After the success of Silicon Valley Bank, tech startups are racing to meet the fees

“If SVB, a pillar of the startup ecosystem for 40 years, can disappear in 36 hours, what else will?” said Rick Heitzman, founder of VC firm Firstmark Capital. “That’s where we start going down. You start to get to a place where people are more cautious about how they think about risk.

Gary Tan, president and CEO of Y Combinator, a startup accelerator in Silicon Valley, said many of the nearly 3,000 active companies had a relationship with Silicon Valley Bank. When YC surveyed those companies Friday morning and Friday afternoon, about 400 said they were vulnerable, and more than 100 said they were worried they wouldn’t be able to make payroll in the next 30 days without a quick solution to the bank.

“The whole startup community is on edge right now,” said Mr. Tan, adding that the companies most affected by this are not major tech companies, but small startups that have been established in the past few years.

The federal seizure of Silicon Valley Bank occurred after startups began pulling their money out of the bank to avoid possible losses on deposits above the federal government’s quota. The cash-outs, spurred by some venture capitalists, have sparked a notorious bank run, disrupting the tech lender’s plans to raise fresh capital and stave off bankruptcy.

The Federal Deposit Insurance Corp. said Friday it was appointed receiver, the second-largest bank failure in U.S. history after Washington Mutual Inc. collapsed during the financial crisis. The FDIC says depositors with more than $250,000 in cash will receive a receivership certificate for their uninsured accounts, meaning those with large deposits stuck in the bank may not get their money anytime soon.

Ben Kaufman, CEO of Retail Camp.com, sent an email to customers offering a 40% discount and encouraging them to keep the company running.

“Unfortunately, most of our company’s financial assets were banked,” Mr. Kaufman wrote in an email seen by the Wall Street Journal. “We hope this will be resolved soon, but in the meantime we are asking our valued customers to help you.”

Mr. Kaufman said in an email that customers can use the code “BANKRUN” at checkout to get the discount. He confirmed the content of the email but declined to comment further.

Some established technology companies also did business with the bank, regulatory filings show. Streaming platform Roku Inc.

In the year As of March 10, SVB said it had $487 million of $1.9 billion in cash and $487 million in cash. The deposits are uninsured, Roku said in its filing. .

Video game company Roblox Corporation

In the year It said about 5% of its $3 billion cash and securities account as of Feb. 28 was with SVB. “Regardless of the final result and timing, this situation will have no impact on the day-to-day operations,” the gaming company said in its filing. Several other companies reported some funds tied up in SVB status, although many described the amounts as relatively small.

Some members of the tech community said they had held out hope that the FDIC would find a buyer over the weekend to freeze tens of billions of uninsured deposits held by banks and limit losses. Meanwhile, some venture firms are planning to provide emergency funding to their startups to prevent them from losing money, investors said.

New York health-tech startup Biotia expects to seek to secure SVB’s accounts on Monday, but in the meantime it is drawing up backup plans for alternative financing, either through loans or equity financing, the company’s founder and CEO said. Executive Director, Niamh O’Hara.

“We’re working on all fronts,” Ms O’Hara said. The company has about 20 full-time employees and expects to be able to make payroll, she said.

After years of establishing itself as a financial hub for many startups and venture-capital firms, Silicon Valley Bank occupies an unusual central position in the startup landscape.

Across Silicon Valley on Friday, startup founders and their venture capital backers were scrambling to figure out what to make of the news that the bank was quickly going out of business.

“The contagion is wide,” said Mr. Heitzman of FirstMark Capital, who said the bank’s failure would prompt founders to diversify their deposits and become more capital efficient.

Silicon Valley was already under pressure. Tech companies have laid off tens of thousands of workers, most of them in the region, and startups have struggled to raise more money in the past year. Some were looking at their already dwindling piles of money.

Ripple, a payroll processing startup that serves other startups, was unable to complete certain payroll operations on Friday, co-founder and CEO Parker Conrad tweeted. We heard from SVB this morning that this is an operational delay and that funds will be released. However, FDIC involvement makes us question the assurances we are getting from SVB,” he tweeted.

A spokeswoman for Rippling, the company’s parent, People Center Inc., did not immediately respond to a request for comment. The company is a key payroll provider for startups and says it has processed $10 billion in employee payroll. Mr Conrad tweeted later on Friday that the company had made the change, which it hoped would pay the affected workers by Monday.

Alex Meshkin, CEO of medical services provider Flow Health and Ripple client, is currently unable to pay at least 1,000 of its employees.

Mr. Meshkin, who is based in Los Angeles, spread the news to employees on Slack and is doing his best to field questions from employees, some of whom he says may be living paycheck to paycheck. The founder said he would file a breach of contract notice if the workers were not paid by Monday. Until a solution is fixed, the company will have to move to manual payroll.

SVB’s decline marks a sharp turnaround from Thursday, when some venture capital firms believed the bank was in good shape and refrained from telling their startups to take money.

In a note to founders late Thursday, Kosla Ventures said that while the bank’s sudden problems were surprising, it still believed SVB was “fundamentally sound” and could survive the current crisis. The organization encouraged startups to have at least three months worth of funding with multiple financial institutions.

A spokesperson for Khosla Ventures said the institution believes that most of the deposits and securities held in Silicon Valley banks will be safe for most of the companies even if they fail.

Brad Hargreaves, who has founded three companies including General Assembly, considered taking out a loan from Silicon Valley Bank a few years ago but found the terms too tough. He said they also had to make their banks with them to take loans. Part of the bank’s field was how they looked at the financing aspects of a founder, he says.

“They’re not just a corporate lender and a corporate bank for your startup, they’re lending to your home founder. They become your personal wealth manager,” Mr. Hargreaves said.

– Yulia Chernova contributed to this article.

Write to Berber Jin at berber.jin@wsj.com, Kathryn Bindley at katie.bindley@wsj.com and Rolfe Winkler at Rolfe.Winkler@wsj.com.