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FutureStarrSVB Collapse: Roku Had $487 Million In Cash At Failed Bank
SVB failed this week, becoming one of the largest bank failures since 2008's global financial crisis. The lender had been a go-to choice for start-ups and biotech businesses who relied on them for loans and operating cash flow.
However, rising interest rates and dislocations among startup clients forced the bank to liquidate $1.8 billion of assets at a loss, prompting many customers to withdraw their deposits. This ignited a run on the bank that eventually led to its seizure by US regulators on Friday.
Silicon Valley Bank was a specialist lender to tech startups and investors, providing them with funds for product launches or venture capital. It had branches around the world including Canada, Denmark, Germany, India, Israel and Sweden; serving customers across North America, Europe, Asia and Latin America.
Roku, the TV streaming company, was one of its customers. On Friday it revealed that it had $487 million in cash at the failed bank but did not know whether or not it could recover it all.
The bank's difficulties were due to a variety of causes, some specific to SVB and others caused by the rapid interest rate hikes implemented by the US Federal Reserve last year to control inflation. Rising rates have made it increasingly difficult for startups to secure venture capital funding, leading many of SVB's startup clients to withdraw funds faster than anticipated in order to cover expenses.
Another issue was SVB's investment portfolio, which invested a large part of its cash in Treasury securities that lost value as interest rates were raised. As a result, more than half of SVB's assets went towards investments - far above what is typical for banks of its size.
Due to this development, the bank was forced to sell off its bond holdings at a loss of $1.8 billion. This prompted major VC firms to advise their clients to withdraw money from SVB.
Meanwhile, the bank was struggling to locate alternative sources of capital and ultimately fell prey to FDIC closure and receivership.
During that process, the FDIC will determine which of SVB's insured depositors can expect their money. Those with more than $250,000 in deposits will have their funds transferred to a new bank, while smaller amounts will be paid out in cash.
Investors and entrepreneurs are still uncertain as to how this will affect them and their businesses. Many fear their companies won't be able to make payroll or other short-term payments until they regain access to scarce funds.
The sudden failure of Silicon Valley Bank, America's 16th largest bank before it closed Friday, has put a number of companies' finances in jeopardy. One notable tech firm with connections to SVB is Roku; it had $487 million (or 26% of its cash) invested in the failed institution.
On Friday, Roku disclosed that approximately $487 million of its $1.9 billion in cash is held by SVB, the failed digital television provider which was taken over by the Federal Deposit Insurance Corporation (FDIC). This accounts for nearly one-quarter of all cash held by the streaming giant.
Roku's money at SVB is largely uninsured, so the company doesn't know how much will be recovered. According to Roku, the remaining $1.4 billion in cash and cash equivalents has been "distributed across multiple large financial institutions."
One other tech firm with connections to SVB was crypto firm Circle, which revealed in a tweet late Friday that it held $3.3 billion at SVB. Of its $40 billion in cash, however, the rest is stored elsewhere.
The company reiterated that they do not anticipate any negative repercussions for their business operations."
Video game maker Roblox recently informed investors in a filing that it had 5 percent of its $3 billion cash at SVB, or approximately $150 million. Regardless of the ultimate outcome and timing, this situation will not impact day-to-day operations for the Company."
Other tech companies have also filed with the SEC regarding their connections to SVB, such as aerospace manufacturer Rocket Lab which held almost 8% (or approximately $38 million) of deposits at SVB. Furthermore, Etsy, an e-commerce site dealing with vendors selling handmade and vintage items, had a balance of "less than $250k" at SVB which will be insured by FDIC.
Meanwhile, several other companies, including BlockFi and FuboTV, announced they had no funds in SVB. Unfortunately, both e-commerce sites had to delay payments for vendor contracts while space company had to reevaluate its supply chain.
Many of Silicon Valley's leading tech companies have funds at SVB Bank, which collapsed this week - raising concerns about how their money will be managed. SVB had been the go-to bank for thousands of startups; its demise marks the largest bank failure since Washington Mutual went under in 2008.
On Wednesday morning, news spread that SVB would sell $21 billion worth of securities in its portfolio at a loss, sending the stock down 60%. Within hours, reports about tech founders and venture capitalists rushing to withdraw their funds from SVB started appearing around Silicon Valley.
One startup founder who asked to remain anonymous due to fear of reprisal informed Vox that he had been inundated with calls from other tech founders urging him to withdraw his money from SVB. A wave of venture capitalists also appeared to be encouraging their portfolio companies to do the same, some even explicitly telling them it was necessary.
It's a situation that could have major repercussions for the industry. With the economy slowing, many VCs have been finding it challenging to raise capital for their companies. Furthermore, they're wary of making new loans due to the potential default risk, especially with tech startups that don't possess many assets and may launch with no revenue at all.
According to a report by The Financial Times, tech companies are increasingly turning to their own cash for growth rather than relying on traditional banks for financing. As a result, many startups have invested their cash in secure assets like bonds.
But the Federal Reserve has raised interest rates, making those bonds worthless. According to Truist Research analyst Tom Miller, this has caused a halt in deposit growth at SVB.
Due to this shortage of liquidity, the bank is forced to sell securities not insured by the FDIC. Because these investments are less liquid than deposits, some investors and companies with large sums invested in SVB may have difficulty accessing those funds because the FDIC only insures amounts up to $250,000. Analysts speculate that this lack of coverage could explain why some large investors and companies with substantial holdings in SVB cannot get their funds out of the bank or haven't had access to them due to this policy limitation.
In the wake of SVB's collapse, many Silicon Valley tech companies are left scrambling and fretting over what will become of their money in accounts with the bank. Many chose SVB because it offered higher interest rates than larger rivals and catered specifically to venture-backed tech and private equity firms.
These firms rely heavily on SVB for funding, as well as to store their operating cash and other valuable assets. Unfortunately, this dependence could prove disastrous for these businesses that have been struggling to stay afloat in an unfavorable macroeconomic climate.
One Silicon Valley startup founder spoke to TechCrunch anonymously about their company's millions of dollars in deposits with SVB, which they are now concerned will be lost due to inability to get them back. When trying to withdraw these funds from SVB's website, however, no customer service representative was available and SVB's website wasn't up and running; consequently, the founder had no option but to give up.
Ultimately, the founder of SVB decided to withdraw his funds and sell them off to another bank. He placed them into First Republic Bank, which is expected to complete their acquisition of SVB tomorrow morning.
It isn't ideal for startups that relied on SVB, as they must make payroll and pay their bills soon. Still, it is better than letting the company go under and losing all money. Hopefully some of these funds can be redeposited at another bank that can reopen these accounts; however, there's still uncertainty as to how much will actually be refunded to customers.
SVB's failure serves to highlight the dangers inherent in risky bets within banking, and is not an isolated incident. According to Konrad Alt of Klaros Group, it's indicative of a larger market crisis which is eating away at banks' balance sheets and liquidity.