I do feel for depositors who got cleaned by transacting with this bank over the FDIC limit. Should have gone with a bigger fish (see above). You can't lose what you don't put in the middle (Rounders reference, love that movie).
For many folks (startups), they had little choice. If you go raise a series A, there is a really good chance you're going to end up with some sort of arrangement that requires you bank with SVB. Not only that, much of the venture capital was banking with SVB too. So the VC may not be able to bail the startups out even if they want to.
These are not your typical bank accounts. The vast majority of these accounts are way over the 250K insurance limit (xxM or better sorts of balances). It's not practical to operate a tech company while staying under 250K limits. You'd run out of banks, and you wouldn't be able to make payroll from a single bank.
A wise startup would have insured themselves against this risk. Problem is - not many of these startups were thinking with that sort of long-term risk management wisdom yet. The likelihood of a SVB bank failure was miniscule compared to the 90% likelihood that their company fails (startup life)
Here is the ELI5 of where we are:
1.) Covid kicked off, the lockdown started, and VC stopped all investments in new startups.
2.) The lockdown eventually ended, and VC was sitting on massive amounts of money that piled up. Not really great for them. They need to get it invested to make the returns their clients are looking for.
3.) VC quickly goes and invests billions and billions into startups last year. VC helps startups get everything setup quickly, and does so with SVB.
4.) SVB's deposits go from 80B to 160B in a very short order of time. This pressures SVB, as they need to figure out where/how to invest this money to generate the returns needed to please the SVB public investors.
5.) For some incredibly stupid reason, SVB decided to go spend this extra 80B on 10/20/30 year treasury bonds (this is where things went horribly wrong)
6.) New series A startups spend a lot of money. In fact, they typically plan to spend their entire initial investment in 18 months or so.
7.) Taking 80B from someone who intends on needing all of that back within 18 months, and using that in 30 year investments, is a bit of a problem.
8.) SVB suddenly needs to make more cash to keep up with the startup spending on the deposits, so they decide to sell the long-term notes at a 2B loss or so.
9.) SVB announced that to their shareholders, and the VC who has all this money tied up in startups, reached out to those startups and told them to move all their money ASAP.
10.) This is tech. Things go fast. You tell a founder to yank all his money and he will be tapping on his phone and getting that done in a few minutes. You don't need to stand in line at a bank anymore. (Some of them got this done, most of them didn't because the SVB website crashed quickly yesterday)
11.) Just like that, SVB was looking at probably one of the worst bank runs in history and the Feds put the hammer down.
Why SVB did not foresee startups spending their initial funding round quickly...I have no idea...
Now a whole bunch of startup employees wait to see whether their company will survive past next week. Without the operating capital of their SVB account - it will not be possible for any of them to make payroll or pay any vendor. They don't have the revenue for that.
This will cascade throughout the whole tech industry in not great ways if not quickly solved. If you are a tech company who does not have their operating capital in SVB, you might still be screwed, as a large portion of your customers probably do.
