Bloomberg Línea — Some Brazilian startups were unable to withdraw all their money in time from Silicon Valley Bank (SVB), where many companies kept their funds received from Silicon Valley venture capital funds, and which collapsed this week.
Bloomberg Línea found that there are Brazilian founders with more than $10 million in SVB, and which was closed down by the California Department of Financial Protection and Innovation on Friday after a bank run by companies to withdraw their resources.
Some founders requested transfers but have not yet received the funds.
The California Department of Financial Protection and Innovation took over the operation of all branches and the bank’s parent company after alleging inadequate liquidity levels and insolvency. The regulator appointed the Federal Deposit Insurance Corporation (FDIC) as a receiver.
With the withdrawal of deposits, those who had money in SVB should receive by Monday, March 13 the insured limit of $250,000.
Uninsured depositors will receive a settlement certificate for the remaining amount of their uninsured funds, the US regulator said, adding that it does not yet know the figures.
In practice, companies that still held more than $250,000 in SVB should be compensated in some way with the cash that will come in from the likely sale of the bank’s assets. But it is still not known when or how this will be done.
People familiar with the discussion heard by Bloomberg Línea said they expect some banks to buy SVB so that the founders who left more than $250,000 in the bank can get the money.
Caio Caputo, a partner at Caputo, Bastos e Serra Advogados, said the sale of $21 billion in bond assets in SVB’s portfolio and stock sales of $2.25 billion was a move that laid bare a financial crisis and a serious balance sheet problem at the bank, and which brought much fear to the market.
“If all the bank’s customers, from one moment to the next, decide to make withdrawals, the bank doesn’t have that money,” he said.
“The situation became even more serious because it is a bank that specializes in startups, which are naturally more fragile companies, in growth movement, and that have money in their bank account that comes precisely from the funds that invest in them,” Caputo said.
Without having to sustain the large volumes of withdrawals from customers, due to the lower flow of incoming investments and higher expenses of companies to maintain the operation, the SVB was experiencing an imbalance, according to Caputo.
Cascading effect
The collapse of SVB could further exacerbate the difficult economic environment for startups, which saw investments drop last year compared to record venture capital volumes in 2020 and 2021.
According to the innovation platform Distrito, in 2021 $5.8 billion was invested in Brazilian late-stage startups, or 63% of the total invested that year. In 2022, that amount fell to $1.5 billion, or 45% of the year’s accumulated amount.
It’s a challenging scenario for entrepreneurs who need external money to launch or run capital-intensive technology businesses. Startups, which generally burn more cash than consolidated companies, depend on access to cash for their businesses. Any delays for money from dammed-up funds could wipe out companies.
“Those who have not drawn down will have to follow the rules imposed by US law and will have to wait for the next news from the FDIC after they take de facto control on Monday,” Caputo said.
SVB was a key institution for the venture capital ecosystem for decades. Silicon Valley Bank was chosen by venture capital investors to transact company investments because of its operating structure suited to the funds.
But the venture capital firms that led to increased deposits at SVB were the same ones that advised portfolio companies to pull money out of the bank after SVB Financial Group announced it would try to raise more than $2 billion after a significant loss in its portfolio. That relationship was highlighted by CEO Greg Becker in his appeal to try to save the bank.
Brazilian venture capital managers such as Canary and Upload Ventures advised founders of startups in their portfolio to withdraw all their money in the face of fears that the US bank would run out of liquidity, according to people familiar with the matter. VC funds have also withdrawn their money from the bank. Canary has not answered Bloomberg Línea’s ask for comments. Upload said will not comment.
Opening an account in a US bank is not simple, considering that startups that have the legal structure of Cayman and Delaware are generally from founders that don’t have a social security number.
The US structure of Brazilian startups is a pass-through LLC company.
Some banks and fintechs initially benefited from deposits with the collapse of SVB, such as Morgan Stanley (MS), Brex, and Mercury. Sources told Bloomberg Línea that Brex and Itaú BBA - in this case funds converted into Brazilian reais - would have received more than $1 billion in deposits since SVB’s collapse.
Itaú BBA denied this, while Brex declined to comment.
But the challenge for Brazilian startups lies in the holding company incorporated in the Cayman Islands since many US banks decide not to work with this type of structure.
There are Brazilian startups that opted for Pacific Western Bank.
The industry estimates that 90% of Brazilian startups that have offshore companies had money in SVB since it was the bank that the venture capital funds themselves used when making investments.
