The Silicon Valley Bank’s (SVB) unforeseen fallout has created ripple effects across the U.S. banking and startup sectors.
This is because the SVB was one of the most coveted banks among startup companies and venture capitalists. What was the 16th-largest bank in the U.S. serviced approximately half of all U.S. venture capitalist-backed startups.
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Consequently, the banking mammoth’s sudden collapse has resulted in startups scrambling to arrange funds.
Billionaire Mark Cuban’s affordable drug pharmacy startup Cost Plus Drug Co., which launched in January last year, had approximately $3.1 million in Silicon Valley Bank. The historic bank run on SVB, as startups and venture capitalists attempted to withdraw $42 billion, caused the innovation-focused financial institution to halt withdrawals, exacerbating the market upheaval.
Cuban’s Biggest Concern
The biggest challenge Cuban and many other venture capitalists faced is how to make payroll. While the Federal Deposit Insurance Corp. (FDIC) guaranteed the return of all funds held in accounts at the Silicon Valley Bank, the sudden loss of working capital will likely hinder Cost Plus Drug’s operations. Most venture capitalists were trying to gather enough funds to meet the mid-month payroll on March 15.
“CostPlusDrugs.com deals with SVB. We had, I think, $3.1 million there, so we’re scrambling and opening up accounts and staying up late talking to banks to get accounts opened up,” Cuban stated on Twitter Spaces. “I’m writing checks on Monday morning first thing to make sure that payroll and payables are covered. CostPlusDrugs.com is my baby right now — I’m not letting it go anywhere — and so I’m playing offense in every way I know how.”
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Cuban plans to write checks using personal funds to meet any working capital deficit.
This is not the only challenge for the billionaire investor. He also had personal holdings of roughly $8 million to $10 million at the failed bank. But Cuban considers himself “fortunate” to have only a small proportion of his personal wealth at the bank.
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FDIC’s Response And Challenges Ahead
The FDIC and the Federal Reserve stated that all funds held with Silicon Valley Bank will be repaid to customers. This is over and above the FDIC’s $250,000 insurance obligation. Though the federal agency has outlined a repayment schedule for uninsured deposits — amounts over $250,000 — Cuban is worried about the timeline of repayment.
The FDIC plans to sell SVB’s assets to return account holders’ funds. The agency will do so through an undetermined amount of dividend payments and a receivership certificate as a guarantee for future payments.
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The amount distributed as the first dividend payment will have a substantial domino effect on the market. If less than 10% of the total uninsured funds are repaid, Cuban expects a “huge contagion,” adding pressure to the banking system. But a 50% to 60% repayment will likely renew market confidence, according to Cuban.
“If there’s a material amount that covers enough of the startups and the wine industry for the companies impacted to pay their bills and make their payroll, then six months from now we won’t remember the details,” he stated.
Even if approximately half of the total uninsured funds are returned, the billionaire investor still predicts a somewhat small contagion, especially if no news regarding the repayment of the rest of the funds is released.
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