New Economic Realities   //   March 10, 2023

The e-commerce industry braces for impact after Silicon Valley Bank’s demise

Editor’s note: The Department of the Treasury, the Federal Reserve and the FDIC issued a joint statement on Sunday that depositors at Silicon Valley Bank would have access to all of their money starting on March 13. You can read the original story below.

California regulators shuttered Silicon Valley Bank on Friday, a stunning demise for a financial stalwart of the startup space. And the e-commerce industry is waiting to see the havoc that may be wreaked.

Founded in 1983, Silicon Valley Bank was the 16th largest bank in the U.S. before its collapse. It’s unclear how many e-commerce startups relied on Silicon Valley Bank. But over the course of four decades, Silicon Valley Bank became the go-to institution in which many startups parked their money after a major fundraise. In turn, the bank started taking a greater hand in many aspects of the startup space, from providing venture debt to even being the place where startup founders went for their personal mortgages.

But Silicon Valley Bank’s ascent also led to a rise in competition. More traditional banks like JP Morgan and First Republic started catering to startups. Meanwhile, fintech companies like Brex and Ampla that focused on growing startups also came out with their own banking products. As a result, e-commerce startups have become increasingly less reliant on Silicon Valley Bank over the years. Still, the startup world is scrambling to know the effects.

Venture capitalists have spent the past two days fielding questions from both their portfolio companies and limited partners about what to do. And given how heavily reliant many aspects of the startup ecosystem were on Silicon Valley Bank, even brands that had no money in the institution are wondering if there could be an adverse effect on their business. If a key partner of an e-commerce startup — say, a payroll software company — was heavily reliant on Silicon Valley Bank, it could lead to ripple effect for them. Meanwhile, some brands that allegedly did have money in the institution are using this moment as a social media marketing ploy.

“Even if you’re not with Silicon Valley Bank, this can impact consumer startups,” Michael Duda, managing partner at Bullish, told Modern Retail.

How Silicon Valley Bank fell

On Wednesday, Silicon Valley Bank disclosed it had taken a $1.8 billion after-tax loss, after selling off $21 billion in available-for-sale securities. Silicon Valley Bank CEO Greg Becker also said the institution was looking to raise $2.5 billion to shore up its balance sheet.

These moves were framed by the bank as a necessary repositioning. Silicon Valley Bank’s assets and deposits almost doubled in 2021. But then, deposits started to decline more quickly than expected in 2022, as interest rates rose and startup funding levels fell.

On Thursday, news also broke that several top venture capital firms  had advised their portfolio companies to pull money out of Silicon Valley Bank. A note from Union Square Ventures to its portfolio companies, for example, advised companies to only keep up to $250,000 in Silicon Valley Bank, the amount that is FDIC-ensured.

That created a ripple effect; more venture capitalists started fielding questions from their portfolio companies about whether they, too, should pull their money from Silicon Valley Bank and move it to other institutions. Charlie O’Donnell, founder of Brooklyn Bridge Ventures, sent a note to his portfolio companies on Thursday night which “outlined the reality of how FDIC insurance works and what is *likely* to happen if [Silicon Valley Bank] became insolvent.”

As such, other finance platforms have been begun getting phone calls too.

“We have seen a huge influx of venture-backed consumer brands looking for more secure places to place their funds,” Mike Grillo, vice president of marketing at Ampla, a fintech company that offers banking services, told Modern Retail on Thursday night. Grillo, who was at Expo West, said much of the inbound was coming to him through attendees at the event.

On Friday morning, Silicon Valley Bank’s stock was halted as rumors swirled that the bank was trying to raise more money or short of that, find an acquirer. But in just a few short hours, California regulators issued a notice that the bank had been shut down.

How this could impact e-commerce startups

Given that e-commerce startups have historically raised lower amounts of venture capital funding than, say, SaaS startups, many of them are less reliant on Silicon Valley Bank than other types of tech companies. And as there have been more banking services available to startups, most e-commerce startups have been able to diversify their money.

O’Donnell estimated that only about one-third of his portfolio companies had money in Silicon Valley Bank. Duda said that his firm was also fielding questions from limited partners about whether or not Bullish had any funds in Silicon Valley Bank. He said that his firm stopped working with Silicon Valley Bank in 2022, and instead now works with First Republic, JP Morgan and Brex.

But, Silicon Valley Bank’s collapse will lead to a seismic ripple effects for all the other companies that e-commerce startups rely on, from banks to alternative lenders to technology vendors. Fintech startup Brex received billions of dollars in deposits from Silicon Valley Bank customers on Thursday night, CNBC reported.

By Friday afternoon, more companies started talking about how they might be impacted by Silicon Valley Bank’s collapse on social media. In one of the more unusual moves, toy store startup Camp took to Instagram on Friday to promote a sale in light of its bank getting shut down boasting 40% for customers who use the discount code “BANKRUN.”

In an email to customers, Camp CEO Ben Kaufman further explained that “We are hopeful this will be resolved soon, but in the meantime we are turning to you, our most valuable customers, to help us.” He added that, “all sales from this point forward will deposit into Chase & allow us to generate the cash needed to continue operations.”

A Camp spokesperson declined to comment on the situation further. But, the spokesperson confirmed to Modern Retail that the social media posts from Camp were legitimate, and that the company does indeed have assets stuck in Silicon Valley Bank.

Meanwhile, payroll companies like Rippling and Gusto were quick to post notices on social media about how reliant its payroll services were (or not) on Silicon Valley Bank. Rippling, for its part, said that its payment rolls had previously relied on Silicon Valley Bank. But after yesterday’s news, it accelerated a planned switch from Silicon Valley Bank to JP Morgan.

“Going forward, payroll runs through Rippling will have no exposure to SVB,” Rippling CEO Parker Conrad tweeted. “But today’s payment delay is a result of pay runs initiated early this week, with funds in-flight through SVB. Our full focus is on getting these employees paid as quickly as possible.”

In turn, the full impact of Silicon Valley Bank’s demise won’t be ascertained until the companies that relied on Silicon Valley Bank are able to sort through their own hiccups. Axios noted that “this weekend is everything for Silicon Valley Bank and its customers.” If another financial institution emerges as a buyer it could help shore up Silicon Valley Bank’s balance sheet. If not, it could lead to more companies struggling to make payroll.

“If you are still running a strong consumer startup company, you are fine” Duda said, noting that “cash is still king.” But, he acknowledged the unease around the situation. “When a surprise thing happens — all of a sudden you fear the worst,” he said.

This story has been updated with comment from Camp.