It was 5:30am on Friday, March 10, in Sydney when startup founder Lauren Humphrey first got word that Silicon Valley Bank (SVB) was in dire trouble.
SVB's shares had fallen more than 60 per cent when the bank said it planned to sell shares to raise capital after taking a $US1.8 billion ($2.7 billion) charge from the sale of some assets.
Its then chief executive Gregory Becker had been telling top venture capitalists in Silicon Valley to "stay calm" amid concerns about a capital crunch that wiped almost $US10 billion off the bank's market valuation.
Humphrey, the Sydney-based co-founder and chief executive of The Mintable, a startup that develops products to teach people how to become better managers, was up early breastfeeding her two-month-old son.
"I was just aimlessly scrolling my email inbox and social media when I started to see some news fluttering about SVB," she says.
"I sent a note to a couple of The Mintable investors just to understand what was happening."
About half of all venture-capital-funded startups in the United States are customers of SVB, and many of them invest in local startups in Australia, creating an interconnected web.
This tight ecosystem can see local founders who tap into funding and networks in Silicon Valley quickly thrive and reach billionaire status. Conversely, it can instantly wipe out their fortunes when the main bank that holds their cash goes under.
That was something that dawned on Humphrey in those frantic hours.
"Our panic started to rise about the level of seriousness and the probability that the bank was actually going to collapse," Humphrey says.
She moved from the United States to Sydney with her Australian husband early in the pandemic, and in June 2021 started her business with close friend and former colleague Melissa Miller.
The business runs out of Sydney, and Denver, Colorado, where Miller is based. And the co-founders recently raised $6.8 million in funding rounds, mostly led by Blackbird Ventures, which is their main investor, and banked with SVB.
"We had approximately 80 per cent of our funding and revenues in the SVB bank, and the remaining 20 per cent in CommBank here in Australia," Humphrey says.
When she became aware that her funds with SVB "may or may not be available" beyond the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC), she started to panic.
"Obviously, losing that money [in SVB] would be quite distressing," she says.
"The first thing that came to mind was, 'Can we make payroll for the team based in the United States,' … And then, 'How can we stay in business? How much time do we have before our capital runs out?'"
Social media frenzy feeds a global bank run
Texts, emails and WhatsApp messages from other startup founders and venture capitalists all over the world were piling in.
"The advice was going from, 'Hey, get maybe some money out,' to like, 'Get it all out, don't be a company that loses its money,'" Humphrey recalls.
"And, you know, the reality is by the time I was up in the morning, we only had an hour to even try to transact in the States before trading hours closed."
Humphrey says the "mayhem … uncertainty and confusion" about what was happening raised her anxiety before she realised this was far bigger than one startup.
"I kind of started to relax when I realised the enormity of the problem," she says.
"I started to think, 'Well, if this really is happening, then The Mintable is not really like the most important thing.' That this could actually take down the US economy and have a ripple effect around the globe."
Across the Pacific Ocean, in Los Angeles, California, Rory Garton-Smith, 31, and Harry Dixon, 29, were having their own panic attacks.
It was Thursday evening their time. Their anxiety was rising with every doomsday tweet and WhatsApp message signalling the imminent collapse of a bank they had come to love and thought was infallible.
The Perth high school friends only recently entered the competitive Silicon Valley tech space.
They moved to San Francisco last year, but now work out of LA after founding Checkmate — an app that gives shoppers a dashboard of all online deals on offer and lets users keep gift cards in one place and track deliveries.
Their business is also backed by Australian venture capital fund Blackbird Ventures as well as US-based Fuel Capital, and the duo have raised $US5 million to date. About $US3 million of that money was sitting in an SVB account.
"We started getting messages like, 'It's probably fine. It's probably nothing. But just in case — if you were thinking about it — maybe wire a little bit of money out,'" Garton-Smith says.
He says SVB was supposedly a "reputable institution", but when Peter Thiel, an industry heavyweight and general partner of venture capital firm Founders Fund, said depositors with SVB should pull their money out, he took action.
"When I saw that it was from someone who was very trustworthy in the industry I thought, 'That's actually a huge, a huge red flag. We should probably act on this immediately,'" Garton-Smith says.
The founders tried to get their money out, but their bank accounts were also frozen.
Dixon says they thought because Silicon Valley Bank backed 50 per cent of the US startup market "they seemed too big to fail".
"We are an early-stage startup. We only had one bank account," Dixon says.
They started calling contacts at Morgan Stanley, JPMorgan Chase "and pretty much anyone that could take our money".
"We got set up with a NEO bank called Mercury ... at probably 5:30pm on Thursday (US time)," he says.
"We initiated the wire and thought that we'd, you know, beat everything to the punch. But we were waiting until Friday (US time) for the banks to reopen.
"We got up at the crack of dawn, refreshing the page … for hours, but no money was transferred.
"And then on Friday at about 10am (US time), we got the notification that the US government had frozen all transfers. And that's when our hearts sank."
Garton-Smith says hours before SVB's collapse, there were founders on Twitter who were virtue signalling and saying: "We won't withdraw money, we will stick around."
"And then, as soon as the bank went under, they were deleting their tweets," he says.
"It's scary when you realise how fragile things are. A bunch of group chats — people texting each other — can cripple one of the USA's top-20 largest financial institutions overnight. It's alarming."
California banking regulators shut down SVB on March 10 after a run on the lender, which had $US209 billion in assets at the end of 2022.
Depositors pulled out as much as $US42 billion on a single day, rendering the bank, which was the go-to bank for tech startups and the 16th-largest bank in America, insolvent.
It was the biggest bank failure since the global financial crisis of 2008.
Since SVB's collapse, other smaller US regional banks have fallen, and the health of major banks around the world including Swiss-based Credit Suisse have been questioned, with tens of billions wiped off their valuations.
On Monday, Swiss authorities said investment bank UBS would take over Credit Suisse for $3 billion Swiss francs ($4.8 billion) in a bid to rescue the embattled lender.
Some on social media have called the SVB collapse and banking sector fallout "Lehman 2.0".
While the banks are now more well capitalised than they were in 2008, fears are mounting this may be the start of another global financial meltdown and an associated economic downturn.
How SVB created its own demise
The downfall of SVB was due to many reasons, but perhaps the biggest was that the bank had forgotten a basic fundamental in finance: Hedge your risk.
Daniel Ives, managing director at US-based Wedbush Securities, says SVB was the "godfather" of the tech ecosystem, but it failed to account for its exposure to rising interest rates.
Around the same time as SVB's collapse, Signature Bank in New York, and Silvergate Bank, which carried similar investments in government bonds, also went under.
Ives notes that, in SVB's case, much of its investments were in government bonds with a 2 per cent yield per year. When the Federal Reserve increased its funds' rate to well over 4 per cent, he says the bank fell into trouble.
SVB had been forced to sell $US21 billion of bonds that had a yield of 1.8 per cent.
That was significantly below the two-year yield (in late February that was paying a yield of 5 per cent but has since fallen), so SVB was going to face a $US1.8 billion loss.
When it revealed this during a capital-raising round where it asked investors for $US2.25 billion, people started pulling their money out.
US regulators, fearing financial contagion, stepped in to guarantee "all insured depositors".
The US Federal Reserve also created a lending facility for the country's banks to give them liquidity.
"This is a management team that ultimately mismanaged risk in just an absolute debacle way, and then the Feds ultimately had to seize it and backstop it," Ives says.
He points out an irony "in almost a Netflix comedy way" that Barney Frank (who played a role in the Dodd-Frank banking regulations after the global financial crisis) was a director on Signature, which got closed.
"The Dodd-Frank sponsor was a director on a bank that ultimately got shut by the FDIC," he says.
Ives thinks that further bank collapses are inevitable, but it's not going to be like the global financial crisis.
"Ultimately, there's usually not just one cockroach, there's more than one," he says.
"You could see some others potentially go down this path, but it does feel like it's ring fenced from a systematic-risk perspective."
SVB executives lobbied for deregulation that played part in bank's collapse
Since the global financial crisis, SVB also spent millions lobbying for the deregulatory policies that many argue ultimately created the conditions for its downfall.
In fact, its former chief executive, Becker, backed two tech industry lobbying groups that tried to influence the Dodd-Frank financial reform law.
It's another irony that is not lost on Betsey Stevenson, who served as an economic adviser under the Obama administration.
"We had [Dodd Frank] regulations put in, you know, certain stress tests, that banks needed to meet certain liquidity requirements, certain capitalisation requirements, and those were for anybody with anything that's over $US50 billion," Stevenson explains.
"And then you have the head of Silicon Valley Bank lobbying Congress to say, us small banks under $US250 billion, this is too much for us. We don't need it, we'll be OK."
In 2018, Republican majorities in the House and Senate voted to raise the bank asset threshold to $US250 billion, and then-president Donald Trump signed it into law.
"So we get the 2018 legislation that moves that cap, essentially deregulating what we think of as small-to-medium-sized banks, because they no longer have to pass the stress test, they no longer have the same capitalisation requirements, they no longer have the same liquidity requirements," Stevenson explains.
"That deregulation certainly played a role."
Stevenson says the "easy thing to do" would be to repeal the 2018 legislation, even if it involves spending months trying to get agreement between Democrats and Republicans.
"Simply go back to what we had, prior to 2018," she says.
"We can't have the same sort of attitude of 'take all the risks you want'. I don't really want to be in the business of vetting my bank. And I think most people don't, including small business owners."
But Rory Garton-Smith says for startups, "regulation is always a double-edged sword".
"I think something that's very important to understand is that SVB hasn't been bailed out; the equity holders have essentially gone to zero," he says.
"The message that sends to other banks is actually, maybe you shouldn't put [more than] $20 billion into bonds. Maybe you should, you know, leverage your portfolio across a more diverse range of things. I don't think there needs to be regulation in place to say that."
A more 'fragile' financial system?
Many of the banks that faltered during the global financial crisis are now perceived as stronger and have now stepped in to take SVB's place.
"I've seen the response from the likes of Airwallex and JP Morgan and Goldman Sachs and Mercury — you can see them already in-bounding (coming to) us to say, 'Hey, we're here to help,'" says Melbourne-based Blackbird Ventures general partner Nick Crocker.
He was one of the investors who called Humphrey and the Checkmate founders in those fateful hours on Friday morning (Australia time), as they are part of Blackbird's investment portfolio.
This portfolio includes 107 companies in the United States, the United Kingdom and Australia, and about a third of those had Silicon Valley Bank accounts, some with "millions and millions of dollars".
SVB's website even spruiked the fact that:
"Blackbird Ventures founders choose Silicon Valley Bank because we champion start-ups at every stage — from seed and venture raising to IPO and beyond — to accelerate growth. And to change the game."
SVB had indeed changed the game, but not in the way Crocker had expected.
The events of March 10 stay with him.
He describes the process of helping startup founders they invest in over a 72-hour period as "like a triage in an ER room".
In those uncertain hours, he and Blackbird's other partners and staff were liaising with startup founders who wanted to pull their money from the bank.
"We actually felt our job wasn't to add to the hysteria," Crocker says.
"But for each company, we were able to say, OK, given your exposure, maybe you need to set up a new account as soon as possible."
He says the collapse of SVB has served as a reminder that the financial system can be tumultuous and funding is not a sure thing.
"The reason SVB was so popular with startups is because it was so easy as a startup to go and get set up," Crocker says.
But now they are advising their portfolio companies to think about having several bank accounts: "Do we have other bank accounts open in the case that Bank X closes and we need to move it all … in a two-hour window?"
"Treasury management will be on the agenda of every board meeting in a way that it probably wasn't," Crocker says.
At Checkmate, Garton-Smith and Dixon have lived through their first major crisis and have also learnt an important lesson about fragility.
"Don't keep all of your money in one account," Garton-Smith says.
"Money is the lifeblood of the company. Protect your money at all costs.
"It's one of those situations where you can't really even afford to have a kind of moral stance or political stance; you have an obligation to your employees first."
Garton-Smith also shares fears that with SVB's disappearance, power will be consolidated with the big investment banks like JP Morgan and Merrill Lynch.
"They (the US government) really want to make sure that banks like Silicon Valley Bank and more regional banks are able to continue functioning," he says.
"But at a time where there's fear in the market, you have got to do what's best for the company. We have moved to essentially one of the big five banks (Merrill Lynch) until, I guess, the dust settles."
The tech and startup sectors will feel the impact for years to come
Ives says because SVB was the "hearts and lungs of the Silicon Valley banking system" its disappearance will be detrimental to startup founders who already struggle to get funding.
He says that could mean many of them don't ever get off the ground, some go under, and others are forced to merge.
He says the banks will think more carefully about which startups they loan to and how much they lend.
That, Ives suggests, will create winners and losers in the startup community within tech, not just in Silicon Valley, but around the world.
Garton-Smith also thinks it will be hard for startups to get funding.
"When we started this company, it (SVB) was really the only bank to go to," he explains.
"If you're an early-stage startup, you can't go to JP Morgan to just open an account. You can't go to Morgan Stanley and just open an account. Those options don't exist for you."
Dixon says they are also worried about the economic climate.
"It typically makes it harder for startups to get funded, or it [creates] more uncertainty in the market where people start losing jobs," he says.
Andrea Gardiner is founder and CEO of Jelix Ventures, another technology startup investor in Australia.
She says very few of her portfolio companies had significant exposure to SVB but agrees that its demise will impact the tech sector.
She says they will be advising startup founders to have what's known in the tech world as a "long runway" — that is to set aside more time, in months, a business has before it runs out of cash.
"It's going to be harder and harder to raise capital," Gardiner says.
"Investors will want to see the companies with more capital to create more runway to sort of mitigate the risk of running out of capital and dying."
Crocker says the funding for startups will still be there, but "there's going to be hoops to jump through in a way that Silicon Valley Bank didn't have".
"There's no change to their ability to go and secure funding, there is a change in their ability to have a great relationship with their bank, or at least a great experience with the bank who might not be as used to banking startups," he adds.
Is a global recession on the cards?
If more mid-sized banks continue to collapse and investors start pulling their money from the financial sector, it could trigger a recession in the US, which would flow through to other countries, including Australia.
Treasurer Jim Chalmers has been trying to assure Australians that "our institutions are solid, our banking sector is well capitalised, and we're in a better position than most other nations".
Humphrey doesn't want to imagine economic Armageddon but has learned to prepare for the worst.
"It (the SVB collapse) sort of sharpened our focus," she says.
"It taught us that we can't necessarily rely on the next capital fundraise, like we may have before."
She thinks venture capitalists are going to hold a much higher bar than they have previously to give a startup funding.
"It's probably a good thing … but it definitely means that it may be longer before we're able to raise capital," she says.
The last few days have "been pretty emotionally exhausting".
"We've had lots of early mornings, late nights together trying to figure out what to do and have just been worried about paying our team," she says.
While the founders have been relieved to see the FDIC step in to guarantee their deposits, Humphrey says her co-founder Melissa Miller asked jokingly: "Should we send the therapy bill somewhere?"