Startups are worried about paying employees after SVB collapse

(Bloomberg) –Startup founders are beginning to worry about whether they’ll be able to keep paying employees following the failure of Silicon Valley Bank.

Payroll service provider Rippling notified customers on Friday that some processing had stalled because SVB helped handle its payments. The company, a startup itself, switched to JPMorgan Chase, but not soon enough: Paychecks were already “in flight” with SVB and have yet to be paid out — and the firm is still trying to understand what the bank’s collapse on Friday will mean for them, Rippling Chief Executive Officer Parker Conrad said in a Twitter post.

We (Rippling) discovered yesterday that Silicon Valley Bank had unexpected solvency challenges. Just now, we learned that the FDIC had stepped in and effectively shut down SVB.— Parker Conrad (@parkerconrad) March 10, 2023
Startup founder Brad Hargreaves said some firms may not be able to make payroll next week. And because boards are incredibly sensitive to employing workers they can’t pay, he said, “Expect mass layoffs later today, Monday at latest.”

Sarika Bajaj, the CEO of early-stage startup Refiberd, said she had been a customer of Silicon Valley Bank for three years and kept most of the company’s funds there. Bajaj, who was at the Sand Hill Road branch of SVB in California on Friday, tried to make withdrawals but couldn’t and is growing concerned about payroll for her and her two team members. 

“I’m sure there are lots of people here with lots and lots of employees,” she said. “It’s not our reality, but I know it’s going to be a lot of people’s realities.”

More than half of tech companies “keep the lion’s share of their cash at SVB,” said Greg Martin, founding partner of the investment firm Liquid Stock. “They all need to make payroll early next week.” 

Martin said he believes the bank is healthier than people think. But the worst-case scenario, he said, is “tens of thousands of people” don’t get paid next week.

Some venture capitalists raced to assist in setting up temporary cash funds to help affected startups make payroll next week. Spark Capital on Friday was steering portfolio companies in need of aid toward Liquidity Capital MC Ltd., which offers financing for startups and posted on LinkedIn that it would offer capital to those affected by Silicon Valley Bank’s failure within 24 hours, a person familiar with the matter said. Liquidity Capital is among Spark’s portfolio companies.

CEOs of some companies with funds trapped at Silicon Valley Bank are planning to use their personal wealth to cover their employees’ salaries amid payroll constraints caused by the bank’s failure, according to a person familiar with the matter.

At least one startup was planning to do layoffs on Friday, but the Silicon Valley Bank situation forestalled those plans because the business, which banked with SVB, no longer had the capital to pay severance, according to a person with knowledge of the matter. 

Conversely, other startups were considering doing layoffs due to the SVB situation, because it’s illegal to have employees without paying them, this person said. Furloughing was also under consideration, as a potential way to bring employees back on the payroll when funds are received. Startups are frantically discussing their options with lawyers, the person added.

It was clear on Friday that the bank failure’s fallout for the startup ecosystem could be profound. In an interview with Bloomberg Television, Former Treasury Secretary Larry Summers warned of “substantial consequences for Silicon Valley — and for the economy of the whole venture sector,” if the government doesn’t intervene.  

On Friday morning, at the SVB office on Silicon Valley’s famed Sand Hill Road, the location was technically closed. Still, a steady stream of clients, many of them startup founders who had placed most of their company’s funds with SVB, knocked on the locked glass doors of the bank’s office and waited patiently for someone to come. Occasionally, a representative for the Federal Deposit Insurance Corporation would emerge from the office and talk privately with customers either in small groups or one-on-one.

Many clients were clearly frustrated. One woman, the founder of a drone startup, said a withdrawal she made on Thursday still had not gone through and that she was concerned about making payroll for her 12 full-time employees. She has tried calling the FDIC multiple times.

“The number doesn’t answer,” she said.