Friday, March On Sept. 10, Mike Wheeler, president and chief legal officer of payroll startup Patriot Software, was on a five-day cruise along the Florida coast to celebrate his brother’s wedding. That morning, while he was ashore for a brief layover in Key West, his cell phone service was restored and he received a message from the company’s former bank representative: “Are you ready to transfer some dollars from Silicon Valley Bank??? 😳 “
Wheeler responded with question marks. That night, his company was supposed to distribute about $40 million in paychecks to fry cooks, librarians and 46,000 other American workers through Silicon Valley Bank (SVB). The banker sent back a screenshot of a stock chart showing that SVB shares were down nearly 90% as Wheeler headed out to sea. The SVB is on the brink of collapse – and Wheeler, trapped aboard – knows little of the unfolding crisis on land.
SVB, known for its startup-friendly loans and lavish wine parties, announced late Wednesday that it would raise additional cash after it lost $1.8 billion on low-coupon bonds. The news comes after weeks of rumors about the bank’s health and sparked a general panic after its chief executive botched a conference call meant to assuage client concerns. The day before Wheeler received the puzzling text messages, SVB customers had attempted to withdraw funds totaling $42 billion, the regulator said, in the largest bank run in U.S. history. The startup industry’s bank of choice closed on a $958 million cash shortfall for the day. Wheeler soon learns that things can only get worse.
Friday, March 10
When Wheeler was on the news in Key West, he learned that SVB’s troubles were affecting not just Canton, Ohio-based Patriot, but the roughly 57,000 organizations where it calculates and pays payroll and payroll taxes. SVB held the funds in escrow for several days before sending them to workers at 12:01 a.m. Friday. The chaos staged by SVB broke the system, Wheeler discovered when he began poring over the delayed text messages. Nobody got paid — not even the Patriots’ own employees.
By then, Allie Egan, founder and CEO of Veracity Selfcare in New York, had lived through a full 24 hours of panic. Venture capital firms including Andreessen Horowitz and Peter Thiel’s Founders Fund have reportedly been advising their portfolio companies to diversify away from SVB, and Egan’s investors joined the chorus Thursday amid the bank run. But Veracity’s seed funding agreement stipulates that the money must stay in the bank.
Egan hasn’t moved the funds yet. But she was still worried. “I’m really scared that we’ve lost everything but the bare minimum,” she said, referring to the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC) for each account. That only pays two months’ salary. “As a founder, you have a lot of investors texting you and they’re like, ‘What’s your plan? What’s your plan?’ And you’re like, ‘I don’t know. I don’t really have a plan.’ ‘”
Taryn Aronson, chief financial officer of Chicago-based smart oven and meal delivery company Tovala, had attempted to withdraw the company’s funds from SVB the night before. But she woke up on Friday to the bad news that the transfer had failed. Like Patriot’s payroll deposits to 8,100 customers that day, cash is stuck. Tovala began to develop a worst-case scenario, stretching the remaining capital for several months. Tovala founder and chief executive David Rabie said it was a “full-blown crisis”.
At noon Friday, with the cruise ship still temporarily anchored in Key West, the Patriot’s Wheeler left his family at the butterfly conservatory while leading the Zoom war room with colleagues back in Ohio. They tried resending failed payroll transfers, to no avail.At 11:56 ET, SVB emailed a just-released government press release Says the FDIC is taking over. A representative for SVB agreed to join Patriot’s war room call and deliver the news customers didn’t want to hear: The worst had already happened and the bank had failed.
Inside SVB, some employees felt their jobs were lost and the bank dead. “The general consensus is that this is a pattern of gradual relaxation,” said a division chief, who requested anonymity. The SVB and FDIC declined to comment for this story.
