What the Silicon Valley Bank Collapse Means for the Channel

Channel partners appear to have escaped the Silicon Valley Bank collapse unscathed, thanks in part to vows from federal regulators to protect depositors. But the fall of the highly active venture capital lender presents a solemn warning to the channel about macroeconomic conditions and investment risks.

Silicon Valley Bank, regarded by some as the “bank of startups,” is back up and running this week after California regulators shut it down on Friday and handed it over to the Federal Deposit Insurance Corporation (FDIC). According to Fortune, one-half of all venture capital-backed startups had chosen the now FDIC-run Silicon Valley Bank (SVB) as their financial institution. Nearly 1,100 private equity and venture capital firms were storing their assets at SVB. And a great deal of those companies fell into the technology category. But for the MSP and agent partner communities, their supplier partners faced more of a threat from the bank’s collapse than from the actual partners.

For example, key Kaseya venture capital funder Insight Partners banked at SVB. A Kaseya spokesperson said the IT software management software provider will see “no material impact” from the bank’s collapse.

Moreover, X4 Advisors founding partner Curt Allen noted that the technology advisory channel would not have seen much of an impact regardless of regulator actions. He noted that SVB particularly focused on “high-risk” Silicon Valley venture capital assets. And while those types of may have been engaging on some level with suppliers in the TSD channel, they don’t appear to have done much downstream in the ecosystem.

X4 Advisor’s Curt Allen

“Most of the money that is backing the TSDs and the direct plays (Amplix, E78, Bluewave, etc.) is true private equity and unlikely to be affected, other than people getting skittish about banks in general,” Allen told Channel Futures. “Short answer: Nah, we’re all good.”

A Tumultuous Weekend

Regulators closed Silicon Valley Bank (SVB) on Friday after its shares fell rapidly on Thursday. Having received an increasing number of deposits in 2021, the bank bought Treasury bonds, which subsequently decreased in value following the Federal Reserve’s raising of interest rates. The commercial bank on March 8 disclosed a $21 million sale of securities and new efforts to raise capital to make accommodate customer withdrawals.

A run on the bank followed, with customers attempting to withdraw a collective $42 billion in deposits on Thursday. California regulators on Friday closed the bank, to re-open it the next day with FDIC as its receiver. Depositors had fretted that they could suffer losses in their accounts of more than $250,000, as the FDIC historically does not assure deposits larger than that.

Vendor Impact

Multiple providers placed a filing with the SEC to say held deposits at Silicon Valley Bank.

Roblox noted that SVB held 5% of its $3 billion cash and securities balance. Hardware provider Lantronix said its $6.7 million in SVB deposits represented about 85% of total outstanding deposits. While Lantronix stated that it expected to regain funds quickly, it had put in place verbal commitments from members of its leadership team for them to lend up to $5 million. Ribbon Communications disclosed that SVB was one of its lenders and a host for certain Ribbon deposit accounts. Ribbon noted that although it withdrew funds on deposit with SVB on Thursday, about $4 million in new payments from its customers went into deposit accounts at SVB. The majority of Ribbon’s remaining deposits were uninsured, but the company stated that it expected to recover all of its cash on deposit.

Even if businesses eventually regain access to all of their deposits, many of their leaders worried about how to get through this week if they couldn’t access funds. For suppliers operating in the channel, losing access to bank accounts for a week could significantly harm their reputation with partners, channel consultant Eric Brooker said.

Eric Brooker

“I think every single supplier has more than that floating around in certain bank accounts, and they just want to make sure – come hell or high water – they can access it, because the minute a supplier doesn’t make payroll, even if it’s not ‘their fault,’ it’s not a good look, because the agent community immediately starts questioning, ‘Well, if they’re not making payroll, are they’re going to make commissions?'” Brooker told Channel Futures.

Businesses with smaller amounts stashed with SVB included Juniper Networks and Bandwidth.

Confidence Maintained?

The U.S. government quelled most of the short-term and long-term concerns these companies held. The FDIC in a joint statement with the Federal Reserve and the Treasury Department Sunday said they will “protect all depositors.”

As a result, depositors regained access to their accounts on Monday. The federal regulators added that U.S. taxpayers wouldn’t shoulder any costs associated with losses. The FDIC and Federal Reserve offered a similar risk exception to New York-based Signature Bank, which closed on Sunday.

SVB re-opened on Monday under the FDIC’s control. Federal regulators said their “decisive actions” helped maintain confidence in the U.S. banking system.

“The U.S. banking system remains resilient and on a solid foundation, in large part due to reforms that were made after the financial crisis that ensured better safeguards for the banking industry,” Treasury Secretary Janet Yellen, Federal Reserve board chair Jerome Powell and FDIC chairman Martin Gruenberg wrote in a joint statement. “Those reforms combined with today’s actions demonstrate our commitment to take the necessary steps to ensure that depositors’ savings remain safe.”

M&A/Investment Impact

Nevertheless, Brooker said he sees the SVB fallout impacting investments in the channel and …

… other industries.

“My gut says, this gives everybody in an already slumping economy a reason to hit the pause button,” Brooker said.

John Holland, managing partner of investment banking group Corporate Finance Associates, has advised on numerous MSP transactions. He agreed that the drama of last weekend could mesh with existing negative macroeconomic conditions to slow M&A.

CFA’s John Holland

“Over the past year, as interest rates have risen and as the probability of recession has risen, lenders have become more conservative. A collapse of any major financial institution will elevate the sense of fear amongst investors and lenders, and thereby cause such investors and lenders to become more careful and conservative with investments and lending,” Holland told Channel Futures. “Therefore, the closure of Silicon Valley Bank and Signature Bank is likely to exacerbate the tightening of credit conditions which could reduce the flow of capital for mergers and acquisitions for a few months.”

An Entrepreneurial Perspective

Brooker said the events served as a reminder for business leaders to diversify their financial institutions. Reuters reports that large banks have seen a flood of new deposits as observers of the SVB crisis seek to diversify their portfolios.

“Regardless of just how diversified people were, they’re looking at how to protect their assets differently than going into the weekend before Silicon Valley Bank collapsed. I think we all felt comfortable with our money sitting where it is,” Brooker said.

Oppuous’ Dante White

Dante White recently founded Oppuous Technologies, a technology advisory firm and channel partner. He has avoided traditional funding methods like private equity and venture capital to scale his business. On the contrary, he has diversified his funding streams with “nontraditional” sources. That can include money from friends, family and crowdfunding.

“I’m in the middle of business funding myself right now. I’m in the middle of closing a pretty sizable debt instrument. I just hope and for pray that the SVB thing doesn’t sideline that,” White told Channel Futures.

Consequences

Former SVB CEO Greg Becker sold $3.6 million in company shares on Feb. 27. That came days before SVB disclosed a significant loss to investors, according to media reports. He sold $25.9 million in 2021.

SVB executive directors had sold $84 billion in stock over the last two years, CNBC reports. Those details have led to accusations of insider trading, and outrage from shareholders and observers.

“Let’s bust out the guillotine like we did in the olden times,” White said. “How many times are we going to take this type of sh** on the chin and just smile and go, ‘Well, that’s the way it is?’ No, that isn’t always how it has to be. We let it be like that.”

Tim Mayopoulos now serves as CEO of the FDIC-run bank. Federal regulators removed all senior management from the SVB.

Edward Gately wrote about attempts by cybercriminals to exploit the bank collapse for their own gain.