Everyone in tech will remember the day that SVB, “the bank for funded tech startups,” surprisingly failed in just two days.
Here’s how I see it so far. What do you think?
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This can’t be blamed on Jerome Powell’s well-broadcast interest rate hikes, runaway inflation, or even the free-money interest rates or government money-gushing.
This could have been prevented by SVB. They made a bad bet and couldn’t unwind it when the tides turned with interest rate hikes and cash outflows.
SVB had a 3X influx of cash in 2020-21 when VC funding went wild. They couldn’t loan it out quickly so they invested in longer-term Treasuries and mortgage-backed securities that are very sensitive to rising interest rates. That’s on them. And on bank regulators too.
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Is there any “George Bailey real community” in big-money Silicon Valley startups and investors? Apparently not.
SVB would be fine today if VCs and their companies didn’t rush to take out all their money in 24 hours. If 90% of SVB customers said, “SVB made a mistake but our money’s fine and we’ll keep it there,” then there would have been no run on the bank.
But they rushed to get their money out first to leave others holding the bag. I can see why this makes sense for them, but it didn’t have to happen the way it did.
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This is a cataclysmic event that will affect tech companies and tech innovation in the US for many years, if it isn’t sorted quickly.
Most SVB clients will get most of their money back at some point. Most companies will find a way to make payroll this month and survive with a dent in their cash piles.
But the loss of trust in one of the steady foundations of capitalism and innovation has been shattered. This could take 10% off the top of returns from VC capital in the next few years and hurt some worthy startups. Ouch.
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Some funded software companies won’t make it. But most won’t make it anyway, so this just accelerates the Darwinian process.
Some VCs won’t make it either. There was going to be a culling of mediocre VCs anyway, but this will speed it up too.
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I don’t think the federal government will or should “bail out” SVB stockholders. Depositors, startup tech companies and big VCs, may get some support to prevent contagion.
I think the FDIC and the feds can facilitate a quick transition of the assets to a big bank. SVB customers might take a big hit but can keep moving forward.
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Tech layoffs will increase as tech CEOs will finally get the message that “You’ve been living on borrowed money and time so you need to get near profitability NOW.”
Investors have been saying this for a year, but tech CEOs have procrastinated action with their lines of credit and hope for the next big funding round. Those are gone now. Reality hits.
This affects the entire tech industry, many many friends of mine, and my own personal investments in companies and seed funds.
There is more pain ahead, but we can get over it.
That’s what I think so far. What do you think?
