Around noon yesterday in Los Angeles, investor Mark Suster of venture firm Upfront Ventures began urging “calmon Twitter. Silicon Valley Bank had botched its message Wednesday about an effort to strengthen its balance sheet, and startup founders were beginning to fear their deposits at the 40-year-old tech-friendly institution were at risk. . “METERore in the VC community needs to speak out publicly to quell the panic about @SVB_Financial,” Suster wrote, saying he believed in the bank’s health and arguing that the biggest risk for startups, the venture capitalists the bank has long served, and for SVB itself would be “panic massive”.
As we now know, Suster was already too late. The industry was nervous, and the bank’s CEO, Greg Becker, coolly addressing bank customers on a Zoom call yesterday morning, managed to scare them even more when he spoke the words: “The last thing we need you to do is walk in.” in a panic”.
This morning, after operations at Silicon Valley Bank were halted to stem the stock’s free fall (they had already plunged more than 80% between Wednesday and Thursday), the California Department of Financial Protection and Innovation closed the bank. It then moved it under the watchful eye of the FDIC, which is determining next steps as bank 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 talk, he also echoed a growing number of people in the startup world who have started pointing finger what they insist on was a small number of VCs that set off alarm bells throughout the startup ecosystem, bringing down SVBs but also, potentially, triggering a contagion. Here is that interview, lightly edited for length and clarity.
TC: You were on CNBC this morning, where you said you thought portfolio companies should have been diversifying where they keep their money all the time. But my understanding is that Silicon Valley Bank required many startups to have an exclusive relationship with it.
MS: SVB generally does not require exclusivity unless it borrows. The problem is that a lot of people get into debt, and we’ve been warning [portfolio companies] about this for a year.
What percentage of your startups do you think have diverse banking relationships?
Approximately half have a relationship with SVB. Maybe half of them have alternate accounts.
You were very visibly supporting SVB yesterday while everyone else was running for the exits. Is SVB an investor in your venture company?
No.
Did Upfront get its money from SVB?
No.
Are you worried because you didn’t get your money?
No. I heard yesterday that SVB came out of $12 billion, and SVB has just under $200 billion in assets, so it’s 6.5% to 7% of [its assets] it came out in one day. That’s not catastrophic, but the Fed knew it was going to ramp up. They don’t want a run on the banks, so I guess the Fed, in a perfect situation, would like someone to buy SBV, and I suspect they are talking to all the banks and doing a review as we speak.
Are you surprised that no one has stepped up yet?
Imagine that you have a lot of people considering buying a bank. How do you assess him when you don’t know how much he’s running away? How do you catch a falling knife? By [shutting down SVB this morning], the Fed stopped the fall of that knife; Now, I think we’ll see an orderly sale 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 withdraw from SVB because you’re worried about SVB, that won’t be a concern anymore.
How will SVB value a buyer? Its market capitalization was approximately $6.3 billion when it closed this morning.
A bank’s valuation is correlated but mostly uncorrelated with its assets. It has debt holders and shareholders, and if a company goes bankrupt, the debt holders get money before the shareholders. What people were betting with SVB is that common shareholders were not going to get anything because SVB was going bust; [its market cap and assets] it became uncorrelated because they did not think that 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-managed technology industry, and these clients are sought after. SVB not only caters to startups, but also to venture capital funds and PE funds. Can you imagine that in one fell swoop you have access to them? That’s why a lot of companies are working with the Federal Reserve, trying to figure out [what’s what] right now, including a bunch of hedge funds and other big PE funds, as well as banks.
Would a big bank face antitrust problems here, trying to acquire SVB?
The Fed has one goal, and that is to prevent contagion. Every other regional or non-scaled bank right now is getting hit. That is why they will force something to happen by Monday.
Don’t you 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 with the government, right?
This is not officially bankruptcy, but it is as close as you can get. Willpower [a buyer] give money to shareholders? I think those shares could go to zero; an acquirer might well decide that he does not want to bail out shareholders, but shareholders are different from depositors.
Speaking of which, is Upfront giving bridging loans to any startups that have lost access to their money for now at SVB?
This has 24 hours. We will likely start those talks next week. We told our CEOs that if you find yourself in a position where you need a bridge loan in the next two weeks, you need to assemble your board, because this is a decision for a board of directors to make. If people believe your prospects, it shouldn’t be hard to get money for one or two payrolls. If they don’t, you can hasten their demise, but [going out of business] it was probably going to happen anyway.
I have to wonder if he was publicly trying to calm down his peers while privately advising founders to get their money out of SVB, just to be safe.
I assure you that I did not. Every venture capitalist I know told people, ‘We think your deposits are safe with SVB. It would be wise to take some money because you could have a cash crunch for a week, but we don’t think a run on the bank makes sense. Professional and experienced Silicon Valley venture capitalists understand that a bank run hurts everyone.
Are you saying that the partners at Founders Fund and Coatue and Y Combinator are not experienced, professional venture capitalists? They were among the companies that reportedly advised their startups to divest their assets.
I said that a handful of people were telling people to run to the door and congratulating themselves on it. Let’s put aside what this does to SVB. If the Fed didn’t step up, how many bankruptcies and other side effects would there be? These venture capitalists congratulate themselves. I see emails from VCs to their LPs, of which I’m at a few companies, and they’re forwarding these things like, ‘Aren’t I super smart?’
How many of your companies will not be able to make a payroll due to this closure?
My guess is this will be resolved on Monday or Tuesday and will affect very few people. If it extends beyond a week or two, it will affect many companies in the industry. Anyone who has payroll today or Monday needs investors to make quick investor bridging loans or delay payroll 48 hours.
Can this really be resolved that quickly?
What gives me confidence is that the Fed knows [the implications if it doesn’t].
Who is the most affected here immediately?
SVB employees who had large amounts of money in the company’s capital because they believed in their employer. Shareholders.
Who benefits from this situation? Where are you going to move your money?
I think you’re likely to see people trusting larger banks rather than smaller banks. That is what I would advise personally. Personally, I already spread my money between bank accounts because I’m subject to FDIC limits and I’m a cautious person. I already have a large number of Treasury bills and other high-yield safe assets. As for Upfront, we bank with SBV and have accounts linked to Morgan Stanley. We will probably open two or three accounts with other banks in the next week.
