Silicon Valley Bank wasn’t your typical bank, which is why its closure presents such a big risk

The sudden closure and receivership of Silicon Valley Bank is going to have a massive impact on the tech ecosystem. That’s because SVB was not only the dominant bank in the tech sector, but it also was highly integrated in some nontraditional ways in the lives and finances of many industry leaders as well. A few downstream consequences that we are likely to see in the coming days and weeks help to illustrate just how immersed the company is in all aspects of the tech sector, and why its failure is a potential catastrophe for tech, for the venture-backed startup economy, and therefore the economy as a whole.

First, SVB was tightly integrated into the lives of many founders. It was not just their startup’s bank and lender, but it also provided wealth management services, including personal mortgages, to many of its client-company founders. So, if you are one of those founders, today your corporate lender, your corporate bank, your personal mortgage lender, and your family’s wealth manager might be the same bank—and that bank is now in Federal Deposit Insurance Corporation (FDIC) receivership. 

The overlap of individual finances and organizational ones is nothing new in the startup world, but the degree to which SVB became dominant in the space is. This presents a whole mess for the FDIC—or the eventual buyer—to unwind. 

Second, any “uninsured” balances at SVB—those above $250,000—are now thought to be in jeopardy.  The FDIC plans to pay them out, according to a statement it released today, “as it sells the assets of SVB.” Many startups had much more than $250,000 in asserts in the bank, and not simply because they weren’t mindful of the risk. In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!

So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of  default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.

Now, these same startups may not be able to make payroll next week. Unpaid wages pierce the corporate veil [meaning that its owners and board directors lose the liability protections that a company provides], so boards are incredibly sensitive to employing workers who they may not be able to pay. The result? We could see mass layoffs later today, or by Monday at the latest. 

Even some companies that did not bank with SVB could be affected if their payroll provider happened to be an SVB client.

Given the weak fundraising environment, a number of startups have been reliant on venture lenders like SVB being relatively lenient, by not aggressively pursuing amortization of debt or triggering default for minor infractions on their loan terms (covenant foot faults, such as cash balances, if you will), even as tech companies’ burn rates and other financials have been seesawing. How will the FDIC handle this? Mass defaults are alarmingly possible.

Having run a startup through the Great Financial Crisis in 2008, this is the first financial shock I’ve seen since then that is even vaguely reminiscent of that time.

Brad Hargreaves, a New York City-based entrepreneur, is the founder of Common and General Assembly and writes about real estate at Thesis Driven.