Around noon yesterday in Los Angeles, investor Mark Suster of venture capital firm Upfront Ventures began urging “calmeon Twitter. Silicon Valley Bank had spoiled its posts Wednesday around an effort to bolster its balance sheet, and startup founders were beginning to fear their deposits with the 40-year-old tech-friendly institution were at risk. “More in the VC community needs to speak out publicly to quell the panic about @SVB_Financial,” Suster wrote, saying he believed in the health of the bank and saying the biggest risk to startups, VCs the bank has long catered to, and SVB itself would be the ” mass panic”.
As we now know, Suster was already too late. The industry was nervous and the bank’s CEO, Greg Becker, calmly speaking to bank customers on a Zoom call to allay their fears, managed to scare them further by telling viewers, “The last thing what we need you to do is panic.”
This morning, after Silicon Valley Bank halted trading – whose shares had already fallen 80% yesterday and were in free fall again – the California Department of Financial Protection and Innovation closed the bank, placing it under the scrutiny of the FDIC, which is figuring out next steps as the bank’s customers grapple with how to pay their bills in the meantime.
Today we asked Suster about his suggestion that startups keep their money at SVB. He hinted that he had no regrets. He also echoed a growing number of other members of the venture capital community who started pointing fingers what they’re insisting is that a small number of VCs have set off alarm bells in the startup ecosystem – and not only brought down SVB in the process, but that may have sparked a unstoppable contagion. Here is that interview, slightly edited for length and clarity.
TC: You were on CNBC this morning, where you said you think holding companies should have diversified where they’ve been holding their money all along. But I understand that Silicon Valley Bank required many startups to have an exclusive relationship with them.
MS: SVB generally does not require exclusivity unless you are incurring debt. The problem is that a lot of people are going into debt, and we warned [portfolio companies] about it for a year.
What percentage of your startups do you think have diversified their banking relationships?
About half have a relationship with SVB. Maybe half of them have alternative accounts.
You were very visibly supporting SVB yesterday as everyone ran for the outings. Is SVB an investor in your venture capital firm?
Has Upfront withdrawn its money from SVB?
Are you worried because you haven’t withdrawn your money?
No. I heard that about $12 billion was taken out of SVB yesterday, and SVB has just under $200 billion in assets, or 6.5% to 7% of [its assets] which is gone in one day. It’s not catastrophic, but the Fed knew it was going to accelerate. They don’t want a bank run, so I guess the Fed, in a perfect situation, would like someone to buy SBV, and I suspect they are talking to each bank and doing a review as we speak.
Are you surprised no one has come forward yet?
Imagine that you have a whole group of people who are evaluating the purchase of a bank. How do you rate it when you don’t know how much is leaking? 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 an orderly sell off by Sunday. JPMorgan, Bank of America, Morgan Stanley, [someone will step in to buy it]. Then I think the panic will stop, because if you pull out of SVB because you are worried about SVB, it won’t be a problem anymore.
How will SVB be rated by a buyer? Its market cap was around $6.3 billion when it closed this morning.
The valuation of a bank is correlated but above all decorrelated from its assets. There are creditors and shareholders, and if a company goes bankrupt, creditors get money before shareholders. What people were betting with SVB was that ordinary shareholders would get nothing because SVB was going bankrupt; [its market cap and assets] became uncorrelated because they did not believe SBV would survive.
What matters is: are there assets and is there value here? SVB is a lender to a very cash-rich and well-run tech industry, and those customers are coveted. SVB not only serves startups, but also venture capital funds and private equity funds. Imagine that all of a sudden you have access to it? That’s why a lot of companies are working with the Fed, trying to figure out [what’s what] right now, including a bunch of hedge funds and other big private equity funds, as well as banks.
Would a major bank face antitrust issues here, trying to acquire SVB?
The Fed has one objective, and that is to avoid contagion. All other regional or non-scale banks are currently affected. That’s why 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? The buyers want to buy the good assets and leave all the liabilities to the government, right?
It’s not officially bankruptcy, but it’s as close as it gets. Will they give money to shareholders? I think those stocks could drop to zero; an acquirer may very well decide not to bail out shareholders, but shareholders are different from depositors.
Speaking of which, does Upfront give bridging loans to any startups that have lost access to their money at SVB for now?
It is 24 hours old. We’ll probably start those conversations next week. We’ve told our CEOs that if you’re in a position where you need a bridge loan in the next two weeks, you need to get your board together because this is a decision that needs to be made. by a board of directors. If people believe in your prospects, it shouldn’t be hard to get money for a paycheck or two. If they don’t, it may hasten your demise, but [going out of business] was probably going to happen anyway.
I wonder if you were publicly trying to placate your peers while privately advising founders to pull their money out of SVB, just to be on the safe side.
I assure you not. Every VC I knew would tell people, “We believe your repositories are safe with SVB. It would be prudent to take cash because you could have a liquidity crunch for a week, but we don’t think a run on the bank makes sense. Experienced and professional VCs in Silicon Valley understand that a bank run hurts everyone.
Are you saying that Founders Fund partners and Coatue and Y Combinator are not experienced professional VCs?
I said a handful of people were telling people to run for the door and congratulating themselves for it. Leave aside what it does to SVB. If the Fed did not intervene, how many bankruptcies and other ripple effects would there be? These VCs welcome each other. I see emails from VCs to their LPs – which I am at some companies – and they pass on these things like, “Am I not super smart?”
How many of your businesses will not be able to make payroll because of this closure?
I assume this will be resolved by Monday or Tuesday and will affect very few people. If it extends beyond a week or two, it will impact many businesses in the industry. Anyone with payday today or Monday needs investors to make quick bridging loans from investors or delay payday 48 hours.
Can this really be resolved so quickly?
What gives me confidence is that the Fed knows [the implications if it doesn’t].
Who is the hardest hit here immediately?
SVB employees who held large sums of money in company equity because they believed in their employer. Shareholders.
Who benefits from this situation? Where are you going to move your money?
I think you will probably see people trusting the big banks rather than the small banks. That’s what I would personally recommend. Personally, I have distributed money in bank accounts before because I am subject to FDIC limits and am a conservative person. I’m already heavily invested in Treasuries and other high yielding safe assets. As for Upfront, we do business with SBV and we have accounts linked to Morgan Stanley. We will probably open two or three accounts with other banks next week.