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Rippling struck a $500 million deal in just 12 hours while SVB was experiencing difficulties
Parker Conrad, a serial entrepreneur who has experienced both success and failure, never expected that Silicon Valley Bank would experience a run that would severely affect his workforce management company, Rippling. The run on the bank caused Rippling to liquidate $130 million in money market funds that were meant for customer payrolls.
However, in a stunning turn of events, Rippling was able to secure $500 million in fresh funding within just 12 hours to protect the company from further market instability. This unexpected turn of events could potentially change the 1,800-person company forever.
Although it has been a week since these events, Conrad is still trying to process everything that happened. He states that there was no time to panic and that they had to act quickly to ensure the survival of the company. The situation has shown the importance of being prepared for the unexpected in the world of business.
Everything everywhere all at once
On the morning of March 9, like many other customers of Silicon Valley Bank, Parker Conrad was informed by a founder friend that there was trouble brewing at the bank. An investor from Valor Equity Partners had called to advise moving their money out of the bank. Initially, Conrad thought it was a crazy idea and was unaware of any issues until he saw a sudden surge in tweets about moving money out of the bank.
As SMS messages from Rippling's investors started appearing on his phone, Conrad quickly opened a Slack channel titled "SVB risk" and invited the finance team to discuss the situation. He hesitated before looping in the company's CTO and engineers, not wanting to cause panic until they were certain there was an issue.
By 11:30, it was clear that there was indeed an issue, as Silicon Valley Bank's CEO launched a Zoom call to provide context around a recent 8-K filing. Rippling's engineering team joined the Slack conversation from different parts of the country to find a way to move the company's banking and payment rails away from SVB to JPMorgan. The team was determined to act quickly to avoid any further damage to the company.
Rippling had already diversified some of its banking business to JPMorgan nine months prior, not due to concerns with SVB, but to ensure redundancy in its infrastructure. Conrad explains that this move was also motivated by JPMorgan's superior global capabilities, which were important for Rippling's global payroll product launched in October. The team was confident that they could move their payroll business away from SVB in about two weeks if necessary, but they did not believe that SVB was going to fail or that payments would not go out. The team's more likely concerns were that SVB would be acquired by another bank, its risk profile would change, or there would be negative PR associated with being affiliated with a struggling bank. As of Thursday night, they believed they had at least a week to transition, even in the worst-case scenario.
Frozen
Many people do not think about the complicated process that occurs in transferring their paychecks from their employer to their bank. In Rippling's case, they debit their clients' accounts early in the week to allow sufficient time for the funds to settle. Historically, SVB would receive instructions from Rippling to pay out those funds to employees and then forward those payments to the Federal Reserve, which distributes the money to the employees' respective banks through the interbank system called ACH. However, funds that were debited early last week and seemed to have been sent out overnight on Thursday never arrived at the Federal Reserve.
At 5:30 a.m. on Friday morning, Conrad received the unfortunate news. He quickly went downstairs to the kitchen with his laptop in hand and joined the Silicon Valley Bank's operations team, who were experiencing a backup due to the high volume of wires and payments being processed simultaneously. The team assured Conrad that there was no issue with liquidity, and the payments would go out as planned.
Conrad remained in the kitchen waiting for updates until 9 a.m., when he finally realized that the payments had not been made. The situation had escalated quickly, and the stakes were now extremely high for Rippling and its clients.
Rippling faced a race against time when news broke that the FDIC had taken control of Silicon Valley Bank. The seizure meant that the company needed to quickly access $130 million to pay 50,000 employees who were waiting for their paychecks. The company set up payment rails with JPMorgan and began liquidating money market funds it had with SVB. However, the team still had to generate a payments file to send to JPMorgan by 12:30 p.m. and ensure that the system would work reliably for Monday's payments.
As customers grew increasingly frustrated, Conrad apologized and promised to reimburse overdraft charges. He also posted updates on Twitter and kept in constant communication with the team of engineers tasked with sending the final payments file to JPMorgan. One angry customer took to Twitter to express their frustration, while another spoke to the San Francisco Chronicle and criticized Rippling's response and transparency. Despite the pressure and criticism, Conrad remained focused on getting payments to employees, working diligently to ensure that the new payment system was reliable and secure.
Conrad's concerns extended beyond just getting his client employees paid. He was also worried about Rippling's ability to handle future payments. With $300 million potentially on the line, Conrad knew that he needed to act quickly. One possible solution was to secure a line of credit, but he also considered the option of selling more of Rippling. He communicated with his board members via text, but most of them were in the same predicament, with their funds locked up at Silicon Valley Bank.
To explore other options, Conrad contacted Neil Mehta of Greenoaks, another early investor in Rippling. Interestingly, Mehta had warned his portfolio companies about Silicon Valley Bank's unstable position back in November. Mehta had cautioned that the bank had invested in too many long-term, low-interest loans, leaving it vulnerable to financial troubles.
From dawn to dusk
According to Parker, Rippling was still receiving interest from investors who were interested in owning more of the company, and they had been attempting to acquire more shares in different ways. While he didn't believe that raising more money would be an issue, it would not be a standard process by any means. He informed Mehta of his intentions to raise capital and explained that the main condition was that they needed to close the deal over the weekend, with the funds available for wiring on Monday morning. He emphasized that the money raised would be used to cover customer payroll.
Mehta was enthusiastic about the opportunity and immediately agreed to the terms. The two parties negotiated the details of the deal, and Parker signed a term sheet before 9 p.m. on Friday night. The entire fundraising process, from the initial phone call at 9:30 a.m. to the signed term sheet, took just under 12 hours. The team then worked tirelessly throughout the weekend to draft the necessary documents, and everything was signed early on Monday morning. Mehta then wired the money to Rippling.
During this time, there were also significant changes occurring at Silicon Valley Bank. Becker and the bank's CFO, Daniel Beck, were both let go.
Last Friday, Rippling's engineers managed to send a critical file to JPMorgan just in time, albeit 21 minutes late. The following Sunday, around 3 p.m. PST, the Federal Reserve issued a statement ensuring that Silicon Valley Bank's depositors, both insured and uninsured, would receive assistance to fully protect them.
Given that the deal with Neil Mehta was made under duress and agreed upon quickly, Rippling's spokesperson described it as having a "light structure - senior to other equity holders." When asked if Mehta received warrants as part of the emergency package, he confirmed that Greenoaks did not, and instead praised Rippling's "incredible ambition" and Conrad's "man of integrity." According to Mehta, despite the potential of Conrad backing out of the deal, Conrad reaffirmed it by calling him just three minutes after the Federal Reserve's statement.
Conrad emphasized the importance of the term sheet and handshake in the venture ecosystem, stating that "there was no chance we were not going to move forward with the deal." He acknowledged that without the FDIC backstopping depositors, there could have been other bank failures on Monday. Despite the circumstances, Conrad believed that Mehta would have still wired the money on Monday, as he had committed to doing so on Friday, saying, "I know that on Monday morning, Neil would have wired me his last dollar even as the world was ending, based on the commitment that he made Friday."
Rippling has recently completed a Series E funding round, raising a total of $500 million and bringing its total funding to $1.2 billion. The company's valuation has remained unchanged from its previous Series D funding round in May, which also valued the company at $11.25 billion. As a result of this latest funding round, Greenoaks, one of Rippling's investors, now holds an additional 4% of the company. Other notable investors in Rippling include Kleiner Perkins, Sequoia Capital, Coatue Management, and Founders Fund.
Source Techcrunch
