The first hint of panic came at 10:08 a.m. last Thursday.
“Do you have cash with SVB?” a lead investor texted Matt Michaelson, the founder of Smalls, a direct-to-cat-owner company that aims to give felines the nutritionist-vetted human-grade pâté that they deserve.
“Yes, was just going to ask you about this,” Michaelson responded from his home office in Portland, Oregon, according to messages he read to me. “I’m about to start a thread.”
“It’s really serious,” the venture capitalist conveyed in a follow-up message, a sentiment echoed by other CEOs Michaelson was in touch with. Usually, the venture capital fund Founder Collective’s email group delivers maybe one message a day. But by 1 p.m. PST last Thursday, the listserv of 200 or so founders was on fire.
“I don’t want to be reactionary, but today is by all accounts rough for SVB and I’m getting a lot of concerned emails from investors,” one founder wrote. “Everyone should sit tight,” another suggested, sharing his head of finance’s argument that avoiding panic was good for everyone. At the time, the regional bank’s stock was plummeting, a day after it disclosed it would take a big loss on government bonds it was selling to try to raise cash. The bank run was already underway. Some founders urged opening an account with Mercury, a banking platform that would become one of the few winners in the whole fiasco. Others cited game theory.
Meanwhile, the dominant message on Twitter, a platform that barely existed during the last major financial crisis, seemed to be Grab your cash and run. It reminded Sam Chen, Smalls’ vice president of finance and analytics, of the early days of the pandemic. “You were getting the same quotes and the same links sent to you by three or four different people, but you didn’t know which ones were real,” she told me over Zoom from her Brooklyn apartment. Michaelson had visions of a physical mob storming the streets. “It felt very difficult to go against the grain and to walk the other direction,” he said.
Eventually they got SVB on the line. The conversation reinforced the high-stakes nature of their decision. If they moved any of their millions out of the bank—even temporarily—they’d be breaching a contract that required them to bank exclusively with SVB; they’d also lose access to $4 million that the bank had committed to lend them. If SVB went under, this would be irrelevant. But it wasn’t clear what would happen at that point.
Thousands of companies banked with Silicon Valley Bank, which was taken over by federal regulators last Friday. This included established tech companies like Etsy, Vimeo, and Roku along with hundreds of emerging startups trying to break through in health care, financial services, swimwear, wine, solar innovation, and beyond. Each company’s ride on the SVB rollercoaster has been different. But for those still trying to make sense of how some companies ended up with every cent tied up in a single bank, why startups loved it, and how panic led to the second-biggest bank failure in U.S. history, a peek through Smalls’ cat door offers an illuminating view.
As a serious cat lover, I found myself wishing, over the past couple of days, that I knew about Smalls when my own sick, skinny pet was refusing to eat last year. The reviews suggest that felines love it, helping rationalize the $4-a-day cost. Alas, I can’t say that Michaelson’s company emerged from a similar fondness for cats. The CEO, who said he travels too much to have a pet, seems to fall into another category of founder: a man who saw an opportunity. (Thankfully, Chen, the vice president of finance, has two cats.)
Before launching Smalls, Michaelson was the head of growth at Thinx, an underwear brand designed to absorb period blood. (New Yorkers may recall the controversy over an ad depicting a half grapefruit, which some men felt was too lewd for the subway. And yes, Thinx has also banked with SVB.) He and his co-founder, who is no longer involved, saw that there was lots of human-grade dog food online but nothing comparable for cats.
Michaelson first contacted SVB in 2020. He was three years into his business, and he’d reached that point in his founder trajectory when he’d raised plenty of venture capital dollars and it was time for a new type of capital: debt. SVB offered to loan them $3 million, which Michaelson planned to direct toward marketing and product innovation. The size of the loan and the interest rate was superior to anything they could find elsewhere. Plus, pretty much every startup they knew went with SVB for debt. This made it a no-brainer, even though the loan came with some rather strict terms: Smalls had to agree to move all its money, accumulated from venture capital and product sales, from other banks into SVB and exclusively use SVB credit cards and accounts from there on out.
As to whether such exclusivity terms are strange, it depends whom you ask. Suresh Sundaresan, a professor of financial institutions at Columbia Business School, said that product bundling is common, but he’d never heard of something that extreme. He doubted that the bank proposed such terms to more established companies. Bandwango, a software startup , DocuSign, the digital signature tool, and Hyperion Therapeutics, a drugmaker, signed similar contracts, according to CNBC and the Wall Street Journal. Arjun Kapur, a venture capital investor who is a co-founder of Forecast Labs, a startup studio, said that though “it may sound odd,” he doesn’t think it’s outrageous to combine such a requirement with a large loan, given that it helps a bank “stay closer to the business and understand the risk.” Shuli Ren, a former investment banker and Bloomberg columnist, argued that venture capitalists should never have normalized a one-bank system.
Michaelson and Chen simply saw it as the cost of doing business. For those of us who are new to startup financing, it may help to think of it this way: Your rich venture capitalist aunt gave you $500 to grow your lemonade stand, in exchange for equity. Your slick cousin, SVB, is willing to lend you still more cash, but only if you keep all your money—the money from your aunt, your incoming revenues, the works—in the shoe box under his bed. “The cousin can’t just be taking the money and putting it in a shoe box,” said Michaelson, who generously rolled with my ridiculous metaphor. Rather, he wants to invest it and make money off it. (The plan failed in this case.)
As to what role exclusivity played in the bank run, it’s not clear. Viewed one way, knowing that all your money was in a single burning shoe box surely added to some founders’ anxiety. (Deposits were FDIC-insured only up to $250,000.) But as the Smalls scenario reveals, in some cases it also discouraged panic moves.
Late Thursday, Chen considered her options. If SVB failed, Smalls could lose $6 million in uninsured cash. But if she moved out all their money, in violation of the SVB contract, Smalls could lose access to $4 million in loan money. (They’d later received another million.) Ultimately she opted for an in-between, moving their money into a cash sweep brokerage account with BlackRock, one of the world’s largest asset managers, through SVB.
Smalls had paid its 46 employees on Thursday before things fell apart, so even if the company briefly lost access to cash, it would be less dire for Smalls than for some other companies. Chen had also already stopped Stripe, a payment processing platform, from sending money to SVB.
Ultimately, she never had to figure out just how smart her BlackRock solution was, because by Monday President Joe Biden had announced that depositors would have access to all their money. On Tuesday, Silicon Valley Bridge Bank, the federally operated bank that has since supplanted SVB, said it would make new loans and honor existing ones.
It’s possible that a surefire path to growing a certain kind of startup will be forever altered. But in the short term, for companies like Smalls, little has changed. No money was lost. Employees are back to focusing on artisanal cat food. Chen said SVB has done too much for the company to be angry with them. Michaelson agreed, though he did concede that in the future he would avoid a debt term sheet that required working exclusively with one bank.