Startup founders who didn't pull their cash from Silicon Valley Bank before its shutdown on Friday are hoping for the bank's sale or a saving grace as they scramble for emergency loans from investors on boards or facilities from third-party lenders.

"I've seen a lot of ups and downs in Silicon Valley. I've seen the dot-com bust, I've seen the housing crisis. This is something else," said Megha Chawla, founder of pre-seed startup Paliq and a 25-year veteran of the industry.

Silicon Valley Bank, a major lender in the tech world that did business with nearly half of all VC-backed startups in the US, was shut down and seized on Friday morning by the FDIC. Despite it having solid finances and its CEO urging calm, investors and depositors got spooked by its launch of a $2.25 billion share sale Wednesday. Depositors withdrew $42 billion from the bank on Thursday alone, spurring a bank run.

FDIC insurance covers up to $250,000 for each depositor. For most Series B and later startups, that figure will barely last them one payroll cycle.

The immediate question is: Will SVB be sold to another bank? This would quell the panic by ensuring depositors access to their funds.

"For a startup, cash is your oxygen. If you lose that for a few weeks, you can't pay people, you start losing people," said Yevgeny Gelfand, an investor at Alumni Ventures.

Startups are looking for ways to reduce burn as much as possible, and some investors are already seeing a surge in fundraising inquiries from founders who don't yet know when their locked funds will be available again.

Nicholas Freund, founder and CEO of data analytics startup Workstream, had millions of dollars in SVB that he was unable to withdraw before the bank was seized.

"We have no cash outside of SVB. So the $250,000 allows us a few payrolls," he said. Workstream raised $7 million in a seed round led by Lerer Hippeau last year.

For larger startups with several hundred employees, the situation is even more immediate.

Healy Jones, vice president of financial strategy at Kruze Consulting, an accounting firm that keeps the books for over 750 early-stage startups, said that the money from FDIC insurance should cover the next payroll of all seed-stage companies and 80% of Series A startups. "Issues will show up at Series B companies and beyond," Jones said.

Late-stage companies in danger of missing their payroll are asking their boards for short-term loans or trying to get a facility from a third-party lender. Several lenders began offering short-terms loans against companies' deposits with SVB.

Even companies that didn't hold the majority of their money in an SVB account may have payroll delays related to the bank's implosion. The founder of a prominent mid-stage startup told PitchBook that while more than 80% of the company's assets are held in interest-paying accounts outside of SVB, the failed bank continued to be the company's payroll processor.

"It's a pain because we now have to reroute payroll through another bank," he said. "It's a one-time hiccup, but we are fortunate that most of our assets aren't at risk."

David Murray, co-founder of Confirm, a HR tech startup that raised a $5.8 million Series A last month said: "We dodged a massive bullet moving all our money out on Thursday."

Many others weren't so fortunate—and either trusted the word of investors still confident in SVB's capitalization or were stuck in a holding pattern with website and withdrawal delays.

"Whatever money I had in SVB I can't access, and that money would have funded three months of development work for me," said Chawla, who is bootstrapping her latest venture and had moved a portion of her own 401(k) into SVB earlier in the week.

In the longer term, investors and founders say that the bank's collapse could have major implications for startups' abilities to raise new capital in an already challenging fundraising environment, as demand for VC cash gets even hotter.

Silicon Valley Bank was never a household name, but for founders, investors and LPs in the startup world, it served a unique purpose.

"SVB was going the extra mile to give startups what they needed, and that's what Silicon Valley will be losing," said venture investor Cheryl Campos.

The bank has also been an important provider of debt to early-stage startups: "Certainly in the last two years, Silicon Valley Bank has been the most aggressive in offering good terms for venture debt," said Paul Lanzi, former co-founder of Remediant.

"Losing one of the stalwarts of venture debt will be a shock for companies, especially those desperate for capital," said Arjun Sethi, co-founder of Tribe Capital, a venture firm with $1.6 billion in AUM. The fallout from SVB's failure will only further exacerbate demand for capital.

For investors, the major uncertainty is how far SVB's contagion will spread. For now, the risk to the financial system seems contained. "I don't think this is our Lehman moment," Gelfand of Alumni Ventures said.

Correction: An earlier version of this article incorrectly said that Megha Chawla has 45 years of experience in Silicon Valley. She has 25. The original version also misstated Cheryl Campos's title. She is a venture investor, not an angel investor.

Featured image by Smith Collection/Gado/Getty Images

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