Around noon yesterday in Los Angeles, investor Mark Suster of the venture firm Upfront Ventures began pleading “Calmon Twitter. Silicon Valley Bank had failed its message Wednesday around an effort to shore up its balance sheet, and startup founders were beginning to fear that their deposits at the tech-friendly, 40-year-old institution were at risk. “MThe need to speak publicly to calm the nervousness about Ore in the VC community @SVB_Financial,” Suster wrote, adding that he believes in the bank’s health and argues that the biggest risks to startups, VCs the bank has long catered to, and SVB itself “at large.” But there will be panic.
As we now know, Suster was already too late. The industry panicked, and the bank’s CEO, Greg Baker, was addressing the bank’s customers in a Zoom call late yesterday morning when he uttered the words: “The last thing we need to be doing is panic.”
As of this morning, the Silicon Valley bank’s trading was halted to prevent the free fall of shares – they had already fallen more than 80% between Wednesday and Thursday – after the California Department of Financial Protection and Innovation closed the bank. done. Then it transferred control of it to the FDIC, which is figuring out next steps as the bank’s customers grapple with how to pay their bills in the interim.
Today, we asked Suster about his advice from yesterday and whether or not he regrets it. During our conversation, he also echoed the growing number of people in the startup world who have started showing finger What they insist was a small number of VCs setting off alarm bells in the startup ecosystem – bringing down SVBs but potentially, triggering a contagion. Here is that interview, lightly edited for length and clarity.
TC: You were on CNBC this morning, where you said that you believe portfolio companies should have diversified into where they keep their money. But my understanding is that many startups needed Silicon Valley Bank to have a special relationship with it.
MS: SVBs generally do not require exclusivity unless you are taking out a loan. The problem is that many people take out loans, and we’ve been warning [portfolio companies] About this for a year.
What percentage of your startups do you think have multiple banking relationships?
About half have ties to the SVB. Maybe half of them have alternate accounts.
You were very clearly endorsing SVB yesterday as everyone else was running for the exits. Is SVB an investor in your venture firm?
Did Upfront get its money out of SVB?
Are you worried because you didn’t get your money?
No. I heard that about $12 billion was pulled out of SVB yesterday, and SVB has a little under $200 billion in assets, so that’s 6.5% to 7%. [its assets] who left in a day. It’s not catastrophic, but the Fed knew it was going to accelerate. They don’t want to run the banks, so my guess is that the Fed, in an ideal situation, would want someone to buy SBVs, and I suspect they’re talking with and reviewing each bank as we speak.
Are you surprised that no one has stepped forward yet?
Imagine you have a whole bunch of people evaluating whether to buy a bank. How do you evaluate this when you don’t know how much is running? How do you catch a falling knife? By [shutting down SVB this morning]The Fed stopped that knife from falling; Now, I think we will see a systematic sale till Sunday. JP Morgan, Bank of America, Morgan Stanley, [someone will step in to buy it], Then I believe the panic will stop, because if you’re getting out of SVB because you’re worried about SVB, it’s no longer a concern.
How will the SVB be appraised by a buyer? When it closed this morning, its market cap was around $6.3 billion.
A bank’s valuation is correlated but mostly uncorrelated with its assets. You have debt holders and equity holders, and if a company goes bankrupt, debt holders get money before equity holders. What people were betting with SVB was that the common shareholders were going to get nothing because SVB was going to go bankrupt; [its market cap and assets] became disaffected as they did not think SBV would survive.
What matters: what are the assets and is there value here? SVB is a lender to a very cash-rich and well-run technology industry and these clients are prestigious. SVB not only serves startups but also VC funds and PE funds. Imagine being able to reach them all in one fell swoop? That’s what a group of firms is working with the Fed to try to figure out. [what’s what] Right now, a slew of banks are involved, along with hedge funds and other large PE funds.
Will a large bank trying to acquire SVB face conflict of interest issues here?
The Fed has one objective, and that is to avoid contagion. Every other regional or non-scale bank is getting hit right now. So they will force something to happen by Monday.
You don’t think bankruptcy is the next step? Isn’t that what happened with Washington Mutual? Buyers want to buy a good property and leave all the liabilities on the government, don’t they?
It’s not officially bankruptcy, but it’s as close as you’ll get. Desire [a buyer] Give money to equity holders? I think those shares may go to zero; An acquirer may well decide that they do not want to bail out equity holders, but shareholders are different from depositors.
Speaking of which, is Upfront offering bridge loans to any startups that have lost access to their money in SVB?
This is 24 hours old. We’ll probably start those conversations next week. We told our CEO that if you are in a situation where you need a bridge loan in the next two weeks, you should assemble your board, as this is a decision that needs to be reached by the board of directors. If people believe in your prospects, then getting the money for one to two payrolls shouldn’t be hard. If they don’t, it may hasten your demise, but [going out of business] It was going to happen anyway.
I have to wonder if you were publicly trying to calm your peers while privately advising founders to move their money out of SVB, just to be safe.
I assure you I didn’t. Every VC I know was telling people, ‘We think your deposit is safe with SVB. It would be wise to take some money as you may have a liquidity crunch for a week, but we don’t think a run on the bank makes any sense. Experienced, professional VCs from Silicon Valley understand that running a bank hurts everyone.
Are you saying that the partners at Founders Fund and Coatue and Y Combinator are not experienced, professional VCs? They were among the firms that reportedly advised his startup to divest its assets.
No. I said a handful of people telling people to run for the door and congratulated themselves for it. Leave aside what it does for SVB. If the Fed doesn’t act, how many bankruptcies will there be and other knock-on effects? These VCs are congratulating themselves. I see emails from VCs to their LPs – some of which I’m at at firms – and they’re forwarding things like, ‘Am I not super smart?’
How many of your companies will not be able to do payroll due to this shutdown?
My guess is that this will be resolved by Monday or Tuesday and it will affect very few people. If this extends beyond a week or two, it will affect a lot of companies across the industry. Anyone who has payroll today or Monday needs investors to take out a quick bridge loan or delay payroll for 48 hours.
Can it really be resolved so quickly?
what i believe the feds know [the implications if it doesn’t],
Who’s been hit hardest here?
Employees of SVB who had large amounts of money in the equity of the company because they believed in their employer. Equity holder.
Who benefits from this situation? Where are you taking your money?
I think you will see people trusting the big banks rather than the small ones. This is what I would personally recommend. I personally already have my money spread across bank accounts as I am subject to FDIC limits and a cautious individual. I’m already heavy in T-bills and other, safer high-yield assets. For upfront, we bank with SBV and we have linked accounts with Morgan Stanley. We will probably open two or three accounts in other banks next week.