Opinion
*) Quote from Jessica Lessin: “The thing I am hearing from a lot of founders is, in the words of one, ‘payroll > good will’. It is such a tremendously challenging situation.”
Silicon Valley Bank (SVB) holds something like 44% of all venture capital (VC) funds. That’s the millions handed out by venture capitalists (investors) to new and not-so-new companies. These companies need a place to store their newly-acquired millions, and so they deposited the cash into accounts with SVB, about $170 billion worth.
Last fall, SVB made a mistake in putting $21 billion into ten-year bonds at a low interest rate of 1.63%, just before interest rates starting going up. Yah, I would never do that either. So Wednesday, it admitted the folly, saying it was selling $2.75 billion to cover losses of $1.8 billion. People freaked out.
Well, the not-so-dire dire news came on top of nervousness around investments due to the FMT/Alameda crypto exchange collapsing very publicly, and on Wednesday crypto firm Silvergate announcing large losses ($1 billion), large layoffs (40%), and loss of some clients. SVB is an actual bank holding actual money, not crypto, but still VC funds are a form of funny money. Here’s why:
A report was released the same week guessing that 80% of VC-funded firms might go out of business before the end of 2023, because VCs were pulling back on how much they fund new firms (aka Series A) or give more money to existing firms still needing cash (aka Series B). So, as Nikita Bier (@nikitabier) put it, “Everyone who has their money in SVB should be counting their blessings. Your startup or venture fund was going to zero anyway and this is your out.”
VCs were pulling back on funding, because the era of free money (close to 0% interest on savings and loans) came to an end last fall, as central banks began raising interest rates to fight inflation. When interest rates go up, it is safer to put your money into a savings account than into a new firm with an uncertain future; also, it becomes more expensive to borrow money to loan out for speculative ventures.
And so Thursday some VCs urged their clients to pull their funds out of SVB bank, suggesting they leave only $250,000 in their accounts -- the largest amount guaranteed by the USA’s financial insurance system for bank deposits, the FDIC. SVB’s stock (named $SIVB ) fell 79%. As I write this, the stock has been halted to keep it from crashing further. The graph below does not show after-hours trades, but you can see the sudden surge is share sales in the gray vertical bars.
Why pull funds so urgently? @scottmelker explains, “VC-backed businesses that burn cash would have no access to their war chest anymore. As a close friend, who could be impacted, told me privately, ‘This could be an extinction-level event’.”
New companies operate on the cash given to them by VCs. They don’t have much in the way of income from other sources, precisely because they are new. So, if they cannot get cash out of SVB to pay employees, utilities, and suppliers, then they have to close eventually. Hence, an extinction-level event.
When too many customers want their money out of a bank at the same time, it’s called a “bank run.” By late in the day, some customers were reporting the bank was delaying fulfilling large requests, as the bank ran out of cash to hand out on demand. Banks normally keep an amount in reserve at each branch, but unfortunately in 2020 the USA’s “Federal Reserve eliminated reserve requirements for all banks to keep economic activity healthy during the pandemic.” So now banks can decide how much to keep in reserve, which could be as little as $0. I looked for, but could not find SVB’s reserve.
The fall of SVB then causes investors to worry about other American banks, selling shares in them. @itstarh said, “The repercussions of high interest rates are now throwing up cracks in the US banking system.”
Think if your credit cards were cut off, and you couldn’t get cash out of your local bank -- you would also panic! I read 217 tweets at techmeme.com/230309/p25#a230309p25 so you didn’t have to, and picked out the ones I think are the best. For the most part, the response on Twitter was of concern, with more “support the bank that supported you” than “run away!”
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@thetranscript_: SVB CEO to clients today: “If everybody is telling each other that SVB is in trouble, that will be a challenge. Stay calm. That's my ask. We've been there for 40 years, supporting you, supporting the portfolio companies, supporting venture capitalists.”
Dan Primack (@danprimack): Good get on the call, but.... Isn't this what any and every bank CEO would say in this sort of situation?
Tero Kuittinen (@teroterotero): One funny thing about the phrase “stay calm” is that it's never a good idea to use it.
Xavier Helgesen (@xavierhelgesen): The thing about a bank run is that there's no upside to keeping your money in the at-risk bank. Max upside is that you have the same amount of money as before. Max downside is that it is gone. So the game theory is obvious, and unfortunately that's bad news for SVB.
Mike Bird (@birdyword): Sort of funny to think of Silicon Valley as being worried by something as prosaic and old-school as a bank run. Wasn't blockchain or microdosing or raw milk meant to solve all this?
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Grant (@grantbrooke): As one of probably the few VC-backed founders to go through a modern bank run, get your money out now. They have to say that everything is ok. If you don't have another bank account, ask your investor to warehouse money in their non-SVB accounts.
Mark Suster (@msuster): I have founders contacting me saying “I heard XYZ firm is saying pull all your cash” but until such time as anybody has public statements or confirmed private statements, I think you should at least be cautious about what it being said. Lots of innuendo.
Dan Primack (@danprimack): Hearing the following from VCs: “We think SVB balance sheet looks ok, but can't risk being wrong.” It's the loss of confidence that leads to bank runs. Not necessarily the underlying fundamentals.
Bryce Roberts (@bryce): FYI, sticking with SVB.
@piratewires: “We are telling people to take their money out,” one VC told us. Another said “There's a famous saying 'Don't panic, but if you're gonna panic, better to panic first.'” Several startup founders have told us they've already removed their money from the SVB.
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@grandtokamak: JPM defending $SIVB. Confident it will trade up from after hours prices.
@deitaone: $SIVB falls another 46% in pre-open trading.
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Felix (@felixsim): "crypto is too volatile”
@seyitaylor: Promoting a bank run for retweets is wild.
Anand Sanwal (@asanwal): SVB should issue a press release about how they're using chatGPT.
Logan Bartlett (@loganbartlett): It's pretty simple: everyone should stay with SVB unless no one stays in which case everyone should leave.
@parikpatelcfa: Welcome to the afterlife, SVB.
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