How the SVB collapse hurt small startup owners
Tiffany Dufu spent one morning last weekend crying in an airport bathroom as she scrambled to navigate the collapse of Silicon Valley Bank, which held most of her business funding.
Dufu is the founder of The Cru, a professional training and coaching startup aimed at keeping women in the workforce. On Friday—just as SVB was taken over by federal regulators, and customers couldn’t access their accounts—she was scrambling to figure out how to make payroll for her employees, she explained in a video she later posted on LinkedIn. “It’s 10 people who I feel responsible for supporting. You take people’s livelihoods very seriously,” Dufu told Fortune in a call on Tuesday.
To make sure The Cru staff got paid, Dufu talked it over with her husband and ultimately decided to pull the money needed for payroll out of their savings account.
“I was very fortunate that I have a savings account, and that I could do that,” Dufu says. “Because of the timing of this, TriNet, who is our payroll provider, needed a wire transfer by the end of the day on Friday. So there wasn’t really a lot of time to figure out what to do.”
It was a scary moment, Dufu says, especially because her son is a junior in high school and college costs are looming just around the corner. In her video, she expressed a lot of the stresses she’s facing as a founder, including a lot of financial anxiety. “You’re thinking: What have I done?”
Thankfully, U.S. regulators announced on Sunday they would backstop the failed Silicon Valley Bank, noting “depositors of this institution will be made whole.” Citing “systemic risk,” the Treasury, Federal Reserve, and FDIC moved quickly in an effort to make funds available to depositors in order to restore consumer confidence and prevent additional bank runs. Regulators noted that there would be no bailout for stockholders and bondholders and senior management was removed.
“I was very heartened by the announcement by the Fed on Sunday, but it is Tuesday at the end of day, and we still do not have access to our funds,” Dufu says. The team recently launched an equity crowdfunding campaign in conjunction with Women’s History Month—and that has brought in over $77,000 in funding giving Dufu a little bit of liquidity. “I’m hoping…that crowdfunding campaign will hopefully prevent me from having to go deeper into my personal savings.”
By Wednesday, Dufu posted on LinkedIn that The Cru finally got access to its funds at SVB.
While startup founders scramble to navigate the continued turmoil, the regulators’ announcement quickly gave rise to backlash with a host of tweets complaining the move was simply a bailout for the rich Silicon Valley elites.
The bailout of SVB is an outright attack on ordinary Americans for the benefit of the oligarchs
— Will Tanner (@Will_Tanner_1) March 13, 2023
But many of the startup founders who have scrambled to figure out their finances over the last week, would beg to disagree.
“People have a stereotype when they think of a tech founder—and when they think of Silicon Valley—they think of Mark Zuckerberg. That is so far from the truth,” Dufu says. “We often are innovating on a razor’s edge financially.
“The majority of us are not rich. And for some of us, the money that was in that SVB account was so hard-fought,” Dufu adds, noting that of the billions of dollars that are doled out in venture capital each year, less than 1% goes to Black female founders.
The collapse of SVB might look like a 1% problem that only impacts the coastal-tech-elite. Not true. This impacts small businesses made up of hard-working people making modest mortgage payments in the midwest. This impacts parents putting dinner on the table (2/23)
— Lindsey Michaelides (@lcmichaelides) March 11, 2023
“The collapse of SVB might look like a 1% problem that only impacts the coastal-tech-elite. Not true,” Lindsey Michaelides, CEO of Ohio-based Strongsuit tweeted on Saturday. “This impacts small businesses made up of hard-working people making modest mortgage payments in the midwest. This impacts parents putting dinner on the table.”
“For us, anything short of being made whole on those deposits would have meant cuts to the team and all the way down to a full-scale closure of our business,” Michaelides tells Fortune.
Why many businesses had accounts holding more than $250,000 with SVB
Many on social media have commented that founders and business owners were irresponsible for having cash in their accounts over the FDIC-insured limit of $250,000. But even a small company of less than 20 people that pays their employees close to the median income would spend a quarter of that threshold on paying staff on a biweekly basis.
Larger companies could easily surpass that $250,000 threshold when trying to process payrolls. And divvying up corporate deposits into multiple accounts, while safer, may not always make the best business sense. Having at least two or three banking relationships is likely prudent; having 20 or 30 is absurd.
“It’s a little different for business,” Michaelides says. “A lot of individuals out there are not accessing that much cash on a regular basis. You’re not paying people, you’re not paying vendors. From a business standpoint, that is working capital that you’re accessing to actively run and grow your business.”
Convenience is also a factor. Dufu, who initially opened a business bank account at Bank of America when she launched her business, says it was simply easier to bank with SVB. “Once I raised venture, all of my investors banked with SVB, all of my tech founder sisters and brothers were banking with SVB, and so I moved my money over,” she says.
Michaelides adds that it takes time and a lot of administrative burden to open and maintain business bank accounts. In the world of startups, $2 million or $3 million is not a whole lot when you consider all the various expenses. So if companies were to spread that out across a bunch of accounts so their balances were under the $250,000 threshold, they’d be managing a pretty sizable number of accounts, she says.
Yet the SVB meltdown has prompted Michaelides to open accounts with two more banks, a process she started Friday, but the team still has yet to get access to those new accounts, she says.
It wasn’t just tech companies—or even just those who bank with SVB—that were affected. Payroll processing companies such as Rippling and Patriot, both of which used SVB as their payroll payment infrastructure, also felt the effects.
Rippling’s CEO tweeted over the weekend that it shifted to J.P Morgan Chase while Patriot noted Monday that it expects to have “two large, well-established banking entities” to replace SVB up and running soon. Meanwhile Patriot noted Tuesday that SVB direct deposit systems were now functional, and that it was starting to process direct deposits.
As a result, some workers were left hanging. Lisa Andresen, an Arizona mother of two who works for the B2B startup ICopy, says she didn’t get her paycheck on Friday because of the SVB collapse. “Finally got my money on Monday morning, but it was a rough weekend,” she tells Fortune.
“Overall my company was great with this. They kept us all updated, tried to meet our needs the best they could, but it was out of their control as much as it was ours. Just a crazy situation overall,” she says, adding that the company told workers they were planning to cover any late fees or overdrafts employees might have incurred because of the delay. “Everyday people have been affected by this.”
The ripple effects are only just being realized
Although many may be breathing a sigh of relief this week, there are likely ripple effects that will continue to play out. Omsom, an Asian seasoning packet startup founded by two Vietnamese sisters, called the SVB collapse a roller coaster in a public letter to its customers over the weekend asking for support by stocking up, buying gift cards, and sharing the company’s story.
“It’s a common misconception that what happened with SVB only poses a threat to big tech,” Vanessa Pham, CEO and co-founder tells Fortune. “But when large institutions and gatekeepers make big changes, it’s often times the smallest, most marginalized groups who feel the impact the heaviest. This includes small, seed-stage companies like Omsom.”
Osmom—which now has access to all of its funds—will be able to make payroll, but Pham says the team was in the process of looking into short-terms loans and talking to investors about potential bridge capital late last week.
“Having the rug ripped from under you is hugely disruptive,” Pham says. “Business owners trust that the hard-earned money they have in the bank will be there every day. When that changes overnight, it creates a massive disruption operationally, financially, and psychologically–especially for small teams like ours.”
Dufu says the experience has also shaken her trust, and she’s looking to move all of her money out of SVB and back to Bank of America. “I would not bank with SVB again. I will keep my money henceforth in a solid, long-standing, old-school, reputable institution,” she says.
Meanwhile, beyond the psychological scars, there are also outstanding financial repercussions for some companies. Businesses who had debt financing or lines of credit at SVB will need more information on those financial options going forward.
The timing of all this matters, too. “In an early stage startup, in so many ways, your time is your most precious resource,” Dufu says. “The time that I’ve spent managing and navigating this crisis is time that I didn’t spend with my customer. It’s time that I didn’t spend on the sales calls.”
For this to happen with just a few weeks left in the quarter, potentially jeopardizes revenue targets and delays new hires, Dufu says. “I’m not focusing my energy on what I really need to be focused on as a CEO of a small, early-stage startup—that is a cost that I am paying right now that I’m not going to get back. The Fed can’t give that back to me.”