A week ago I would have never imagined I would be writing about Silicon Valley Bank today. Actually, even three four days ago, on Wednesday, I would have never imaged I would be writing about Silicon Valley Bank today. To make a long story short, a small thing became a big thing. The greatest banking crisis to hit the venture capital industry unfurled over a period of about 36 hours and the consequences could be devastating. I’m hoping they won’t. I have spent no fewer than 12 hours on phone calls since yesterday trying to calm nerves and find solutions for founders and funds who are staring down existential threats to their businesses. First off, this really should have never happened.
Venture capitalists and entrepreneurs are professional risk-takers. But they take risks with their businesses, not their banking. Nobody thought they were taking any risk at all keeping their money with Silicon Valley Bank. I read a heart-wrenching email on Friday from a founder who was weighing handing over his money to some alternate money managers that would give some yield on cash, but decided instead to take the “safe” approach and keep his money at SVB. He tearfully regrets that decision as $15m of $16m his company had is now inaccessible. Clearly, SVB made some mistakes. Those mistakes were then compounded by hell child spawned from the space that sits exactly between hysteria and fiduciary responsibility. Now we have chaos.
Before I add the hysteria, I want to make clear that all is not lost and I do not expect all to be lost. People who know better are causing panic because they want attention and it’s fun. The SVB deposits are not completely gone. Based on the information that is publicly available, barring some unknown and frankly highly unlikely fraud or manipulation on the part of SVB, depositors should eventually receive at least the substantial majority of their deposits. A haircut on the deposits, which is really, really, really bad but hopefully survivable for most, is likely without an acquirer or the government stepping in to make depositors whole. But what we’re talking about here should be in an extreme case a 20% loss, and more likely much less than that, possibly a few percent. Nobody should be a losing a few percent of the money they had in a bank account. But barring new information materially worse than what we currently know, we should anticipate most funds will be recovered. That’s not to say this isn’t a big problem. It’s a huge problem.
Automated bank transfers now need to be re-routed. Bank accounts are frozen, new ones are being created. Days and weeks will be lost fixing what is broken, and many companies may not be able to make payroll on Wednesday. In a best case, barring an acquisition or fed intervention, it could take 6–9 months for companies to regain access to most of the funds they had SVB. Plenty of the companies needed that money now to operate for the next 6–9 months. There should be plenty of lenders willing to lend against SVB balances for the businesses that need money. The cost in interest, time, and operational complexity of having to do this is going to be massively disruptive to many startups, many of which were already gasping for air in a questionable market. That is really bad. I do think there should be an intervention.
If a private buyer doesn’t manifest by early this week, the feds should step in to protect depositors. There is no moral hazard issue with a bailout in this case. Depositors certainly took no extraordinary risk, or frankly any. We need to trust banks. If the 20th largest bank in the United States can fail in 48 hours and depositors take a haircut on their money, the ripple effect for our banking system will be consequential. If SVB can fail, every regional bank can fail too. I’ve heard people completely unaffiliated with tech asking if they need to take money out of their credit unions. The SVB story has thus far mostly been contained to people in tech and on Wall Street. If it hits Main Street, it could be massively destabilizing to our banking system, the foundation of financial system and economy.
If there is no intervention, my fiduciary responsibility is to shift assets out of all but the largest, safest banks. I’d rather not do that. I like smaller businesses. Our bankers at SVB were good people who have done a lot for our community and stepped up to help many of my companies when they were in need. Sure, they are motivated by a profit incentive, but they really did cater to our business. There was a problem inherent to having funds and companies banking with the same bank. Nobody considered that an idiosyncratic failure of such a bank could take down a whole industry, where neither companies not their backers, the natural place they would go for bridge loans through crisis, have access to capital, but nobody thought that SVB would fail.
None of this is to excuse whatever mistakes and failures in risk management occurred. It’s essential that we immediately resolve the problem at hand, and that we learn from what mistakes were made and never find ourselves in this situation again.