‘Peak fear’: How Australia’s tech sector handled a bank meltdown
‘Peak fear’: How Australia’s tech sector handled a bank meltdown
Australian start-up founders and investors are taking stock after a furious weekend of shepherding their companies through the collapse of the most technology-friendly big bank in the United States.
While start-up founders are used to the anxiety of their company going bust, few had every thought about their bank going belly-up, especially when it’s a 40-year-old $US209 billion ($313.4 billion) institution.
So, when Benjamin Humphrey, the chief executive and co-founder of the Sydney-based customer insights software start-up Dovetail, awoke on Friday to a flurry of WhatsApp messages warning that the Silicon Valley Bank (SVB) was in trouble, he was concerned but not alarmed.
“The consensus seemed to be that there’s a lot of fear being spread on Twitter, driving an old-fashioned bank run,” Humphrey said. “I didn’t really have any reason to suspect that it was going to collapse.”
Like many Australian start-ups with US operations, Dovetail had an account with SVB to pay American staff and receive payments from local customers.
But the bank’s concentration of technology clients and investment strategy made it vulnerable to interest rate rises. That triggered worries about the bank’s stability and an announcement it needed more money from investors late last week. Some US venture capitalists began telling their companies to pull money from SVB, triggering a full-blown bank run.
On Friday morning at AirTree Ventures, one of Australia’s largest technology investment funds, the partners and staff were taking a more measured approach.
SVB had helped Australian start-ups launch US operations for years, originally as one of the few banks that would even open an account for them while other institutions ignored the sector. “We were very conscious of that,” said Jackie Vullinghs, an AirTree partner. “We’re also very conscious that cash is the most important lifeline for start-ups.”
AirTree later announced that about 28 per cent of its companies had an SVB account. While most held a relatively small amount of money there, some had entrusted the bank with much of their cash.
“And so we were recommending startups [transfer money to] keep three to six months minimum of runway in other bank accounts,” Vullinghs said.
But by 10am Friday, AirTree was hearing of companies that had tried to move money out of SVB and had their requests stuck in endless processing. AirTree staff were checking which companies had money in SVB, bouncing back and forth with founders on a channel in the messaging app Slack, figuring out which AirTree fund had invested in them in case they needed emergency help.
Meanwhile, Humphrey was in discussions with his co-founder and chief of staff. Dovetail, which is worth about $1 billion, had a “few million” in its SVB account — not enough to be a risk to its survival but painful to lose or have trapped.
“One of the investors that called me was like, ‘You are the only one of our 75 portfolio companies that is not moving money out right now,’” Humphrey said. His co-founder, Bradley Ayers, pointed out that moving Dovetail’s money out would cost very little, despite the moral issue of participating in a bank run, whereas keeping it in SVB could cost millions.
“At that point, any sort of moral obligation to avoid a bank run, even if you think it’s mostly fear, uncertainty and doubt-driven, is sort of put aside for the fiduciary duty [to your start-up],” Humphrey said.
On Friday afternoon, Dovetail tried to move the money. It went nowhere, sitting in a "processing" status. At Humphrey's housewarming, which happened to be on Friday evening, SVB was all anyone was talking about.
Vullinghs woke up on Saturday the same way she had on Friday: to bad news online about SVB. Local regulators had shut the bank. They would seek a buyer, but in the meantime, how much deposit holders would get back beyond the $250,000 that the federal government insured in each account was unclear.
It threatened to be an “extinction event” for the mostly US start-ups with their entire reserves in the bank, potentially leaving them without access to the cash to pay their staff. For Australian founders, the most urgent question was how to transfer money to America to staff there.
Airwallex, an Australian foreign exchange start-up, saw 250 local companies sign up or express interest over the weekend.
‘At that point, any sort of moral obligation to avoid a bank run, even if you think it’s mostly fear, uncertainty and doubt-driven, is sort of put aside for the fiduciary duty [to your start-up].’
Benjamin Humphrey, head of Dovetail
“Our teams have been working around the clock and through the weekend to support double the number of new customers moving their business to Airwallex over the last few days compared to the same time a week ago,” said Airwallex executive Amelia Hamer.
One source said Mr Yum, the Melbourne-based food ordering start-up that has expanded to America, was planning out scenarios based on how much cash they might get back from SVB. Mr Yum did not respond to a request for comment. Humphrey and his team were working out how to tell their customers not to pay invoices into the SVB account.
At Blackbird Ventures, which is an investor in Dovetail, partner Niki Scevak and the entire team were working through the worst-case scenarios for the companies in their portfolio most exposed to SVB. A small number had loans from SVB that meant they had to do their business banking with the company, making them a particular risk.
“Saturday was probably a time of peak fear,” Scevak said. “I was at my daughter’s year three basketball game, watching the game and then at halftime firing back and forth WhatsApp and text messages.”
An email thread Blackbird had started for its founders on Friday was on rapid fire, with start-up bosses sharing tips on how to move money, make payroll and understand the intricacies of US banking rules.
By Sunday, Scevak says, things started to look better with a consensus that depositors would at least get back 30 to 50 per cent this week, ensuring companies could pay their staff.
In America, some venture capitalists were in full flight, demanding a full US government bailout for SVB depositors – their investments chief among them – immediately. “ON MONDAY 100,000 AMERICANS WILL BE LINED UP AT THEIR REGIONAL BANK DEMANDING THEIR MONEY — MOST WILL NOT GET IT,” tweeted Jason Calacanis, a media figure and investor close to Elon Musk. “THIS WENT FROM SILICON VALLEY INSIDERS ON THURSDAY TO THE MIDDLE CLASS ON SATURDAY — MAIN STREET FINDS OUT MONDAY.”
He dismissed calls for him to stop panicking.
Humphrey says he was strangely calm — something Vullinghs says was true of AirTree’s companies as well. “Usually when startups make a mistake, it’s the result of a decision that the founders make either in the moment or maybe months or years prior,” Humphrey says. “And in this instance, it was completely not my fault. And so I kind of felt a sense of relief, almost.”
On Monday morning, Blackbird’s leadership team were in a group call when a text came in from a founder to Rick Baker, one of the fund’s partners, linking to a US government announcement that all SVB deposits would be accessible in full from Monday (Californian time).
“It marked the completion of a very, very scary rollercoaster of three days,” Scevak said. But Blackbird remains wary, with Scevak saying the aftershocks of SVB’s failure as a friendly lender, payment services provider and bank to the start-up sector could take months to play out. Vullinghs half-joking said she plans to find her copy of The Black Swan, a book about rare but disastrous events.
For an industry that was just starting, in Vullinghs words, to find “green shoots” after so many layoffs, it is another blow. But Scevak, whose daughter won her Saturday basketball game 12-6 in a good omen of the eventual outcome, is sanguine. “I think people’s attitude is to have confidence that they’ll get through everything,” he said.
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