Bloomberg Línea — Some Brazilian startups that have funds trapped in Silicon Valley Bank (SVB) (SIVB), that since Friday is under Federal Deposit Insurance Corporation (FDIC) receivership, begin to make action plans to meet salary payments and maintain operations, which include loans as alternatives.
These startups are also awaiting information on possible payments from the FDIC beyond the insured amounts of $250,000 on Monday.
At least 10 Brazilian startups have bridged the gap with Trace Finance to receive a line of credit from Capchase based on the funds trapped in SVB.
“Founders are signing up on the FDIC form to try to get the $250,000 as soon as possible, and if that’s not enough, they’re looking at debt alternatives,” one founder told Bloomberg Línea on condition of anonymity.
The US government has been saying that the amounts up to $250,000 will be released this Monday.
Most of those Brazilian startups that applied for the Capchase line have up to $250,000 in the bank - an amount that is FDIC-insured - but some founders wanted to “have a plan B”, according to Bernardo Brites, CEO and co-founder of Trace Finance.
Bloomberg Línea found that there are founders with more than $10 million tied up in the bank. Some made wire requests on Friday but have not yet received the funds.
This weekend, founders and investors (even of startups that had no funds dammed up but are concerned about the impact on the industry) drew up action plans to meet day-to-day payments and salaries.
One founder familiar with the discussions told Bloomberg Línea, on condition of anonymity because the conversations are private, that there are two scenarios for Brazilian startups today: startups that are cash-strapped enough in Brazil for the next six months, typically 30% of the amount raised with venture capital funds; and startups that are cash-strapped in Brazil and will need a plan for the short term.
For these companies in a cash-strapped situation, in addition to waiting for support from the FDIC to return the funds in the coming days, they are starting to talk about taking on small emergency debts with fintechs such as Brex, from Brazilians Henrique Dubugras and Pedro Franceschi, and other institutions.
The Capchase, which anticipates recurring receivables of startups, made a joint effort over the weekend so that on Monday, March 13 credit lines will begin to be released. The goal is that these startups with dammed-up resources can honor their salary payments and maintain operations while they do not draw the FDIC resources.
The loan will be equivalent to 20% to 30% of the balance trapped in SVB, with interest.
“Action plans to do what they can. A lot of these founders are going to try to send the money either by exchange or by bank account in the US. It is understood that there may be a larger withdrawal window this Monday, if not of the total, but of the $250,000 that the FDIC should release,” Brites said.
“There are a lot of startups that have already solved that problem, that doesn’t have money there [in SVB], but are already thinking about new rounds with structure in Cayman and opening offshore accounts with Trace.”
Avoiding contagion
Late Saturday, the FDIC began an auction process of the failed bank, with the final bids due Sunday afternoon, people familiar with the matter told Bloomberg News.
The FDIC is seeking a quick deal to buy the bank’s assets so it can make a portion of customers’ uninsured deposits available as early as Monday, Bloomberg News quoted people with knowledge of the situation as saying.
At the end of last year, SVB had more than $175 billion in deposits - the vast majority exceeding the $250,000 limit per customer and therefore uninsured - and $209 billion in total assets, according to Bloomberg News. Industry experts estimate that 90% of Brazilian startups with offshore operations had money in SVB before the rush for withdrawals on Thursday.
On a LinkedIn post, investor Paulo Passoni, former SoftBank managing partner for Latin America, stressed the importance of all depositors to be made good “or this thing is going to spread like wild fire”.
“I am not talking about bailing out equity holders of SVB. I am talking about guaranteeing all depositors in full otherwise a huge portion of other businesses’ deposits in smaller banks will migrate quickly to the big banks that are too big to fail. I do believe in capitalism and moral hazard, but first you stop the spread, which is arguably faster nowadays with social media and all. In sum, this is such a serious situation that I believe it is highly likely we have a solution for depositors by tomorrow morning. Cheering for no policy mistake like Lehman [Brothers],” Passoni said.
“The way it’s shaping up, the startups will get much of the dammed-up amount, if not all of it, in the next few weeks. But there is a possibility that it may not happen, or it may happen in a delayed way. And startups have salaries to pay,” Brites said in an interview with Bloomberg Línea.
He stressed that most Brazilian startups have considerable cash to make salary payments and maintain operations. “The situation is relatively under control,” Brites said.
“I don’t think that needing [the credit line] is the case for most startups, but there are cases in which, even to have an extra guarantee because you don’t know how long it will take to withdraw the money or part of it, the founders seek other alternatives,” said the entrepreneur.
“Trace is not gaining anything with this line of credit, it is a partnership to help startups. It is not in our interest for any startup to go bust.”
Trace Finance operates with foreign exchange for startups and on Thursday, during the rush of founders to draw down their balances at SVB, it opened a waiting list for a global account to receive these funds. According to Brites, Trace has received about $200 million from startups coming from SVB accounts and transferred that amount to reais or sent it to another dollar account.
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