Silicon Valley Bank (SVB) and its UK division were shut down by U.S. and UK regulators on Friday after several major VC funds told investors earlier in the week to pull their investments out of the bank, causing a bank run. SVB is a publicly-traded U.S. financial institution, which “banks nearly half of the 2022 U.S. venture-backed technology and life science companies,” according to its Q4 2022 financial highlights presentation.
The market’s loss of confidence in SVB began when the company announced Wednesday plans to raise additional capital by offering $1.25B USD of its common stock and $500M of depositary shares. SVB also announced that it had sold its “available for sale securities portfolio” for approximately $21B of securities at an “after tax loss of approximately $1.8 billion in the first quarter of 2023.”
Shares of SVB Financial Group were halted Friday morning by Nasdaq following a premarket selloff that saw it fall 68% to around $34 per share (on Monday morning SVB was trading at around $284 a share at the market’s open). By Friday afternoon the Federal Deposit Insurance Corporation (FDIC) was forced to take control of the bank by freezing withdrawals, and temporarily closing SVB’s branches, leaving companies that hold accounts there in the lurch. The timing couldn’t be worse for companies that do business with SVB, as payroll and other expenses become due.
The FDIC is expected to find a short-term solution over the weekend, noting that “insured depositors would have access to their funds by no later than Monday morning” and that “customers with accounts that have more than $250,000″ should contact the the FDIC at 1-866-799-0959,” according to a release. This news was part of an announcement by the California Department of Financial Protection and Innovation that it had created the “Deposit Insurance National Bank of Santa Clara” and that the FDIC would serve as receiver, with plans to open Silicon Valley Bank branches on Monday morning.
The bank run that forced the FDIC to step in was caused by VC funds such as Peter Thiel’s Founders Fund (which has investments in Cloud9), who told investors to pull their money out of the bank on Thursday afternoon. Also telling investors to exit was Coatue Management, which invested $300M in Pokémon GO developer Niantic a few years ago and was part of a $15M financing round in 2018 for scholastic esports company PlayVS.
The reason this news is particularly alarming is that in its U.S. offices, $151.5B of SVB’s total deposits of $173.1B were uninsured as of Dec. 31, 2022, as were $13.9B of its foreign deposits. While that is in line with the FDIC’s Deposit Insurance Fund rules requiring an insured deposit ratio of 1.35%, the lack of insured deposits fueled the SVB bank run as startups and VCs that have accounts with the bank are concerned about liquidity. Some of those startups include gaming companies, esports organizations, and companies tangentially connected to both industries.
Tier-One Esports Organizations in LA Mostly Unaffected
The good news, if there is any, is that a majority of the esports organizations in Los Angeles that could have been doing business with SVB don’t appear to have any financial ties to the bank.
The Esports Advocate reached out to a number of Los Angeles-based esports organizations to gauge the impact of SVB’s collapse on Friday.
Representatives from FaZe Clan, Sentinels, Immortals (which includes its Overwatch League team Los Angeles Valiant), XSET, M80, Optic Gaming, and TSM told TEA Friday evening and Saturday morning that they don’t currently have any business dealings with SVB.
Gen.G Esports CEO Arnold Hur told TEA on Saturday morning that, while the company received a significant investment from SVB and other investors in 2019 ($46M) and worked with the bank on the Gen.G Foundation in 2020, those transactions were finished a long time ago and investment funds are safely in other banks. SVB has also been a longtime partner of the organization as well.
“Our impact is limited as we have multiple banking partners around the world, especially given so much of our operations and accounts are located in Asia,” Hur told TEA. “SVB has always been a great partner for us and we hope everything can be resolved quickly.”
Cloud9 and 100 Thieves did not respond to a request for comments, as of this writing. It should be noted—given Founders Fund’s position on exiting SVB—that Cloud9 was likely not affected.
An NRG Esports spokesperson told TEA Friday evening that the organization has been impacted by the situation because it has some accounts there, but it also has access to capital at other institutions.
“We have made a bunch of moves to safeguard our money but are just waiting like everyone else for what’s next,” they told TEA.
It is unclear if the $300K grant from SVB to the SoLa I CAN Foundation’s Technology and Entrepreneurship Center “powered by Riot Games” will be affected. The grant was announced in January for the 501(c)3 nonprofit affiliate of the LA-based minority-owned and operated social impact fund. A Riot Games spokesperson told TEA that it does not currently have any financial ties to SVB. It should also be noted that grants for charity and endowments are typically paid out quickly, though we don’t know if this particular grant money was being held in the bank as of Friday.
Also of note, Roblox Corporation said in an SEC filing Friday that about 5% of its $3B in cash and securities, or around $150M, was at Silicon Valley Bank as of Feb. 28, but also noted that “…regardless of the ultimate outcome and the timing, this situation will have no impact on the day to day operations of the Company.”
LA-based coaching platform Metfy detailed its actions to quell any damage it might take from SVB over the weekend. That journey is detailed in this report.
Extinction Level Event for Startups
On Friday, Y Combinator Founder Garry Tan described SVB’s collapse as an “extinction level event for startups and will set startups and innovation back by 10 years or more,” adding that “all little startups, tomorrow’s Google’s and Facebooks, will be extinguished if we don’t find a fix.” Y Combinator’s esports investments are minor in the grand scheme of things; it has invested in sponsorship brokerage platform Athlane and San Francisco-based gaming performance start-up Visor. It also joined Riot Games in backing mobile gaming developer Gamelynx.
Tan also noted that startup founders should be reaching out to elected officials to accelerate a fix by the FDIC as quickly as possible because “30% of YC companies exposed through SVB can’t make payroll in the next 30 days.”
Billionaire Mark Cuban noted on Twitter Friday that the true tragedy of the SVB situation is that it’s the little guys that are taking a hit: “It’s the thousands of companies who borrowed from SVB and were required to keep their cash in SVB. Those entrepreneurs and their employees and vendors are feeling the pain. And they are who the FED should protect.”
But perhaps the most apropos commentary comes from Yahoo writer Dan DeFrancesco, who noted in the headline of a recent article on SVB that “Silicon Valley Bank gave the tech industry 40 years. The tech industry couldn’t give Silicon Valley Bank 40 hours.”
Ironically, Forbes ranked SVB #1 in its annual list of America’s Best Banks last week.
SVB Capital, the company’s investment platform arm, works with a number of select VC funds including 83 North, Accel, Bessemer Venture Partners, Engineering Capital, Felicis, Frazier Healthcare Partners, Greylock, Index Ventures, Kleiner Perkins, Pivot North Capital, Redpoint, Ribbit Capital, Sequoia, Spark Capital, and Zetta Venture Partners.
For continuing coverage on the SVB situation, follow this link.
Editor’s note: This story was updated after publication with confirmation from XSET, Riot Games, and M80 that they had no ties to SVB, along with additional details on Metafy.
