Bloomberg Línea — Brazilian venture capital managers such as Canary and Upload Ventures have advised founders of startups in their portfolio to withdraw all the money they have (or had) in Silicon Valley Bank (SVB), in the face of fears the U.S. bank will run out of liquidity, people told Bloomberg Línea on condition of anonymity because conversations were private.
Bloomberg Línea reached out to SVB and Canary for comment but had not heard back by the time this report was published. Upload said it will not comment.
On Friday morning, at least 10 Brazilian startups that had made the transfer request were still waiting for the remittances. Millions of dollars of drafts are waiting for transfers that have not yet been confirmed.
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Bloomberg Línea found that the SVB money of some Brazilian startups was transferred to Morgan Stanley (MS) or Brex, American fintech founded by Brazilians Henrique Dubugras and Pedro Franceschi, or converted into real and brought to Brazil.
Brazilian founders who received foreign venture capital investment traditionally opened an account at SVB because it was the most practical financial institution to bank their companies in the Cayman Islands and Delaware, in the United States.
In general, global VC funds demand that a startup have a company open in Cayman and Delaware to receive investment, since they are places where the procedures for this type of transaction are simpler than contributing money directly to an institution in Brazil, for example.
Caution urged elsewhere
Most investors and advisors consulted by Bloomberg Linea say they prefer to be cautious about any impact SVB’s downfall could have on the Latin American startup ecosystem.
Mexico City’s Miranda Partners advisory firm CEO Damian Fraser said he does not believe there will be an impact.
“It appears that Silicon Valley Bank (SVB) has a problem with buying long-term bonds and losing money due to rising rates. However, with a supply of new capital it should become solvent again,” Fraser said.
However, there is still no certainty about what will happen, “the impact is still unfolding,” said a Mexican investor who asked not to be named.
Fraser noted that “if it is true that many startups in Latin America have their money with SVB, they are likely to look to other banks to diversify risk.”
SVB invests in funds such as Redwood Evergreen Fund, Capital Preferred Return Fund, Growth Partners and Strategic Investors Fund, according to its 2022 annual financial report.
In 2020 SVB closed the Latin America Growth Lending Fund, a $30 million venture and growth debt fund with Partners for Growth (PFG) and IDB Invest. The fund’s objective is to unlock innovation by providing capital to help emerging growth companies in Latin America and the Caribbean.
90% of offshore Brazilian startups had an account in SVB
Why startups in the region chose Silicon Valley Bank over traditional banks?
Opening an account in a US bank is not simple considering that startups with the legal structure of Cayman and Delaware are generally from founders without a Social Security Number (the US Social Security number issued to US citizens, permanent residents, and temporary residents).
The US structure of Brazilian startups is a pass-through LLC company. The challenge for Brazilian startups lies in the holding company set up in the Cayman Islands, as many American banks have difficulty working with this type of structure.
“The ‘icing on the cake’ is that the operation of these companies is in Brazil,” explained a founder heard by Bloomberg Línea in reference to the complexity of US banks’ willingness to have Brazilian startups as clients.
Also, for Brazilian early-stage startups that have little cash flow and assets, opening an account with SVB or alternative banks like Pacific Western Bank is easier and faster.
Still, an industry expert heard by Bloomberg Line on condition of anonymity said that a strategy of diversifying capital allocation by startups makes sense and that many founders are racing to find another bank for cash. That’s because startups typically depend on that money to keep their businesses going and worry if they can’t access it.
“At first SVB will not become insolvent, maybe it will be more smoke than fire, but it is good to have a diversification strategy. Caution is needed with treasury and cash management. Doing the transfer in a rush can worsen the startup’s situation,” this person said, warning that VCs are talking about backing SVB to prevent the bank rush for redemptions from leading to a breakup.
The industry estimates that 90% of Brazilian startups that have offshore companies had money in SVB, as it was the bank that the VCs themselves indicated. It is usually the bank where the money is and from which they can make the transfer to the funded startup.
In Brazil, startups such as Kamino and Latitud have platforms (which have lawyers) to speed up the opening of a startup and its legal structure abroad, as well as the way to open an account in an American bank. These companies indicated opening accounts at SVB and partner banks.
Bloomberg Línea also reached out to Kamino and Latitud for comment but had not heard back as of press time.
Warning sign on deposits
Although now managers such as Peter Thiel’s Founders Fund are advising founders to take their money out of SVB, much of US entrepreneurs’ choice to keep their money in SVB previously came from investor recommendations, as the bank was considered solid.
But the bank’s deposits have fallen as startups struggle to get cash amid risk aversion from investors with interest rates rising to curb inflation.
VCs are advising this rush to withdrawals because SVB, one of the 20 biggest banks in the US, sold assets that were tied up to make cash, making a loss. And yet it still needed to raise cash by selling $2.25 billion in stock.
In a statement to shareholders, the bank said it needed the funds to plug a US$1.8 billion hole caused by the sale of a US$21 billion portfolio of mainly US bonds. “I think they were very unprepared for an interest rate increase,” an investor familiar with the matter said on condition of anonymity.
With the credit side performing poorly, the bank started losing liquidity quickly, which caused startups and VC funds to rush money out, in a vicious circle. “It’s probably going to have some kind of buyer at some point,” this investor said.
“Even if there was no problem [at the bank] before, it was already a delicate situation. I wouldn’t be crazy to leave my money there with a bank run like that going on,” one founder told Bloomberg Linea.
Bloomberg Línea spoke with one founder who said he decided to keep what little money he had in SVB because of the U.S. FDIC (Federal Deposit Insurance Corporation), which protects depositors of money in insured banks in the event of a failure. Each depositor is insured for at least US$250,000.
SVB’s stock melted 44% in pre-market trading before the stock markets opened in New York on Friday.
-- With assistance from Yanin Alfaro