Amid the crisis at Silicon Valley Bank, Y Combinator, an American technology startup accelerator, has submitted a concerning petition to the US government, exposing a distressing reality for over 10,000 startups.
According to the petition, startups could potentially leave their employees without pay within the next 30 days, resulting in a staggering loss of 100,000 jobs.
Reportedly, one-third of Y Combinator's startup community solely depended on Silicon Valley Bank for their accounts, and now they face an inevitable financial catastrophe. Y Combinator has directed the petition to top government officials, including US Secretary of the Treasury Janet Yellen and FDIC chairman Martin J. Gruenberg, urging immediate action to prevent the impending disaster.
"By that measure, we can estimate that payroll-related furlough or shutdown will impact more than 10,000 small businesses and startups. If the average small business or startup employs 10 workers, this will have an immediate effect of furlough, layoff, or shutdown, affecting over 100,000 jobs in the most vibrant sector of innovation in our economy," the petition said. More than 3,500 co-founders, CEOs, and over 2 lakh employees of startups and small businesses, including Indian companies PayO, SaveIN, and SalaryBook, have agreed to support the petition.
What Is the Silicon Valley Bank Crisis?
On Friday, Silicon Valley Bank - a financial institution that provides loans to major players in the tech industry - collapsed. It turned out to be the largest bank failure since the financial crisis of 2008. As a result, the Federal Deposit Insurance Corp now holds control over approximately $175 billion in customer deposits. Here are the latest updates on this developing news.
California Regulators Seize Control of Silicon Valley Bank
Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation on Friday, shortly after urging customers not to withdraw their funds due to concerns about the bank's liquidity. The Federal Deposit Insurance Corp. was then appointed as the bank's receiver.
In response, the FDIC established the National Bank of Santa Clara as a new bank to manage the deposits and other assets of the failed institution. According to a press release, the new bank is set to begin operations on Monday, and checks issued by the old bank will still be processed.
Silicon Valley Bank Hit Hard by Rising Interest Rates
As a result of substantial investments made in bonds over a year ago, Silicon Valley Bank had amassed a significant amount of cash from successful startups. Similar to other banks, most of the deposits were invested with the aim of generating returns, while a small percentage was held in reserve.
This strategy worked well until the Federal Reserve started raising interest rates in 2022 to curb inflation. Meanwhile, the flow of funding to startups began to diminish, putting pressure on many of the bank's clients, who then began to withdraw their funds. To meet these requests, Silicon Valley Bank was forced to sell off some of its investments, which had lost value. In a surprising announcement on Wednesday, the bank revealed that it had lost nearly $2 billion.
Silicon Valley Bank's Collapse Raises Alarm Bells for Other Banks
Compared to the country's biggest banks, Silicon Valley Bank's assets of $209 billion are relatively small, with JPMorgan Chase holding more than $3 trillion in assets. However, bank runs can occur if customers or investors begin to panic and withdraw their funds. As a result, the failure of Silicon Valley Bank has caused concern that it may frighten away customers from other banks.
On Friday, shares of San Francisco-based First Republic Bank and New York's Signature Bank both fell by over 20%. Meanwhile, shares of some of the largest banks in the country, such as JPMorgan, Wells Fargo, and Citigroup, slightly increased on Friday following a previous decline.