(Revised 8:56 am 3/19)
Looks like I picked the wrong week to be off-grid in Argentina.
When I came back on-grid last night, I quickly discovered that the world, or more precisely, my Silicon Valley business world, had basically exploded while I was flyfishing in Patagonia.
A few weeks ago there had been talk of a mass extinction event for startups in 2023. It was about funding, not banking, and the prediction was for the second half of 2023. But perhaps it had come early and for a different reason.
Instead of writing yet-another explainer article, I’ll do two things:
- Provide links to the best explainer articles I’ve found thus far
- Share some of my own views on the situation, reminding readers that I am go-to-market person and former CEO (and not a finance person or former CFO)
The Best Explainer Posts I’ve Found
- Since I like original sources, the FDIC press release. Of note, as of 12/31/22 SVB had $209B in assets and $175B in deposits.
- Note that how those assets are valued depends on whether they are classified as hold-to-maturity (HTM) or available-for-sale (AFS) which leads us to this article, The Demise of SVB, by Marc Rubinstein.
- The best single, overall explainer piece I’ve found is Why There Was A Run on SVB by Noah Smith.
- For the TLDR crowd, the best one-tweet explanation is from Jack Farley.
- The best analysis of SVB’s failed communications strategy is this thread from Lulu Cheng Meservey.
- The best what-to-do-about-it advice thread is from Brett Adcock.
- The best we-could-have-prevented-this (if we uniformly applied regulations) article comes from the FT, SVB is a Very American Mess.
- The best sardonic soundbite comes from Eric Newcomer: there are no atheists in a foxhole and no libertarians in a bank run.
My Personal Views on the Situation
I’ll quickly share my personal views on the situation here:
- Almost every company I work with uses SVB. They are the default startup bank in Silicon Valley. Many keep all their cash there because it’s a fairly standard term of an associated venture debt loan. If depositors lose their funds I believe large numbers of startups could fail, eliminating the thousands of jobs that they provide. The Alderaan scenario. I think it’s unlikely, but absolutely must be avoided.
- Startup death is a natural part of the Silicon Valley ecosystem, the Darwinian process that produces the innovation that drives a large part of our economy. Startup death is a natural part of the process — but it should result from a bad idea or a unworkable product. Not from your bank failing.
- There is a blame game with three primary parties involved: VCs for provoking the bank run, the Fed for raising rates (which devalued SVB’s long bonds), and SVB for putting themselves in an weak position. Who you blame seems to say more about you than the situation. People who like SVB blame the Fed. People who dislike VCs blame them.
- Answering the question “what happens to us if rates go up?” seems absolutely core to the operation of a bank. (Think: it’s what we do here.) SVB put themselves into a situation where the liquidity rumors couldn’t be easily dismissed. Yes, VCs likely provoked the bank run, but SVB put themselves in a place where they couldn’t stop it and bungled communications on top of that.
- You cannot overstate the interconnectedness around SVB. I know startups with all their money there. I know VCs who are unable to provide bridge loans to startups because all their working capital is also at SVB. I’ve heard of founder/CEOs who have all their personal money there as well, so they are unable to even use their own funds to bail out their companies. The single worst story I’ve heard is a startup who had all their money in SVB successfully arranged a loan to cover payroll and wired that money to their payroll provider … who then put it in SVB. Additionally, startups often sell to other startups, so the web is intereconnected not just across investors, but companies and customers.
- SVB’s depositors must be protected. I’m not talking about bailing out SVB investors or management. I’m talking about protecting depositors, thousands of startups, the jobs they provide today, and their potential to become world-leading tech companies — the next Oracle, Cisco, or Salesforce might be killed off if we don’t.
Personally, while I’m not an expert in banking, I am uncharacteristically optimistic because SVB owns plenty of high-quality assets and, as mentioned above, those assets exceed deposits in value (though that is a function of valuation method as discussed in the Rubinstein article).
They are not sitting atop a pile of incredibly complex, thinly-traded derivatives (e.g., CDOs, CDO swaps). They are sitting atop a pile of long government bonds. This is not 2008. SVB is not Lehman Brothers. Because of this, I think there is a good chance that someone acquires them this weekend (or soon thereafter), finding opportunity in SVB’s wreckage and ending this industry-wide liquidity crunch.
Let’s hope so, at least.
Let’s hope it’s not Elon Musk!
Your last paragraph hasn’t come to pass, but it’s getting there. I’m sure there’ s a lot of backroom discussion going on about the price an acquirer will pay. A smart bank will definitely make money on SVBs high-quality assets.