Start-ups scramble to pay employees after SVB collapse

Chief executives of some companies plan to use their personal wealth to cover their employees’ salaries

Silicon Valley Bank headquarters in Santa Clara, California. The bank failure’s fallout on start-ups is expected to be profound. Reuters

Start-up founders are beginning to worry about whether they will 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 start-up itself, switched to JP Morgan Chase, but not soon enough: Paychecks were already “in flight” with SVB and have yet to be paid out — and the company is still trying to understand what the bank’s collapse on Friday will mean for them, Rippling chief executive Parker Conrad said on Twitter.

Start-up founder Brad Hargreaves said some companies may not be able to make payroll next week. And because boards are sensitive to employing workers they cannot pay, he said, “Expect mass layoffs later today, Monday at latest.”

Sarika Bajaj, the chief executive of start-up Refiberd, said she had been a customer of Silicon Valley Bank for three years and kept most of the company’s funds there.

Ms Bajaj, who was at the Sand Hill Road branch of SVB in California on Friday, tried to make withdrawals but could not and is becoming 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.”

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

Some venture capitalists raced to assist in setting up temporary cash funds to help affected start-ups make payroll next week.

Spark Capital on Friday was steering portfolio companies in need of aid towards Liquidity Capital, which offers financing for start-ups and posted on LinkedIn that it would offer capital to those affected by Silicon Valley Bank’s failure within 24 hours, a source said. Liquidity Capital is among Spark’s portfolio of companies.

Chief executives 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 source.

At least one start-up 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, a source said.

Conversely, other start-ups were considering doing layoffs due to the SVB situation, because it is 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. Start-ups are discussing their options with lawyers.

The US rushed to seize the assets of Silicon Valley Bank on Friday after a run on the bank, the largest failure of a financial institution since Washington Mutual during the height of the financial crisis more than a decade ago. AP Photo

It was clear on Friday that the bank failure’s fallout for the start-up ecosystem could be profound.

In an interview with Bloomberg Television, former Treasury secretary Larry Summers spoke of “substantial consequences for Silicon Valley — and for the economy of the whole venture sector”, if the government does not intervene.

On Friday morning, at the SVB office on Silicon Valley’s Sand Hill Road, the location was technically closed. Still, a steady stream of clients, many of them start-up 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 start-up, 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.