From: allin
The implosion of Silicon Valley Bank (SVB) in March 2023 represents a “Black Swan” event for Silicon Valley, comparable in its acute impact to 2008 or the COVID-19 pandemic, particularly for the startup ecosystem [00:02:34], [00:03:08]. This event has caused widespread panic and concern, with thousands of companies and investors actively dealing with acute effects [00:02:48].
Immediate Impact on Startups
The immediate and most significant impact is on startups that had their funds deposited at SVB. Many are now in a state of distress [00:03:03]:
- Payroll Issues: Thousands of companies may be unable to make payroll in the coming weeks because their money is trapped at SVB, which is under receivership [00:03:45]. Funds are frozen, and there is uncertainty about when they can be accessed or at what percentage of their value [00:04:10].
- Company Closures: This situation risks wiping out thousands of small companies (10-100 employees) that did nothing wrong, potentially having a damaging effect on the entire startup economy and the United States economy [00:04:37]. These are considered “little Tech” companies, crucial for future U.S. competitiveness [00:04:52].
- “Extinction Level Event”: This crisis has been described as an “extinction level event” for Silicon Valley [00:04:21].
- Loss of Innovation: The crisis threatens to torch years of U.S. innovation, potentially leading to a “lost decade” for hundreds, if not thousands, of startups working on critical issues like climate change or cancer research [00:43:13]. These companies should not fail due to a banking crisis [00:43:35].
Broader Contagion and Effects
The collapse extends beyond individual startups to the broader financial plumbing of Silicon Valley:
- Frozen Deposits: Billions of dollars in deposits have been frozen, preventing companies from paying bills, accessing funds, and meeting payroll [00:07:16].
- Payment and Payroll Processors: Critical infrastructure companies, such as payment processors and payroll companies like Rippling, stored capital at SVB. This means payroll cycles for many businesses, not just tech companies, could be delayed or missed [00:44:14].
- Uncertainty and Panic: The lack of reliability in the banking system leads to a “contagion of panic,” where people question the soundness of the overall financial system [00:45:27]. The interconnected nature of Silicon Valley meant that once a few venture capitalists advised withdrawal, a widespread run on the bank occurred rapidly [01:08:51].
- Global Impact: SVB was also a crucial on-ramp for U.S. investors to fund startups in China, meaning the issue impacts China’s innovation economy as well [00:46:53].
Impact on Venture Capital and Investment
The SVB collapse creates significant challenges for venture capital and startup funding:
- VC Funds Affected: Many venture firms also had their money at SVB [00:06:08]. Some funds have hundreds of millions tied up, unable to access capital for new investments or to support existing portfolio companies [01:00:46].
- Capital Calls: Venture funds are urgently contacting their Limited Partners (LPs) for early capital calls to support distressed companies and cover their own operating expenses [01:01:22].
- Chilling Effect on Investment: The uncertainty created by this event will have a chilling effect on the investment environment, impacting both General Partners’ (GPs) willingness to sign new term sheets and LPs’ follow-through on capital commitments [01:01:31].
- Market Freeze: The private markets, particularly in VC, could seize, leading to a significant reduction in new fundings as investors prioritize shoring up existing portfolios [01:02:20].
- Fund Shutdowns: Some VC funds may shut down, and already distressed companies will face accelerated shutdowns as bridging capital becomes scarce [01:02:41].
- Shift to “Cash is King”: The crisis reinforces the shift to a “cash is king” mentality, where liquidity and capital preservation become paramount [01:02:57].
- Risk Management Re-evaluation: This event serves as a wake-up call for the venture industry, highlighting the importance of risk management, which some believed was not worthwhile in the past [01:04:47].
Causes of the Crisis
Several factors contributed to SVB’s collapse, impacting the ecosystem:
- Duration Mismatch: SVB had a severe duration mismatch, investing short-term customer deposits (which could be called daily or weekly) into long-term assets like 10-year U.S. treasuries and mortgage-backed securities (MBS) [01:5:08]. This was exacerbated by rapid interest rate hikes [00:13:33].
- Declining Deposits: Venture Capital firms stopped investing new money, and startups continued to burn cash at high rates, leading to a decline in total deposits at SVB [00:12:34].
- Venture Debt Exposure: A significant portion (10%, or $7 billion) of SVB’s loan portfolio was in Venture Debt, which relies on VCs continuing to fund companies [01:4:36]. When VC funding slowed, this asset class showed distress [00:14:44].
- Regulatory Loopholes: Regulators allowed banks to not mark these long-dated bonds to market daily, hiding losses until they were sold [00:22:52].
- Lack of Governance: Some VCs and founders failed to heed warnings about rising rates and continued excessive spending, exacerbating the liquidity drain [00:18:33]. Experienced VCs had been advising portfolio companies to cut burn and prepare for a “regime change” since early 2022 [00:28:08].
Potential Solutions and Government Role
- 100% Deposit Guarantee: To prevent wider contagion, there is a strong call for the federal government to guarantee 100% of all deposits at SVB by early next week, ideally by finding a larger bank to take over SVB [00:45:44].
- Taxpayer Benefit: A bailout, though unpopular with the public who confuse “big Tech” with “small Tech” [00:51:35], could be structured to benefit the American taxpayer, similar to the TARP program (which yielded a profit). This could involve the government taking warrants or ownership in these innovative companies, ensuring that saving the startup ecosystem is not a free lunch for the privileged few [00:48:01].
- Regulatory Reform: This event highlights the need for regulatory changes, such as increasing FDIC insurance limits for business accounts (e.g., to $25 million) and stricter rules on how banks can invest customer deposits, ensuring they are held in highly liquid, marked-to-market assets [01:19:15].
- Unplugging the Contagion: A strong statement from federal agencies, guaranteeing a large capital facility, could stop the panic and prevent further withdrawals without necessarily needing to deploy the full capital, as confidence alone can halt a bank run [01:17:09].