agree to give up 20 to 40% of their deposits, the hedge funds hoping to recover all or part of the difference from the bank.

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“This will seriously impact everyone”

Beyond that, Adam Arrigo, boss of the Wave virtual concert platform, warned his fellow technology entrepreneurs. “Whether or not you had money at SVB, you will not be unscathed. This is going to seriously impact everyone.”.

Like others Champ Bennett is worried about the fate of other popular banks in the technology sector, in particular the Californian First Republic, whose price has melted by nearly 30% in two days.

For some, the failure of two banks in a few hours this week, SVB but also Silvergate Bank, is a lesson on the alleged solidity of the financial system.

“Why suddenly no one talks about banks being safe and better than decentralized finance” (DeFi), an alternative financial system based on cryptocurrencies and so-called blockchain technology, quipped Arjun Sethi, American entrepreneur and investor, on Twitter.

THE ” Challenge “ allows, in theory, access to its funds at any time and without an intermediary, but without protection of deposits or supervision of a regulator.