Silicon Valley Bank’s lesson is ‘you can’t have a single point of failure’: Endor Labs CEO

Endor Labs Co-Founder and CEO Varun Badhwar joins Yahoo Finance Live to discuss the lessons learned so far from Silicon Valley Bank's collapse.

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- Well, the federal government has stepped in to backstop customers of Silicon Valley Bank. But even with current deposits guaranteed, startups still face a swirl of questions, including how to keep up with payroll and also where to find new lines of credit. Joining us now are one of those customers of a Silicon Valley Bank, Varun Badhwar. He's Endor Labs co-founder and CEO.

Varun, it's great to see you here. I know it's been a very chaotic couple of days for you. I believe you had 100% of your funds in Silicon Valley Bank up until Thursday afternoon. So just give us an inside look and a walk through what the last week or so has been like for you.

VARUN BADHWAR: It's been a roller coaster of emotions. As a startup founder, you think about a lot of risk, but not one of your deposits evaporating from the bank. Thursday was business as usual here at Endor Labs until about 10:30 AM Pacific when an employee posted on Slack a news article about the stock tanking at SVB. My first reaction was this is a market overreacting. SVB has been around for 40 years, a darling of Silicon Valley.

But I'd say the feeling shifted over the course of the day from there to initial texts blowing up my phone related to everything should be fine to by mid-afternoon, well, you should probably draw some of your money out. We were fortunate. We had prior banking relationships at First Republic Bank.

And even though those were dormant, at 2:30 PM Pacific, I sent an email asking if I could still wire some money over to First Republic. And I got a response in five minutes I could. And I basically beat the buzzer in moving 5 million by wire transfer 13 minutes before the wire cut off on Thursday afternoon from Silicon Valley Bank to First Republic. I was fortunate because over half my friends in this ecosystem have been stuck with zero funds outside of Silicon Valley.

- So where do you go from here, Varun?

VARUN BADHWAR: Look, we were obviously very nervous about what happens to the rest of the funds that remain because the majority of our funds are still at SVB. Obviously, comforting getting out of the weekend knowing they're safe. Arguably the safest place in the banking ecosystem right now with the Fed's backing it is still Silicon Valley Bank deposits. I think for us, the clear learning here is you can't have a single point of failure.

And, unfortunately, the way the business banking relationships are set up is you're incentivized to be in one bank for the most part. But I think that's going to be a big change for the ecosystem moving forward. So we're actively diversifying our assets to the top five banks as well as other banks that we have relationships with.

- Varun, you mentioned the fact that a number of people within the startup community don't have access to funds because they weren't able to withdraw it, like you said, before that deadline. How big of a deal is this for Silicon Valley? Is that right up there with 2008?

VARUN BADHWAR: This is huge because you have tens of thousands of employees in this ecosystem that will not get paid if wires don't start clearing by today. You also have to remember it's not just those companies without the money. It's also a lot of our payroll providers who are banking at Silicon Valley Bank. And just so everybody understands, even though everything is supposed to be fine as of this morning, for the last several hours I have tried unsuccessfully to log in and access my Silicon Valley Bank accounts online. I continue to get errors.

I've got reports from our payroll providers that they have not been able to successfully withdraw wires out of Silicon Valley for rest of the customers of theirs. We are fortunate. We directly wired money from First Republic to them. So our employees will get paid on time. But this has a trickle down effect across the entire ecosystem when employees don't get paid on time.

- You mentioned the regrets over diversification, Varun. Were there red flags along the way?

VARUN BADHWAR: There really weren't. I mean, it's been a phenomenal bank. It's been a phenomenal partner to this innovating kind of machinery out of Silicon Valley. More than half of the VCs bank here. More than half of the tech startups bank here. Up until that Wednesday filing, I don't think there was any reaction. And to this date, I will say that I think all of this has been an overreaction.

Did SVB make some judgment call errors on how they staggered their treasuries and bonds? Possibly. But does that require a collapse of a bank with $200 billion in assets? I don't think that was warranted. And I think we need to look back and say, what could we have done better? I think there was a lot of misinformation being spread at the same time. And once the run for the bank happens, unfortunately, you don't want to be the last person waiting it out.

- Varun, I know we're still working through the details, still trying to figure out exactly what happened. But what could have been done better? What could have-- you're looking at it right now. Hindsight's 20/20. What did you learn?

VARUN BADHWAR: A couple of things. I think one on my side as an entrepreneur and leader is don't have a single point of failure in banking. Deposits are not necessarily entirely safe. The second is I think, honestly, if I look back, and time will tell when studies are done on this fiasco, it was a PR and communications failure. I think SVB waited too long. They then shared too much on a long day, on a day when another bank was shutting its door in Silvergate.

And I think that we're in a fragile place in our economy where people were just trying to understand how to process that bad news. And then, unfortunately, there were people in this industry, in this community who, for whatever reason, kind of went down this bandwagon of saying, pull out all your money. And once that started, the information spread was just like wildfire. I think if everybody had taken a step back, things would have been-- the outlook would have been different here because, foundationally, those assets are still fine. This is why the Biden administration is saying, you're not going to lose money on backstopping these deposits.

- Varun, in the absence of SVB, what's the impact on the tech startup and health care startup environment?

VARUN BADHWAR: Look, I think the biggest impact is going to be Silicon Valley Bank understood a lot of our entrepreneurial needs. And one of the big things that a lot of CEOs took advantage of in private markets was venture debt or line of credit facilities that SVB was very good at underwriting the risk on for younger companies. That is typically a facility that most larger banks don't provide until you're close to going public or a late-stage company. So I think one of the biggest hits in this economy where anyways venture funding has slowed down will be a lot of entrepreneurs who suddenly find themselves needing capital desperately because they had expected the 6- to 12-month runway of venture debt that no longer exists today.

- Boy. Varun Badhwar, I know it's a difficult day, but we really appreciate you being with us here on Yahoo Finance. Thanks so much.

VARUN BADHWAR: Thanks for having me.