As a serial entrepreneur who has endured some ups and downs low, Parker Conrad thought he had seen it all. Still, he never imagined there would be a run on Silicon Valley Bank that would turn undulationhis six-year workforce management firm, a career so grueling that Rippling would liquidate $130 million in money market funds his clients needed for their payrolls.
Nor did he imagine that in the span of 12 hours, Rippling could secure $500 million in new funding to protect his company in case the markets got even more out of hand.
Both of these things happened in a short time, however, allowing Rippling to avoid disaster and also quite possibly change the 1,800-person company forever. Now, a week later, Conrad suggests that he’s still processing everything, saying there really wasn’t time to panic; there was too much to do.
Everything everywhere at once
As with so many clients of the 40-year-old bank, Conrad first heard that trouble was brewing last Thursday morning, March 9. Conrad got a call from a founder friend around 10am. doing with SVB?’” Conrad recalls now. “I was like, ‘What are you talking about?’ and said they had received a call from an investor at Valor Equity Partners who told them they should get their money out of SVB.”
Conrad’s initial reaction was: “That sounds crazy; I haven’t heard anything about that.” He then began taking a closer look at his laptop, where on Twitter, withdrawing money from the bank had suddenly become the talk of the startup world.
When SMS messages from Rippling’s own investors began appearing on his phone, Conrad quickly opened a Slack channel titled “SVB Risk,” inviting the company’s finance team, but hesitated briefly before contacting the company’s CTO, Albert Strasheim, and other engineers. Says Conrad: “I didn’t want to scare anyone or trigger an internal crisis until we were sure there was a problem.”
At 11:30, it was clear; there was a problem When Silicon Valley Bank CEO Greg Becker launched a Zoom call to provide context around an 8-K filed by the bank the day before, a growing percentage of Rippling’s engineering team joined in. Slack chat from different parts of the country to discuss a way to move the company’s banking and payment rails from SVB to JPMorgan.
The good news for Rippling, which runs a variety of services for its clients, from payroll to device management to corporate cards: It had already moved part of its banking business to JPMorgan nine months earlier. “It wasn’t because of any specific concerns with SVB,” says Conrad. It just seemed prudent to create some redundancies in their infrastructure, he says. In addition, Rippling also launched a global payroll product in October, and JPMorgan seemed to have “a lot more global capabilities,” he says.
Still, the team thought that if the time ever came, they could move their payroll business, which processes roughly $2 billion in payments each month, away from SVB “in about two weeks.” Now, that window was, well, outside the window.
“Even at that time we didn’t really think that SVB was going to fail or that the payments weren’t going to come out,” says Conrad. The team thought that the most likely scenarios were that another bank would buy SVB, or that its risk profile might change out of necessity, or that there might be a public relations setback at Rippling if it remained affiliated with a beleaguered bank. As of Thursday night, “we think we have at least a week to move, even in the worst case scenario.”
Frozen
Most people don’t think about how their paychecks get from their employer to their bank, but it’s not a straight shot. Rippling debits its clients’ accounts at the beginning of a given week, providing ample time for funds to clear or settle. Historically, SVB has been instructed by Rippling to pay those funds to employees, then sends those payments to the Federal Reserve, which then sends the money to the various employee banks as part of the broad interbank system called ACH. However, funds loaded early last week that appeared to have been sent overnight last Thursday never made it to the Federal Reserve.
Conrad woke up to the bad news at 5:30 a.m. Friday morning. Jumping out of bed, he headed downstairs to the kitchen with his open laptop in hand, cleared away the Legos on the kitchen table, and sat down as members of the “ops team” at Silicon Valley Bank outlined a backup due to the many cables and payments. the bank was processing at the same time.
There was no liquidity problem, they reiterated. The payments would come out.
Conrad was still sitting in his kitchen at 9 a.m. when he realized they wouldn’t.
That’s when the announcement came out: Silicon Valley Bank had been seized by the FDIC, which meant Rippling needed to quickly figure out how to access the funds and get them to the people who needed those paychecks. Specifically, Rippling needed $130 million to pay approximately 50,000 employees. In addition to establishing some preliminary payment rails with JPMorgan, he also had capital in money market funds with the bank. He began to liquidate them.
Still, he needed to generate a payment file that he could send to JPMorgan by 12:30 p.m., and he needed the routes the team was creating to work reliably the following week, as more people were expecting payments on Monday.
Meanwhile, customers were understandably getting angrier. Wrote one angry small business owner on Twitter: “@Rippling where are our direct deposits for payroll? Nobody got paid today! He has withdrawn it from our account, so he has our money. #wavy #shady #missingmoney #SVBBank”. Another customer told the San Francisco Chronicle of Rippling on Friday: “Your response and transparency has been appalling.”
Conrad apologized to the clients’ employees and promised to refund related overdraft fees. He posted updates on Twitter when he found out about them. He checked every 60 seconds with the 50 or so Rippling engineers tasked with getting the final payment file to JPMorgan on time.
I was also thinking about the next steps. Even if Rippling could pay these employees, what would happen next week? Rippling would need to send $300 million more in the worst case. The ripple could maybe secure a line of credit; another alternative was to sell more of Rippling. He sent text messages to his board members; most of them were in the same boat as Rippling, they told him. His money was locked up in Silicon Valley Bank.
He reached out to Neil Mehta of Greenoaks, another early and ongoing Rippling investor who had no money in Silicon Valley Bank. In fact, Mehta had written his portfolio of companies in Novemberwarning them that Silicon Valley Bank was in a precarious position because it was invested in too many long-term, low-interest loans.
From dawn to dusk
Parker now says: “We are still in a position where there is a group of investors who seemed very interested in owning more of Rippling and have been trying to buy more in various ways.” He didn’t think raising money would be a problem, but it would be far from standard in almost every way. As he told Mehta: “I want to raise some money, but I want to tell you up front that the main condition here is that we have to close for the weekend, and you have to be able to transfer the full amount first thing in the morning.” Monday in the morning. And what you need to understand is that we will send it directly to cover the payroll of the clients. That is the intention”.
Mehta, as Conrad recounts, said: “Let’s do it. And we negotiated the terms, and I signed a term sheet before 9:00 pm Friday night. And just as effectively, the entire fundraising process from the initial phone calls at 9:30 am to a signed term sheet was less than 12 hours. Then the rest of the weekend was just a Herculean effort to get the papers drawn up and we signed everything early Monday morning. Then they transferred the money.
In between, of course, a lot happened. Becker and Silicon Valley Bank CFO Daniel Beck were sent packing.
Rippling’s engineers were able to submit that file to JPMorgan on time last Friday afternoon. (They were 21 minutes late, but apparently the bank waited.)
The Federal Reserve also announced last Sunday around 3 p.m. PST that Silicon Valley Bank depositors, both insured and uninsured, would be helped in a way that would “fully protect” them, it said in a statement.
We asked Rippling what the deal with Mehta is like, given that it was made under duress and agreed so quickly. A Rippling spokesperson describes it as a “lightweight structure, superior to other shareholders.”
We asked Mehta if he also received warrants for his arrest as part of the emergency package, and he says Greenoaks did not. Instead, he speaks of Rippling’s “incredible ambition” and calls Conrad a “man of integrity”. Although Conrad could have tried to back out of the agreement, Mehta says, Conrad called him three minutes after the Federal Reserve made his statement on Sunday, reaffirming it.
Conrad says of the episode that “there was no chance we wouldn’t go through with the deal. One of the most important things in the entire ecosystem of companies is the sanctity of a term sheet and getting to a handshake on a term sheet. I know that if the FDIC had not supported depositors, there may have been many other bank failures on Monday.” Greenoaks wouldn’t have cared, Conrad insists. “I know that on Monday morning, Neil would have sent me his last dollar even as the world was ending, based on the commitment he made on Friday.”
Rippling has now raised $1.2 billion in total. The $500 million Series E values the company at $11.25 billion, the same valuation it was assigned when it closed on $250 million in Series D funding in May. (It also buys Greenoaks another 4% or so of the company.)
Other of the company’s past backers include Kleiner Perkins, Sequoia Capital, Coatue Management and Founders Fund.
