Quang Hoang, the co-founder of a startup called Birdly Inc., spent his Monday refreshing the website of Silicon Valley Bank every hour. His San Francisco-based mentoring startup had about $10 million deposited with the now-failed financial institution, patronized by a large portion of the country’s most promising tech companies. But as afternoon turned to evening, he still hadn’t been able to recover his cash.
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Hoang was one of thousands of founders globally trying to track down their money this week after days of chaos, and who are completely rethinking the way they bank. Startups from Silicon Valley to London, Tel Aviv and tech hubs across Africa depended on SVB as a one-stop shop for everything from holding their fortunes to personal mortgages. Now they face a financial reckoning. Many investors and tech firms believe that the future will be significantly more difficult, even if the bank continues to solicit deposits under its new name.
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Deals ranging from venture debt financing to funding rounds are likely to be impacted by recent days’ upheaval. As startups grapple with the logistics of moving money around and opening accounts at new banks, Edith Yeung, general partner at Race Capital, believes that transactions will likely be delayed or even scrapped amid the bedlam.
“I’m sure there were deals made last week that are now not going to happen,” Yeung said. “This is a huge disruption to the venture space.”
Monday became a day of massive money moving and account closings after what one winemaker deemed a “crisis purgatory” over the weekend.
Many in the tech industry this week are mourning the undoing of SVB, and lamenting the future difficulty of working with banks unfamiliar with the unique needs of young tech companies. Sequoia Capital’s Mike Moritz compared its failure to a “death in the family” in a column on Sunday. Yeung said VCs are going to have to ask more questions of their banks and may have to try more traditional options.
She also advised that going forward, VCs shouldn’t simply rely on word of mouth when picking a bank: “We chose this bank on reputation and reputation is not enough.”
David Pakman, managing partner at crypto VC firm CoinFund, said that tech firms and venture capitalists are still reeling from this weekend’s events, despite the government backstop. For startups, SVB distinguished itself by making allowances for the volatile nature of their businesses. “You’re not going to get that from a Big Three bank,” he said.
In Israel, where SVB had an outsized presence in the country’s booming tech sector, companies are bracing for delays while setting up accounts at other lenders, according to Avi Eyal, a managing partner at Entree Capital. “It may be a long time before things get back to normal, and international companies are going to be at the end of the line,” he said.
SVB’s UK clients face less disruption after HSBC Holdings PLC scooped up its local unit for a symbolic price of £1, but they will have to get used to a culture shift. HSBC is the country’s largest bank and has a conservative reputation, while SVB catered to freewheeling young companies in tech, life sciences and crypto.
For U.S. venture firms, the path forward may be simpler. “VCs don’t have trouble getting bank accounts,” Pakman said.
Many startups plan to move their money to a large institution, where they’re guaranteed it will be safe, even if they don’t get hyper-personalized service or particularly high interest rates. Several founders have said they’ll do business in the future with Bank of America and JPMorgan. Deposit insurance is also a priority, and some startups plan to put their money in accounts at multiple banks in order to stay below the $250,000 Federal Deposit Insurance Corp. insurance threshold. Healy Jones, vice president of financial strategy at Kruze Consulting, said clients are increasingly looking for options that allow them to get several million insured by the FDIC.
“People want FDIC coverage all of a sudden,” Jones said. “Nobody cared about it five days ago, but now everybody wants it.”
The global fallout may be felt even in places where SVB didn’t have a large presence. While SVB only had relationships with a limited number of companies in Africa, startups there are still indirectly exposed, according to Samuel Sul, director of the financing group at Renaissance Capital in London.
“If U.S. tech and VCs sneeze, African tech companies catch a cold,” Sul said. “There will be less liquidity in the system.”
SVB’s failure was also a wake-up call that some CEOs need to learn a new role: money manager. When seed-stage firm NFX met with its portfolio companies on Monday, half the questions were around money management, said Pete Flint, an NFX general partner. Not only were CEOs concerned about how to protect money, but they also wanted to learn how they could take advantage of the high interest rate environment to get meaningful returns, he said. He’s been recommending founders make sure they have more than one bank account.
“This is a new skill that founders and CEOs have not had to learn in the last eight years,” Flint said. “Everyone’s trying to figure out the right risk-reward profile.”
Some nontraditional financial companies have seized the moment to step up their own loan offerings. Startups like Arc Technologies Inc., Tranch Inc. and Brex Inc. have offered cash-strapped startups financing. And Brex said it has seen record business.
Hoang, the co-founder of Birdly, which does business as Plato, said he will use large banks in addition to Brex going forward. Right now, his Brex account has sufficient funds to cover immediate expenses at his 25-person startup for a month or so, Hoang said.
Before the crash, many advisers had “told us that Brex is fine, but we needed a real bank — one that was stable like SVB,” Hoang said. “That’s the ironic part.”
After a stressful weekend of worst-case scenario planning that included the prospect of layoffs, Hoang was relieved by the government’s decision late Sunday to guarantee deposits. “I believe in this country and I trust the system,” said Hoang.
Around 7 p.m. San Francisco time, he got his money back.
CNN's Julia Chatterley talks to the fintech firm's CEO about the fall of SVB
How business survival strategies compare during recessions versus COVID-19
How business survival strategies compare during recessions versus COVID-19
Only some companies that survived the COVID-19 crisis can use the same blueprint for the next economic downturn.
To compare business strategies for surviving the recent COVID-19 crisis and a typical recession, altLINE analyzed research from the World Bank, data from the Federal Reserve, and news reports.
A recession is usually defined as two back-to-back fiscal quarters in which the total amount of all goods and services declines. The COVID-19 pandemic began with a deep but brief recession in the U.S. economy, unlike any that preceded it in modern history. The ultimate effect was like flipping a light switch off for a couple of weeks and then turning it back on again.
As local officials announced restrictions on which types of businesses could stay in operation, many businesses feared the worst from the unknown virus. Companies and workers in sectors including travel, hospitality, entertainment, and events were hit especially hard with an abrupt halt to most social and in-person activities.
As uncertainty reigned, the U.S. GDP actually increased 12% in the two years spanning the fourth quarter (Q4) of 2019 through Q4 2021, a huge economic win compared with the 1918 influenza pandemic. During the two years following that influenza outbreak, experts estimate, global economies contracted 6%.
But a recession, much like the impact of COVID-19, is also "a high-pressure exercise in change management," as Harvard Business Review contributing editor Walter Frick observed. And that supreme uncertainty enveloping COVID-19 was felt not only by employers but their employees, too.
Businesses that survived the COVID-19 crisis in 2020 were more productive firms
The firms that survived the introduction of COVID-19 had one statistically significant key factor—their employees were more productive, according to a study from the World Bank.
The authors concluded that the strong correlation between sales per worker annually and the death of firms suggested a market "cleansing" of inefficient companies.
By the summer of 2021, tumultuous pandemic conditions forced at least 3.5% of businesses to close their doors permanently worldwide, according to conservative estimates from the World Bank study. In some developed countries, that estimate varied. Italy is estimated to have lost at least 8% of its businesses by that time. The country was an epicenter of disease early on in the pandemic.
Some countries suffered even more devastating losses on the upper end of World Bank estimates. In Mongolia, estimates suggest some 1 in 5 businesses went under.
In the past, productivity was not necessarily cited as an end-all-be-all factor in surviving typical recessions. Since a recession tends to be accompanied by decreased demand for goods and services, fewer people and work hours are needed to produce enough goods to meet demand.
But in 2020, the federal government rapidly issued increased unemployment assistance and thousands of dollars in stimulus that allowed consumers to continue spending money regardless of whether they remained employed.
Firms pivoted entire business models overnight
Some businesses were prepared to meet the demand—large ones, at least. Amazon had built the largest private logistics network in modern U.S. history, allowing consumers to have nearly anything they wanted delivered to their homes.
Public data shows that businesses that suffered the most under COVID-19 were in the service industry—restaurants, hotels, and live event companies that were forced to close under safer-at-home regulations. Even after rules loosened though, many continued to see steep declines as wary customers stayed away.
Convincing customers to come back wasn't due to lack of trying, though. Event venues shelled out for accreditations like the GBAC-STAR to tout they had adequate public health practices in place for visitors. Like a scene ripped straight from Hollywood, it became commonplace to see hotels using electrostatic sprayers to decontaminate rooms, and plexiglass shields were erected at front desks, cash registers, and restaurant dining rooms across the country.
But these companies, especially small ones, also launched new products, adapting to the changing needs of a country stricken by a pandemic. Hotels rented out rooms as office space for local white-collar workers dismissed from large office buildings and business travel obligations. Restaurants rolled out curbside pickup with online ordering.
Traditionally, any recession can threaten existing business models since consumer demand shifts in affected industries. But the pressure builds more gradually and has often led companies to focus on cutting costs throughout a downturn to survive.
Businesses historically have more time to react to a recession as opposed to a public health crisis
There have been 13 recessions in the U.S. economy since World War II, and no two have looked the same. They do, however, share characteristics, according to leading economic research. And while recession indicators can appear in just one fiscal quarter, conditions typically decline more slowly than in 2020.
A recent study of economic indicators accompanying recessions from the Federal Reserve Bank of St. Louis shows just how steep the dropoff in incomes, payroll employment, production, and retail sales was after COVID-19 compared to past downturns. Employment levels plummeted by 15% as more than 20 million people lost their jobs between February 2020 and April 2020, according to the Bureau of Labor Statistics. The staggering job loss broke the prior record set during the Great Recession (2007-2009), when 6% of jobs were lost.
In a typical recession, businesses often begin taking action to preserve cash as indicators first start to show, whereas the sudden onset of the pandemic caught many businesses by surprise. For example, the retail and hospitality industries were disproportionately affected by social distancing health restrictions. With little time to prepare for the impact, the hard-hit sector shed more than 8 million workers from payrolls in March 2020 and April 2020 alone.
COVID-19 forced companies to invest, whereas typical recessions require spending cuts
The U.S. government may not have adequately prepared for the public health crisis, having had its pandemic infrastructure that was built upon decades of Democratic and Republican administrations gutted by the Trump administration, but the private industry was ready.
Commercially available technologies had arrived at an opportune time by 2020. Video conference calling had been steadily gaining ground in board rooms and businesses across the country, thanks to companies that emerged in the aftermath of recessions such as Skype (launched in 2003) and Zoom (launched in 2011). Internet connectivity has only increased in availability since 2008, and workplaces are more connected than ever with real-time collaborative applications like Slack and Microsoft Teams.
Companies that had been slow to evolve digitally suddenly saw an opportunity to lean into internet-connected services that allowed the public to isolate themselves while still working, eating, shopping, and socializing. Financial, artificial intelligence, and health care-focused tech companies staffed up en masse.
Software and IT infrastructure writ large saw widespread investment as companies pulled back on investing in the construction of buildings, according to a Deloitte analysis of Bureau of Economic Analysis data.
Lobbying strength can sway survivability for industries no matter the crisis
Businesses banded together in the early days of the COVID-19 crisis and the Great Recession to flex their influence over lawmakers with an ultimatum: If you let us die, the jobs die, too.
Bailouts for the automotive manufacturing industry in 2008 and 2009 saved 1.5 million American jobs and the companies that employed them.
On the contrary, the live events industry that crawled out of the COVID-19 wreckage in late 2020 provides a case study of what can happen when those channels with the government aren't already open. The industry had difficulty appealing to lawmakers for more targeted relief.
Prior to the financial crisis of 2008, businesses in the service sector had remained more resilient through recessions compared to manufacturing sector firms, according to a 2010 study from the Federal Reserve Bank of Richmond. Where a downturn in consumer spending might have meant large firms could trim costs to survive in past recessions, COVID-19's impact was prolonged and came with different barriers to doing business than simply reduced propensities to spend.
A coalition of businesses, including Live Nation and SAG-AFTRA, banded together to launch the #SaveLiveEvents campaign, encouraging Americans to lobby representatives for more assistance for events industry workers and small venues.
This story originally appeared on altLINE and was produced and distributed in partnership with Stacker Studio.
