This Week in Startups - EMERGENCY POD: $SVIB implodes, contagion risk, advice for founders, and what’s next? | E1696

Episode Date: March 11, 2023

Jason reacts to Silicon Valley Bank being shut down by the FDIC and breaks down what this means for founders and VCs. (0:00) Breaking down the SVB situation (4:28) FDIC press release (7:41) What Jason hopes will happen (10:16) Defcon 1 (12:39) Thoughts on emergency funding (15:46) How does the SVB situation affect early-stage fundraising (26:59) SVB sells their securities (29:10) USV email to founders (31:06) SVB CEO addresses the situation (33:07) Bill Ackman’s response (34:31)Mark Suster’s response (35:52) Audience questions FOLLOW Jason: https://linktr.ee/calacanis FOLLOW Molly: https://twitter.com/mollywood

Okay, everybody, welcome to a live emergency pod. If you're not following us on YouTube, you could have listened to this live. This came out shortly after we taped it on YouTube. YouTube.com slash this week in, no spaces, no dashes. We'll get you to our channel. Hit the subscribe button. Next to the subscribe button is a bell. If you click the bell, if I go live, you'll get an alert just to give you a fair warning.

We don't go live that often, like once a week right now. And today I'm going to talk a little bit about Silicon Valley Bank shutting down. Yes, that's right. If you're catching up to the story, this is the fastest moving story I've seen in the history of Silicon Valley. And this could be one of the most impactful stories in the history of Silicon Valley because so many successful companies and successful venture firms are being impacted by this shutdown. And I have not seen this much chaos in Silicon Valley since the 2008 financial crisis and the dot com crisis. Now, is it going to be as bad? Maybe, maybe not.

I think there's an 80 or 90% chance that Silicon Valley Bank is rescued this weekend, bought by Goldman Sachs, JP Morgan, somebody, and that everything is back to normal within a couple of days or weeks. And everybody's money in the bank is taking care of. There is a non-zero chance. And I'm going to just pick a number here, 10, 20% chance, that this could have a severe impact. And people will not have access to the funds they have on deposit. And that's going to cause a lot of second. and third stream or second and third order downstream impacts. Okay. So we have 650 people watching

this live. Please give a thumbs up. If the thumbs up gets to 50% of the number of people watching live, then this will trend and more people will get to see it. And I've got a lot of important information for founders. So, again, the FDIC has shut down Silicon Valley Bank. That happened this morning. For context, Silicon Valley Bank, SVB, I'll refer to it as we go forward here. Um, they claim half of all U.S.-backed tech and life science companies bank with them. And that's true. Venture backed. Every board of, I'm on. Yes. So for contact, Silicon Valley Bank claims that nearly half of all U.S. venture-backed tech and life science companies bank with them. So if you have received money from venture capitalists, you're probably flip a coin going to be using Silicon Valley Bank.

You might be using First Republic or other banks. And I've had a wonderful experience, being a customer of Silicon Valley Bank over the years. I have been a customer of theirs, First Republics, and many other banks. In fact, I got taught early in my career by Elliot Cook, who was like my chief operating officer, and he was much older than me. When I first started having millions of dollars in the bank for different businesses, he would always keep it in three different accounts. And I said, why is that? He said, one case of a bank run or something, we can't access the money. It's taken 30 years for me to realize how right Elliot Cook was.

I had never seen this happen before where people could not get access to cash they had in a super credible bank. And so this is Black Swan territory. Of course, a bank run you've all heard of. If you've seen It's a Wonderful Life, you've seen a bank run before in a movie. And so this is so fast moving,

we just have to recap it really quick. 36 hours ago, Silicon Valley Bank, was down 60% their stock. And that was because they had a bunch of news that they were going to rebalance, right? The CEO had announced that they would rebalance their balance sheet, basically. And that got everybody really interested.

Now, there had been some rumblings before this quietly that Silicon Valley Bank had some balance sheet issues and we'll get into those in a moment. but trading was halted today, and today's Friday, for those of you listening on Saturday, due to pending news, in quotes. And around noon eastern, the federal deposit insurance corporation shut down Silicon Valley Bank. They basically took it over.

And this means they went from trading at a $16 billion market cap to being shut down entirely in two days. So just let that sink in. A $16 billion company that services half of the venture back. companies is insolvent, it's gone. And two days ago, it was worth $16 billion. This is where the rubber hits the road. All insured depositors, and this came from the FDIC's press release today, all insured depositors will have full access to their insured deposits no later than Monday morning. Okay, that sounds great. March 13th, 2023. If you're our startup founder,

you're like, oh, I have access. But insured deposits is the key word in that sentence, the qualifier. the FDIC will pay uninsured depositors and advance dividend within the next week. Okay, wait, uninsured depositors. And this is where when you see FDIC insured in commercials, in fact, I've read Silicon Valley Bank, First Republic, and countless other commercials on this very podcast, it always ends with that little jingle, hey, FDIC insured so you know your money or some portion of is insured. As the FDIC sells the assets up, and then this is where it gets really critical, uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds.

A receivership certificate. Okay, this sounds like a participation certificate. This does not sound like money. And here is the kicker. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. Okay. If you're a venture-backed company, the average venture-back deal, the minimum venture-back deal, is typically has two common. in it, right? A million dollars or more. Seed investors might put in 250, but when you raise venture

capital, you know, Series A on average 5, 10 million bucks. And sometimes in this hot market, it was even more. So what this means, in just simple plain English, as I'm reading it, and as you could probably tell, if you're an SVB client, you're one of these startups, you're going to get access to your insured funds on Monday. Fantastic. But that's only 250,000. That's the limit of FDIC insurance for businesses. the rest of the money you are getting an IOU, a receivership certificate. I'm reading that as an IOU. How long does it take to liquidate a company?

It becomes the key question. Well, if somebody buys Silicon Valley Bank this weekend, and there's been a ton of speculation about this, Will Goldman, J.P. Morgan, whoever, come in and buy this very elite crown jewel of Silicon Valley, of banks. People really do think this is a real asset, right? Silicon Valley Bank has a very good reputation and an incredible group of customers. Venture capitalists are also equally exposed to Silicon Valley Bank.

It is the bank of record, not just for founders in Silicon Valley who are venture back, but the venture capitalists who invest in them. And so if this became a large unwind where they were selling assets, you know, from the desks and office buildings, the wine collection, they have a famously Silicon Valley Bank service, the wineries up in Napa and Sonoma, you know, if they're liquidating all this stuff, how long does it take? Now, of course, there's going to be treasuries, equities,

there's going to be all kinds of loans, and this is where unpacking this, if it has to occur through the FDIC and a liquidation, this could take years and could be incredibly painful. If somebody comes in, a white queen or a white knight comes in and just buys this thing, well, then everybody should have their money up and running very quickly. So I'm hoping that one of two things happens here.

A large bank with a big balance sheet buys it and make sure that everybody who has cash in there has access to it. Or two, the government comes in and backstops this. Now, that's quite controversial. Should the government come in and backstop this? I believe that the government should backstop many businesses that have second and third order impacts. So if an airline goes out of business and that basically shuts down Atlanta because that's their hub or Southwest Airlines operates out of what Phoenix or something or Arizona and that shuts down the whole hub and it impacts all these other businesses and jobs, I don't have a problem with those backstops occurring by the government. I think it's a good use of government funds of our funds as taxpayers, but it has to be under the condition that it is the senior debt and that they get interest or an equity kicker. So if the government does take the risk, bailing out Silicon Valley Bank or an airline or whatever it needs to be bailed out in the world because we think it's a good idea to bail it out because there'll be second

and third order effects that we can't even anticipate. If that does happen, I think they should get paid off like we do as venture capitalists, unlimited upside. They get to own 10 or 20% of the company or they get double their money back minimum over 10 years. Make it, I don't want to say painful, but make the risk the government is taken by backstopping. something like Silicon Valley Bank or an airline or the car industry, the automotive industry, make it so the public gets a big payday. In fact, all of those Obama era loans that were given to electric vehicles, companies like Tesla, Fisker, there was a Solera, I think, like an energy company. Some of those didn't work. Some of them got paid back with interest, like in the case of

Tesla, and I think not Fisker. So we are going to have a crazy, weekend. I do think majority chance this weekend, somebody will buy Silicon Valley Bank. That's a guess on my part. Hopefully it's an educated guess. I don't exactly have inside information, but I'm on a lot of group chats with a lot of people speculating. So, and the people who are in my circle are, you know, in and around the industry, right? Their customers are Silicon Valley Bank. They might have their kid soccer game might be with Silicon Valley Bank executive. So I have no idea of knowing, you know, uh, if these rumors are true or the back channel is true. But I suspect that somebody will want to buy this. And this is a Depcon 1 type situation. Why? Well, if your startup can only take out 250 and you have $10, $20, $100 million in that bank account, you're not going to make payroll.

You might have $250 or $1 million in your bank account. Typically, that's what folks will do. they'll have money at Silicon Valley Bank. They might sweep a million dollars automatically. So anytime it dips below a million or 500,000, whatever you set in your checking account or your accounts payable payroll account, it gets swept, put into that account and then goes out. If that number goes under 500, it replenishes 500 on top of it, right?

You've probably done this in your own personal life, which are personal bank accounts, perhaps instead of having to manually do it. I think there are many companies out there. could be dozens to hundreds, and they will have collectively tens of thousands of employees who are at risk of not making payroll in the next two weeks

to 10 weeks. And maybe on average, it's four weeks. And that is what scares me most is that there are companies that were solvent, right? We spent the last 18 months, no, five quarters. The last five quarters, 15 months, working out in our portfolios,

in these investments, all of the companies that weren't going to make it or needed to cut half their staffs, needed to raise emergency funding bridge rounds, all of that was for the companies that were broken that didn't have product market fit, that were overspending, right? Then we had a group of companies that had either been profitable, had 50 months of runway, had raised money at the right time, and they were sitting pretty with huge bank accounts filled with cash that they now can't access. So now they get put in the bucket of troubled startups.

So if 50% of venture back startups are in this bucket, and I would say 50% of startups were having a problem, that means a full 75% of startups could be in for a world of pain. The 50% that didn't have product market fit, plus another 25% that were doing just fine, but are part of the 50% that were exposed to Silicon Valley Bank's implosion here. So let me give you a little background on, and then I'll get to what I think founders should be doing this week,

and maybe I'll take questions as well somewhere in this. Should I take some questions now? Maybe I'll pause there, Nick, and we have two more segments to go where I'm going to give you how this happened, how Silicon Valley got so big, and then what founders should do?

So let's just pause. Levi asked, what are your thoughts on emergency funding sources, accelerated recaps, etc.? Okay, great question. Going to your venture capitalist and saying, I need emergency funding, there is a possibility,

I don't know if it's a probability, that they had their LPS, funds, their investment dollars at Silicon Valley Bank. This morning I got an email from a fund. I'm an LPN and they said we had X millions of dollars in Silicon Valley Bank. We weren't able to get it out of Silicon Valley Bank yesterday. We tried. We're going to get 250 of that, which is a fraction of the amount of money, the millions of dollars they have there. And now that venture firm cannot fund their companies. So let's just pause there and think about what's going to happen. A company that has Silicon Valley Bank as their treasury can't get access and can't make payroll, their lead VC

is also on Silicon Valley Bank and can't get access this money. Now what happens. Now that founder would have to go get emergency funds for another venture capital firm. Those firms are already dealing with the mess of startups during this correction. And this is why I believe we're in the early stages of a contagion or potentially a contagion. And if this becomes an acute contagion, where many venture funds are frozen, other venture funds don't want to solve their problems and there's a bunch of problems and people get laid off, this could have cascading effects.

And so I would be lying if I wasn't telling you that this is terrifying. This is a terrifying situation. Now, I do think it's an 80 or 90% chance that somebody buys it or the government comes in and backstops this. If that doesn't happen, I can tell you, in all honesty, I would not lie to you.

I am terrified. I am terrified that this is a Black Swan contagion-like effect. That could happen. Now, it's not going to affect people who are not in the tech industry, largely. That would be like a third order, fourth order kind of impact. Like, oh, people who go to our private school are from Silicon Valley. They got laid off. Now, they can't afford private school tuition.

Now, that sounds crazy, right? I'm on the board of a private school. Literally, during the Great Recession and during other times, that can happen. You will have parents who have been laid off, say, hey, I'm going to the school, I got laid off. And so now you have private schools being impacted for it. You could have mortgages. You could have, you know, people who are domestic staff or work at a small business that's funded by somebody who works in tech. So those emergency funding sources don't exist, Levi, if this thing.

goes the contagion round. I think then it's game over. I think it's every man, woman, and startup for themselves. And that's scary. I mean, that is shutdown central. Nick T. Nick asks, how does Silicon Valley Bank affect founders trying to raise seed rounds right now?

I think this is going to be a huge distraction. And I think any funding that was going to occur or without any discussions that were going on are frozen for 60 days. Because I have multiple deals I'm working on. Now, I am getting pulled out of those deals to deal with my existing portfolio companies. What would you do if you were me? Try to save an existing strong startup company where I've already made the bet or make another bet.

So just think that through for a second. Obviously, I have to take care of my portfolio companies first before I do new investments. Now, we have multiple investments that we're in the process of working on. We're going to keep working on them. But my time might get pulled away. And if this were to become acute, yes, I might have to stop investing in startup for 30 or 60 days. I hope that doesn't happen. But I think a lot of VCs, when these kind of things happen, they do stop meetings with founders and they stop investing.

All right. Let's get back to the docket here and go through how we got here. It's very simple. 2020 and 2021 were the most ridiculous investment. year since the dot-com era. These were record years, not just for startups raising money, but also for VCs. Why? Well, there was a ton of liquidity sloshing around.

Everybody was making money, and we were in a zero interest rate environment. So money was looking for projects to back, whether it was crazy things like NFTs and crypto or totally legitimate SaaS businesses that just became worth more money. They got higher multiples than they should have. and LPs were making money. So, of course, VCs were making money. The party was in full swing. VCs raised larger funds

because their LPs are making larger returns and everybody's making bigger bets. And that's logical. But it obviously got overheated. According to Pitchbook and the NVCA, 2023, Q4 was U.S. Venture Monitor. That's kind of the goal standard for fundraising data.

according to that in 2021 vc's raised a record $154 billion from LPs that's up 65% over 2020 2020 2020 was also a record year so we had record year on record year and if you look at this chart it just tells the story you know you you see 2015 to 2019 hey we're cooking with oil this the funds are getting larger and larger especially compared to the amounts raised in 2012 and 2013 what was one of the big reasons people were raising all this money? Well, we had a talent war, didn't we? What caused the talent war? Low interest rate environment caused Google and Amazon.

And then some of the big private companies like Stripe and Uber and the Facebook's to, which obviously was public, to double and triple their staffs and the size of their companies in two or three years. So you have a talent war going on. Then what do startups do? Startups try to compete with. $400, $800,000 offers that Google or META or Amazon are giving to employees. So they have to raise more money.

So they're coming to venture capital saying, hey, you know, we would normally raise $3 million, but we really need $10 because everybody's salaries triple what it used to be. So this graph you're seeing here is why people started getting paid so much money in tech. all of these systems are not independent of each other. They form a giant superstorm. These are multiple factors creating an environment. Low interest rates, a talent war, LPs having amazing exits, and then people putting more money to work, VCs being more ambitious saying,

hey, maybe I'll raise a larger fund. Maybe I'll raise a fund every two years instead of every four. Maybe I'll start a crypto fund on the side. Maybe I'll start a VR fund, right? Everybody got frisky, everybody got aggressive. That's great for society. It's great that we're making all these investments. These are small numbers when compared to the overall economy, obviously.

But this can have really weird impacts. So let's get into what those impacts have been. All of that money raised resulted in a record $344 billion in capital. capital from VCs going into startups in 2021. So as the amount of money being raised happens, VCs are like, you know what? Instead of you raising a seed round, why don't we just have you go straight to A? Or instead of you raising a series B when you get to $5 million in revenue, let's do it when you're at two. It used to be, I would send a VC a company when they had two or three million dollars in revenue to get their Series A. Then I saw VCs investing in

series A's $10 million at a $40 million post, a $50 million post for 20, 25% of the company, before the company really had product market fit. And when you do that, weird things happen. People start hiring a bunch of people before they have product market fit. They get distracted. The capital equals distraction. And this is why you hear VC's saying, like, raise what you need. Raise 24 months of capital, 18 months of capital. You don't need five years of capital. It's going to distract you, right? And that great distraction that occurred. and that lack of focus on efficiency and getting fit as Brad Gersner would say, or managers, managing managers, manage managers, as Zuckerberg would say, all of that led to a lack of focus.

When you have a lack of focus, you don't have real revenues underpinning these valuations. So if you have a high valuation, a high burn rate, and low product market fit and low revenue, there's a big gap. And when the market changes like it did during this, what I'll call the speculative asset bubble bursting, when the speculative asset bubble bursted, people said, you know what, your company's actually worth a lot less. And then you're free falling between where your company was valued and what the reality is. And man, that could be a large, large drop for some companies. Some companies were being valued a series B companies at $100 million before they had product market fit, before they actually had. had a product that worked. So now you're plowing money into a product that's not really, doesn't have what we call market pull in the industry. It's getting pulled along.

And so that is another very dangerous thing. That's what we've been sorting out the last year. So now as we were sorting out those problems, now we have this. A lot of startups were overfunded with a lot of capital in a short amount of time. A lot of VCs raised too many funds. And you might have seen Founders Fund just took the side. of their fund and said, we're going to cut, they didn't give the money back. They just resized

their fund to half the size. And all of this created a ton of new clients for Silicon Valley Bank and very large deposits at Silicon Valley Bank. Those customers were putting large amounts. And here's the stat to prove it. Silicon Valley Bank's deposits jumped from $61.8 billion at the end of 2019, and this is staggering, to $189 billion by the end of 2019. So, I'm sorry, Silicon Valley Bank's deposits jumped from $61.8 billion. Let's call it $62 billion at the end of 2019. At the end of 2021, two years later, they had $189 billion. That's a 3x increase in deposits in two years. In other words, Silicon Valley Bank is now sitting on a large amount of capital. So they don't have, they have to take that money and they have to, when they have that amount of cash, they build a loan book.

And I'm no expert on this. And, you know, we'll talk about on the all-in pot as well. So you get a back-to-back, an emergency this week in startups and you'll have a conversation with the besties talking about this. But they weren't able to build their loan book to generate all those favorable yields, right? That's what a bank does. They have a bunch of cash. They loan it out and they try to balance those things, just like a sports book does. I just realized in some ways.

So instead they purchased over $80 billion in mortgage-backed securities MBS like U.S. Treasuries. Now, these are considered one of the safest places to put your money. So they bought U.S. treasuries. And as a reward for buying the safest thing you could imagine, or one of the safest things, I mean, I guess gold or cash maybe would be safer, they bought U.S. treasuries. These were not crazy trades where they were buying, you know, Theranos shares or putting their money into Peloton or something. They did not jump the fence and do anything crazy with the money. They put it into U.S. treasuries.

And they bought long duration ones at low interest rates. And they did this during a low interest rate environment. Remember we said the zero interest rate or close to zero interest rate environment created this problem? Okay. And so they bought these. And then you know what happened? the Fed raised rates at a faster pace than anybody could ever have imagined, right? Remember in 2022? They did the 25 to 50s, 75, 75, 75, all of that. I don't even, it was so many rates.

I can't even remember. I used to have it committed to memory, each of the step-ups. Now when you see the step-ups, it's like a little jagged edge. It's parabolic in a way, right? It's just going straight up to, you know, where we think the actual stasis point or where we'll stay for a little while, will be 5.x or maybe even 6.x. So when the Fed raised those rates, those treasuries, they declined in value on paper, right? Now, when you buy treasuries, my understanding, again, I'm not a super expert on this. If you hold them to maturity, no problem. But you can also trade those, right?

So people will buy them, but they would buy them at a discount because obviously you can buy ones with a 4% or 5% rate. So why would you buy the ones with a low rate? but, and this should be no problem, unless all of your clients, right, remember that $189 billion that's sitting there, if they all decide to withdraw their funds quickly, you may have to rebalance, and that's what Silicon Valley Bank was in the process of doing. And when they do that, those paper losses, right, those treasuries are worth less now because they're not as desirable, but they would have been made whole if they were held, you got to sell them. And if you sell them

you start losing money, oh my lord, this can cause a big, big problem because you've now locked in the losses. And the losses were substantial. And then people start to worry, oh, are they going to be able to pay out all their clients? And that's where, and there's a really good compound 248 on Twitter did a good explainer thread. He said, technically, if all the depositors asked for their money back at once, SVB needs to sell those bonds at the mark to market value, crystallizing what would have been a temporary loss. And if those losses are big, enough, SVB may not have enough money to pay out all depositors. So fast forward to Wednesday, March 8th, they announced that they, Silicon Valley announces

that they've sold basically all of its available for sales securities with the attention of reinvesting the proceeds. Basically, they were rebalancing their balance sheet and trying to get away from those long dated bonds. And Reuters noted they sold $21 billion of its security portfolio, which CNBC noted mostly consistent of U.S. Treasury bonds. And all of this will come out eventually. Long story short, that sale,

we could probably describe it as a fire sale, would have a post-tax loss of $1.8 billion in Q1. The bank was trying to rework the balance sheet, and that, I think, got everybody panicked. So to offset that loss, they also announced Silicon Valley Bank that they would raise $2.25 billion by issuing shares,

and $500 billion was committed by General Atlantic. with this announcement, SVB essentially hit the starters pistol for the bank run. They basically told the market, hey, we got problems. And that made everybody scared

because everybody's been on edge because we've been trying to figure out how long is this going to be a hard landing, a soft landing? Well, if you show weakness, then people are going to drop the stock. The stock drops 60%. Now everybody's looking at this, right?

And previously, only a small number of people were watching this. And of course, VCs then tell all their portfolio companies to withdraw their money from Silicon Valley Bank. Another group of VCs says, Silicon Valley Bank's been great to the community, a true statement. Why would you do that to them?

Don't take your money out. And now you have this basic prisonist dilemma. If you take your money out, you're protected and you're protected your team, your investors, your founders, your customers, your clients, all the stakeholders and shareholders in your company, but you're not loyal to Silicon Valley Bank.

If you leave it in Silicon Valley Bank, maybe you lose that money because you only have $250K in protection. And most people would say, well, that's an edge case. It's not going to happen. I've never seen it happen. In fact, I had never seen it happen in my career

into the great financial crisis. And I think everybody got bailed out there. And so from the information, one of our favorite publications, New York-based venture firm, USV, this week sent an email to founders advising them to only keep minimal funds in cash accounts at SVB funds up to 250K.

From the USV email, SVB is in a severe cash crisis. Do not accept any offers from SVB to keep your money there, even if they dangle 5% interest rates in front of you. Union Square Ventures, that's Fred Wilson's venture firm, a friend of mine for a long time, noted it had reached out to many of its portfolio companies early in the year saying it had expected such a situation,

according to Bloomberg. Back in November, Green Oaks Capital told its portfolio founders to withdraw assets from SVB. Some people were kind of sensing this. And then via Eric Newcomer, who was just on the show today, or we taped to yesterday came out today, from Newcomer.com. He's got a great newsletter.

He should go subscribe to. He said he spoke to major investors who told him that 10 portfolio companies that pulled out about $1.5 billion collectively from SVB. Yesterday, I was getting reports in the group chats from friends, from friends of friends, that everybody was pulling out at the same time, and that some people were getting their deposits out, their withdrawals, and some people weren't, and some people's withdrawal said they had gone out,

and then they actually didn't make it out. So that's the chaos that's going on at startups today. And a Friday morning, about a dozen founders were instructed by SVB themselves to go get a cashier's check from its New York office if they wanted to move funds. That's like a power move. Oh, yeah, we're going to just put a little friction here. Or maybe it's good advice. Maybe that was the quickest way to do it.

So those founders went to the SVB office and we're waiting outside for a little while. You can see the photo here from newcomer.co. Eventually, SVB called the police on them and politely asked the founders to leave according to Eric's reporting. And I've seen other videos of people outside the office and down by Santo Road. So here's what SVB CEO said on a call with some top clients and VCs on Thursday. We're back to yesterday, which feels like 10 years ago. Greg Becker said that calls from clients, and started coming in and started panic.

He didn't use proper grammar there, but I can't blame the guys, but pretty tough. 24 hours. I would ask everyone to stay calm and support us just like we supported you during challenging times. And when you hear something like that, that is a tell that things are really not good.

And I think that also, when those quotes started coming out, like, hey, support us during challenging times. When your bank says that, that's not what the bank's supposed to say. Again, I think this is another, like, waving the red flag in front of the bull, like, get your money out. And I know he's trying to be honest with people and appeal to people's better instincts,

but I'm playing Monday morning quarterback here and we're, it's barely Monday morning. So I think SVB didn't have to do this. They were trying to do the right thing. And that did not go unpunished. They were, and the high rate interest environment seems to be what caused this problem. And maybe they should have just held on to these treasuries. This is above my pay grade and above most people's pay grade, I think. Or this would be really simple.

They just made a bad trade. And a panic started. And this is where a bank run, the term comes from and a panic comes from. This exists as a concept in the world because it is so unique. And now we get to witness it firsthand. And you really don't get to witness things like this happen. And, you know, a bank run is intense. technically a Black Swan event.

But I would say for Silicon Valley, you know, black swan will be something you haven't seen before. Obviously, we all saw this and it's a wonderful life. But what we haven't seen is something like this happened in the tech industry on both sides of the table. So when I say this feels black swanish and feels like a contagion, the reason I feel that way is because both parties are being impacted so severely. Bill Ackman, uh, hedge fund guy, um, he says the failure, and he did this tweet storm,

The failure of SVB could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash in private capital can't provide a solution. A highly dilutive government preferred bailout should be considered. And he is kind of tipping, like I did in my sort of tweet storm, he's kind of tipping his cards a little bit saying he knows that this is going to be unpopular. Saving big tech. I'm trying to think of a more unpopular thing to do for the public.

Like, why should they get a bailout? that's why he's saying a highly delutive government preferred bailout, highly dilutive, the shareholders get screwed in they lose all their shares and then preferred bailout, they are the top of the stack. So when this thing does get unwound, the government gets their money back. I can't remember who. Someone had a really funny tweet earlier today that was like, could you think of a name of a bank that the government would want to bail out less than Silicon Valley Bank? I mean, a billionaire bank. Yeah, right. Top 1% bank?

Yeah, I think it's like, yeah, 1% or banker. Yeah. Dictator bank. Dictator and billionaire banking services, financials. Yeah, we probably don't want to bail them out. I think we're good. Mark Suster, yeah, I think we're good. Mark Suster, a friend of mine, he says,

more in the VC community need to speak out publicly to quell the panic about SVB. I believe their CEO when he says they are solvent and not in violation of any banking ratios and goal was to raise and strengthen balance sheet. They announced that they are settling, selling long-term investments at a loss and investing in higher yield investments that improve their financial metrics. They are raising $2.25 billion to stabilize a balance sheet, yada, yada. Obviously, you know, this advice to speak out publicly is fine. I did say I wish them the best.

But yeah, this is the problem with a bank run. the right thing to do is like a tragedy of the commons or a prisoner's dilemma doing what's right for everybody and doing what's right for yourself. These things can sometimes be in conflict. And so, um, and, uh, Mark says,

I believe SVB is one of the 20 largest banks in the U.S. I do not believe the U.S. government would like to see them fail. Um, and so I agree with them on that. Um, but, uh, obviously taking your money out was the right.

move and could be the right move by a long margin if this thing does go belly up. Okay, that's all I got in terms of running you through what happened. Now we'll just get to your questions and feel free to give it a thumbs up if you like. Let's get some questions here. What happens to companies with credit facilities? Are they just void? Yeah, that's a great question. If you have a loan, that's not void. I think whoever acquires this thing would then acquire your loan. If you have a credit facility, I think that goes kaput. I think you don't know longer have that credit facility, which is why I always tell founders, don't rely on venture debt lines, don't rely on, you know, these credit facilities to pay for your runway. If you have like a factory you're building, sure, getting a loan to build a factory, if you have hardware, if you have a bunch of receivables that are guaranteeing you factor them, you know, like those things can make sense to me, but my lord, I don't think it's a great idea to be living on loans at startups, nor do I think generally living on loans is a great idea for a country or for an individual or for a company or for a VC. And there are VCs, by the way, this is a little bit of a secret. There are VCs

who have loans with Silicon Valley Bank, and those loans are against, like, let's say, their carry or their interest in previous funds. So let's say I had $10 million in carry profits from my previous venture funds, I might be able to go to Silicon Valley Bank or other banks offer this and get a $5 million loan. It gets those $10 million in paper gains to go live a lavish lifestyle. And that's how we build our relationship. And then VCs are recommending Silicon Valley Bank and they've got a deep relationship. I actually have a mortgage for this office that I'm sitting in, I believe, is a Silicon Valley Bank mortgage. I have like a mortgage for, instead of renting office space, I calculated that I could buy a loft

in Soma, and it would be cheaper than we work, so I did that. So I have a mortgage with Silicon Valley Bank. So what is the impact for startups that have venture debt is a really good question. I think whoever acquires this thing owns that venture debt. And then I think the founders could probably stop paying it until they get some feedback as to what to do. So it's, you know, like a holding pattern situation. I think most founders are not going to pay their venture debt while they

wait to see what happens with the new owners and the new owners might need to sit down with everybody who owes venture debt and, you know, restart the relationship and then decide how hardcore they want to be with them. And are all the employees at Silicon Valley Bank? I haven't heard one person talk about that. Are they all laid off immediately? Does nobody work at Silicon Valley Bank now? Or are they working for free? Are they working on spec? Or do they they know where they're salaries or does the FDIC say everybody has their job at Silicon Valley Bank? we need you here to do it orderly, sell or shutdown, whatever.

I believe the FDIC post said that they, the FDIC said that was going to take over operations, but let me double check that. No, I think that's what happened. So the question is like for how long? And so, you know, one wonders what's going to happen there. How does this compare it to 2008? And what lessons can be taken from that, Adam asks.

Well, in 2008, you had, I guess, Bear Stearns and Lehman and other places have this risk of ruin. And it was outside of our wheelhouse. so we weren't exactly impacted, but the government did come in famously. Guardian asked, will Stripes attempt to raise $6 billion get hurt by this SVB fiasco?

I think that was already done, but if to the extent those VCs have their money in Silicon Valley Bank, they now might have to call down another LP request. They might not have to do another capital call from their investors to fund that, and those are big numbers, so it's possible. Do you expect to start laying off immediately

or what companies wait a few weeks, Alice asks. Yeah, I think I did a tweet storm about this. So my best advice for companies is figure out what your payroll is. Number one, stop paying any bills. Tell all your vendors that you're impacted by the Silicon Valley Bank. So you have like the accounts payable department shut down all payments out. This way, whatever cash you happen to have, even if it's that $2.50 you get it on Monday, you're solid. Figure out what your payroll is.

Then you got to figure out there's HR laws like, You have to let the employees know how much if you're going to be shutting down. Let's say your burn for the month is $250K,000, your salaries, your payroll is $250, and you have $250. Okay, you're going to have to let people know. We have four weeks of salary. And that means if you were going to give any severance, and in some places, if you do a plant shutdown, there are laws around the concept of a plant shutdown. Some places you have to give two weeks notice, some place four weeks notice.

I'm sorry, some places, two months notice, some places three months notice, some places three months notice if you were going to let go of more than 100 people or more than X percent of staff. And those shutdowns, those plant shutdowns, you saw come into effect with the layoffs at Twitter, Google, Amazon, Facebook. All of those people got those severance packages. And sometimes it was 60 days. Sometimes it was 90s. That depends on the state you're in. And then sometimes companies would put a factor on top of that. Now, for small companies, If you're under, I think, 100 people or 50 people, you have to consult with your HR company, and you're going to have to get HR involved in this, you know, Ripley, Gusto, whoever you use,

you're going to have to talk to them and say, what is our liability here? And I think there might be people if they can't get access to the funds and they can't do a bridge around with their existing investors who would be forced to shut down. And they would, if they were doing this kind of emergency shutdown, the board and individuals might be personally liable for those people's salaries. And so I'm not certain of that, but there are some things that will pierce the corporate veil, and I think these kind of shutdowns are one of them. So this could get acute. This is where you have to get legal and HR involved. Will it trickle over to other banks? That is a possibility. And I have, that is one of the conversations that is occurring right now. There are also some banks. You may have seen Parker from Rippling. He's blocking me for some

reason, I think, because I'm friends with David Sachs. He is using Rippling, which is a payment service, like a HR provider. He is using SVB's rails and had to move those rails over to JP Morgan, he said, in his tweet storm, but that payroll didn't go out. So every Rippling customer didn't hit payroll this week, and they're going to hit it next week, or maybe early next week, I guess. So this is where like second order effects and third order effects, you know, are hard to predict, right? And what started all this was the low interest rate environment running into interest rates going up so quickly and volatility and all this money being put into bank accounts. You get the idea.

What about companies with more than 250K in deposits, 97 accounts were not insured? Yeah, that's the problem. I have multiple portfolio companies that are sitting on treasuries of tens of millions. in some cases hundreds of millions of dollars. And I'm sure some of them are at Silicon Valley Bank, venture capital firms. And now we are left to wonder what some of our strongest and best companies are going to do. This is a very terrifying situation. Harmon asks, SVB manages over 250 of funds on our behalf in a market account at JP Morgan.

What do you think is going to happen with that? Okay, I've heard about this situation. Silicon Valley Bank and people have multiple bank accounts, but Silicon Valley Bank is administering them. I actually don't know. This is a gray area, and I wish you luck trying to figure that out. I think you might be okay. I think what everybody's going to learn coming out of this is you need to have three or four banking providers and you need to split your money across from them. And if they don't like that, well, that's too bad. It's just the way business should work. You should always have multiple accounts. Even if just, you know, you have a rogue employee on your

side changes to password. You don't have access to it and you need to hit pay a or something. What happens to Silicon Valley Bank shareholders? Do they get anything back? I think they are going to be wiped out. But we'll see. California backyard bytas, what do you think about the realization

of $15 million losses for the acquirer? I guess, you know, there's some amount of goodwill in the brand, but brand now seems damaged. But I think if you keep all the employees, you have the relationships. So that's a great question. What is the value, right?

What do you think about the CEO? of SBV selling 3.5 million in stock in the last two weeks. Is that true? That I don't have confirmation of, so I would need to check on that. If that was part of an automated, it certainly doesn't look good, if that was part of an automated plan and he was selling 1.75 million a week for the last 50 weeks, it wouldn't be a problem because it was automated selling. If that trade was put in, you know, while he knew that there was problems and people, worth drawing funds. Yeah, that could be actionable.

Our founders are allowed to file a lawsuit against SVB. Yeah, you just become a creditor and you're already a creditor, even if you were. So I think everybody's going to be put in line. FDIC is going to try to do this in an orderly fashion. Bruce says, how much is SVB in the red? That's what they have to figure out. That is the question. That is the question that nobody has the answer to.

Miko asked again, what happens to SVB loads to tech companies? I don't know the answer to that. It depends on if this thing is shut down and then if it's shut down that is the government going to go after those loans and call those loans or try to recoup those and then slowly give them back to people of deposits.

Well, there are some people who have $10 million in deposits at SVB and they might have a $5 million loan. What happens to that person? They don't get their $10 million until they give $5 million back. Well, that's kind of impossible because you have their $10 million. They can't pay back the loan. or do you net it out? So this is where I think we're in uncharted territory and a bankruptcy lawyer or an FDIC restructuring person is going to have to answer these really weird cases because the whole industry is so intertwined here.

There's so many conflicts that who gets paid when is going to be crazy. And Austin asks what happens to General Lentux $500 million private investment now that the FDIC has taken over. If they've already paid it, I guess they lose it. and now they're a creditor and the equity stack. I don't know where they stand. We don't have the documents, but that could have been a loan. This is where, like, the device used to make the investment matters. You could have, that could have been done in senior debt.

That could, transaction could not have been consummated. The money might not have been wired yet. So all of this is, you know, like the minutia that's going to get sorted out. I hope this has been helpful to folks. And we'll see you next time on this weekend startups. Make sure you listen to All In. as well. And you'll heal the besties talk about a lot of these issues as well. Thank you for giving me the warm up here to get out to the founders and capital allocators in my audience. I said this week in startups this information. And thanks for your great questions. If you haven't already, thumbs up and subscribe. My lord, the chat is moving quickly. Thanks to everybody. 2,000 people in the room. 2,000 viewers. What? You're kidding. Yeah. Live right now. I think that's a record for us, 2000. Do me a favor.

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