Federal agencies are saving Silicon Valley, but tech may never be the same

On Sunday evening the federal banking regulators announced it would make whole all Silicon Valley Bank depositors—meaning that startups won’t lose the billions that had been at stake when California’s financial regulator shuttered its doors on Friday. Federal regulators said they would also do the same for Signature Bank, the New York-based regional bank regulators closed on Sunday. In a joint statement filed at the same time as the announcement, the Treasury, Federal Deposit Insurance Corporation (FDIC), and Federal Reserve said that depositors will be able to access “all of their money starting Monday, March 13,” and that no losses from SVB “will be borne by the taxpayer.” 

While federal agencies are effectively rescuing the startup ecosystem, the whole debacle has still managed to shake the tech world to its core, and some startups might still face challenges making payroll as they set up new bank accounts. Meanwhile, the startup industry has lost a really important member of its ranks—one much more willing to dish out loans to the high-risk, high-cash-burn tech companies that populate the Valley. And VCs will likely pay closer attention to their banking partners—and their diversification of banking partners—from now on. 

“It was emotional,” one venture investor told Term Sheet right after news of the government’s rescue broke Sunday evening. “Incredible action. Still a lot to unwind and address,” they noted, but “there’s a release from the immediate crisis.” They added that there’s “literally an outpouring of love on some of these WhatsApp groups that have been helping everyone navigate together.” 

One founder told Term Sheet that they were “so relieved,” and that they were “frankly excited to just worry about all the other things we typically worry about.” 

The sudden collapse of Silicon Valley Bank on Friday initiated a ticking clock—a countdown until banks opened on Monday for either another financial institution to come in and buy up SVB’s assets and give peace of mind to depositors or for the government to take further action. Over the weekend, the FDIC reportedly hosted an auction for SVB’s assets with a deadline of Sunday evening—but federal agencies stepped in and put the Valley’s minds to ease by around 6 p.m. New York time. It looks like SVB could still find a buyer.

This is a huge deal for more than just VCs—It’s important to think of the startup founders who worried they wouldn’t be able to pay payroll for their employees with their funds locked up. One startup founder told Anne on Friday that “my company is done” with their funds frozen in the bank. Now, the startup crowd has been tweeting and telling us in private messages how relieved they are.

But everything is not totally resolved. A Treasury official reportedly told reporters on a call on Sunday evening that “there are some institutions that look like they have some similarities to SVB and perhaps to Signature,” as Bloomberg reported. 

Some worry how this whole fiasco might still impact regional banks, like First Republic. One VC told Term Sheet that while the government’s move was “good for SVB account holders,” it’s “still dangerous times for regional banks.” 

First Republic has been proactively providing guidance on its financial position. Last week, it issued an 8-K telling investors it was well-capitalized and that its customer base was diversified. Yesterday it said it had arranged additional liquidity via JPMorgan Chase, in addition to the Department of the Treasury’s $25 billion it said it is prepared to loan out to financial institutions that may be experiencing heightened withdrawals, so long as they can pledge treasuries, mortgage-backed securities, or other assets as collateral.

Wesley Chan, cofounder and managing partner at FPV Ventures, told Term Sheet that he thinks this move does stop the contagion. “It has to, right?…If the government is saying, ‘We’re backstopping the assets, you have access to it, we’ll take the hit on it, not you,’ I think that stops it.” He said FPV is telling portfolio companies now to move their funds to a “top four” bank, to focus on making payroll, and not to “sign covenants that require only one banking relationship.” Indeed, in addition to the relief his portfolio companies are feeling, there’s a recognition that they need to diversify their bank accounts given what went down at SVB. That’s “one of the lessons” from the disaster, Chan argues. 

Venture capitalists, too, will likely think twice about how they are diversifying their financial partners. As data analyzed by Fortune revealed yesterday, more than 1,000 venture firms and private equity funds custodied at least some capital with Silicon Valley Bank in 2022, meaning capital has likely been frozen for a series of the venture industry’s most prominent funds.

If VC shops weren’t already using multiple banking partners, then they surely will be planning for that now—and likely ones with a less-concentrated customer base so sensitive to interest rates.

SVB’s demise will likely have ripple effects to the availability of loans to less blue-chip startups down the line. James Currier, founding partner at early-stage VC firm NFX, told Term Sheet that he thinks two things will result from the blowup: “One is that, for a year or two, you will have less lending to the higher risk companies. But I also think you’re going to have a reevaluation of whether those debt products should be taken on,” he said (in other words, startups may think twice before tapping venture debt, something that had become increasingly popular in the last year). 

But for Currier, “the system worked as designed. And it can get better, and it needs to get better, but every time we go through one of these things, we take notes, and we put in more buffers for the next time.” 

Regulators and politicians are taking notes, too. Yesterday, President Joe Biden issued a statement saying he was “firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.” Meanwhile, Securities and Exchange Commission Chair Gary Gensler said that his agency would be investigating the latest events and “bring enforcement actions if we find violations of the federal securities laws.” 

As for Term Sheet, we sincerely hope we will not be writing about another massive bank failure as the week progresses. 

See you tomorrow,

Anne Sraders and Jessica Mathews
Email: anne.sraders@fortune.com and jessica.mathews@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Shennon Biotechnologies, a San Francisco-based immunotherapies developer, raised $13 million in seed funding. DCVC led the round and was joined by Foundation Capital, AV8, and other angels. 

- K2 Space, a Los Angeles-based spacecraft company, raised $8.5 million in seed funding. First Round Capital and Republic Capital co-led the round and were joined by Boost VC, Also Capital, Countdown Capital, and others. 

- Powered by People, a Nairobi and Toronto-based digital wholesale platform, raised $8 million in Series A funding. Altos Ventures led the round and was joined by Golden Ventures and Susa Ventures.

- HeadRace, an Austin-based recruiting marketplace platform for employers and independent recruiters, raised $6 million in seed funding. Greylock, Susa Ventures, and Breyer Capital invested in the round. 

- Tweed, a New York and Tel Aviv-based wallet and payment solution platform, raised $4 million in seed funding. Accel led the round and was joined by Communitas Capital Partners, Zero Knowledge Ventures, and other angels.