From: allin
The collapse of Silicon Valley Bank (SVB) has had a significant and immediate impact on the venture capital and investment landscape, leading to widespread panic and uncertainty within the startup ecosystem and broader financial markets. The event has been described as a “Lehman sized event for Silicon Valley” [00:03:14].
Immediate Consequences for Startups and Venture Firms
Frozen Funds and Payroll Issues
Thousands of companies now face immediate challenges in making payroll and covering operational expenses because their money is trapped at Silicon Valley Bank, which is under receivership [00:03:45]. While some managed to wire their money out, many others found their funds frozen, with uncertainty about when or how much they will recover [00:04:02]. This situation primarily affects small companies with 10 to 100 employees, not larger tech giants [00:04:36]. This has been called an “extinction level event” for the startup ecosystem [00:04:21].
Impact on Venture Capitalists and Funds
Silicon Valley Bank was utilized by approximately 50% of venture-backed startups and the majority of venture firms [00:06:03]. Venture firms themselves also have funds tied up, preventing them from investing new money in startups [00:06:16]. SVB also provided mortgages for venture capitalists and founders, and loans to General Partners (GPs) who run venture firms [00:06:27].
Many VCs are now contacting their Limited Partners (LPs) to request early capital calls to support their portfolio companies, as cash is stuck [01:01:21]. Funds could shut down, and companies that were already distressed are now “done for,” with no one likely to bridge or fund them [01:02:41].
Halt in Deal-Making
The crisis is expected to cause a 60-day freeze in deal-making activity within venture capital and startup funding [01:03:06]. VCs are shifting focus to shoring up their existing portfolios and managing companies in distress rather than making new investments [01:03:12].
Contributing Factors and Broader Implications
Mismanagement of Funds and “Duration Mismatch”
A core issue for SVB was a “duration mismatch” in their investment strategy [00:19:46]. They invested customer deposits, which could be called daily or weekly, into long-term assets like 10-year mortgage-backed securities and U.S. treasuries [00:20:37]. When interest rates rapidly increased, the value of these long-dated bonds plummeted [00:32:00]. When large withdrawals occurred, SVB had to sell these assets at a significant loss to meet demand, triggering the bank run [00:35:50].
Venture Debt Exposure
SVB’s loan portfolio included 10% in venture debt [00:14:34]. This type of debt relies on VCs continuing to fund companies, and if that funding stops, the venture debt defaults [00:14:44]. The performance of SVB’s venture debt portfolio, particularly the warrants they received from successful startups, fell off a cliff in Q4 2022 due to a lack of exits [00:15:25]. Critics argue that using customer deposits for risky, non-liquid investments like venture debt, especially without proper collateral or covenants, is inappropriate and creates systemic risk [00:26:16].
Lack of Risk Management by VCs and Startups
Some VCs and companies are blamed for not adequately preparing for rising interest rates and a changing market, continuing to spend as if it were 2020 [00:18:33]. This “lack of governance” and accountability in some companies exacerbated the situation [00:19:00]. Experienced VCs had advised founders to cut burn and conserve cash as early as February 2022 [00:28:10]. The crisis is seen as a “wake-up call” for the industry that risk management in venture is crucial [01:05:47].
Regulatory Oversight and Systemic Risk
Regulators are criticized for allowing banks to hold long-dated bonds at book value instead of marking them to market daily, which obscured losses [00:22:55]. The lack of clarity around these “unrealized losses” in the banking system, which are estimated at $620 billion on treasuries alone, contributes to a crisis of confidence [00:52:48]. The failure of SVB, a top 20 bank, has raised concerns about a potential regional banking crisis as depositors move money to larger, perceived safer institutions [00:05:02].
Contagion and Panic
The highly interconnected nature of Silicon Valley’s network, with VCs and founders rapidly sharing information, led to a “herd mentality” that accelerated the bank run [01:08:40]. This rational self-interest—to be the first to withdraw funds—created a classic prisoner’s dilemma scenario [01:10:36].
Calls for Action
There is an urgent call for federal authorities to step in and guarantee 100% of deposits to prevent further contagion [00:45:42]. A “bear hug” solution, where the government backstops all deposits with a large facility (e.g., $500 billion), could restore confidence and stop further bank runs [01:17:09]. This intervention is framed not as a bailout for “big Tech” or billionaires, but as a protection for “small Tech” and innovators working on critical advancements like cancer research or renewable energy [00:48:28]. It is argued that such a backstop could even be profitable for the American taxpayer, similar to the Troubled Asset Relief Program (TARP) which returned a profit [00:48:01].
This crisis highlights the challenges in venture capital and entrepreneurship when combined with broader economic shifts and regulatory gaps, potentially leading to a “lost decade” for innovation if not swiftly addressed [00:43:54].