Key Moments
E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more
All-In PodcastKey Moments
SVB collapse triggers potential startup extinction event and regional banking crisis.
Key Insights
Silicon Valley Bank's collapse was triggered by a "run on the bank" fueled by a rapid decline in deposits and a devaluation of its bond portfolio due to rising interest rates.
The crisis poses an "extinction level event" for thousands of small tech companies, potentially making them unable to meet payroll.
A contagion risk exists for the broader regional banking system as depositors lose confidence and move funds to larger, perceived safer institutions.
Culpability is debated, with potential blame on venture capitalists and founders for continued spending, SVB's poor risk management and duration mismatch, and regulators for oversight failures.
The VC industry faces a "chilling effect" with potential deal-making freezes, more shutdowns, and a renewed focus on risk management.
Government intervention, potentially via guaranteed deposits or buying distressed assets, is seen as necessary to prevent systemic collapse, though with careful structuring to benefit taxpayers.
THE SUDDEN COLLAPSE OF SILICON VALLEY BANK
Silicon Valley Bank (SVB) experienced a sudden and dramatic collapse, leading to its takeover by the FDIC. This event triggered a "run on the bank" as depositors, primarily startups and venture capital firms, rushed to withdraw their funds. The crisis paralyzed billions of dollars in deposits, creating immediate existential threats for thousands of companies unable to access their capital for essential operations like payroll. This situation is described as a "Black Swan" event, comparable in its immediate impact on the Silicon Valley ecosystem to the 2008 financial crisis and the onset of COVID-19.
AN EXTINCTION LEVEL EVENT FOR STARTUPS
The immediate fallout from SVB's collapse is an "extinction level event" for a significant portion of the startup ecosystem. Thousands of small to medium-sized companies, not the tech giants, have their operating capital frozen at SVB. This means they may be unable to make payroll in the coming weeks. This crisis is seen as potentially more damaging to the core of the U.S. innovation economy—the future companies that will drive competitiveness—than past crises, as it directly threatens their ability to survive and operate.
CAUSES OF THE SVB COLLAPSE: A PERFECT STORM
Several factors converged to cause SVB's downfall. Over the past two years, SVB saw a massive influx of deposits from venture-backed startups. To generate yield, the bank invested heavily in long-duration U.S. Treasuries and mortgage-backed securities. As interest rates rapidly increased, the market value of these bonds plummeted, creating significant unrealized losses. Simultaneously, venture capital funding slowed, and startups continued to burn cash, leading to deposit outflows. When SVB announced plans to sell a portfolio of these devalued assets and raise capital, it ignited panic among depositors, leading to a classic bank run.
BLAME GAME: VCS, SVB, AND REGULATORS
The culpability for the SVB collapse is spread across several actors. Some venture capitalists and founders are criticized for not adequately managing cash reserves and continuing to spend aggressively as interest rates rose and funding dried up. SVB itself is at fault for a severe duration mismatch—investing short-term deposits into long-term, interest-rate-sensitive assets—and for poor risk management. Furthermore, regulators are questioned for allowing such significant duration mismatches and for not identifying or acting on the brewing crisis sooner, despite warning signs from financial analysis sites and internal bank issues.
CONTAGION RISK AND BROADER ECONOMIC IMPACTS
The SVB failure poses a significant contagion risk not just to the tech sector but to the broader regional banking system. Depositors at SVB, realizing their uninsured funds above $250,000 were at risk, began questioning the safety of their money at other regional banks. This fear could lead to runs on other institutions, potentially consolidating the banking system into a few large players. Beyond banking, the crisis impacts payment processors, payroll companies, and other infrastructure providers that relied on SVB, creating cascading effects throughout the economy, including potential impacts on commercial real estate if rent and mortgage payments falter.
THE FUTURE OF VC AND RECOMMENDATIONS FOR FOUNDERS
This crisis is expected to have a profound chilling effect on the venture capital industry. Deal-making activity is likely to freeze in the short term as VCs focus on managing their existing portfolios and triaging distressed companies. Fundraising for new ventures will become significantly harder. Founders are strongly advised to diversify their banking relationships, maintain multiple bank accounts, and prioritize cash runway and burn rate management. Experiencing a bear market and understanding risk management are highlighted as crucial for both VCs and founders to navigate future downturns.
GOVERNMENT INTERVENTION AND TAXPAYER PROTECTION
There is a strong consensus that government intervention is necessary to prevent a wider systemic collapse. Potential solutions discussed include a federal backstop to guarantee 100% of deposits, similar to TARP during the 2008 crisis, or an entity acquiring SVB and the Federal Reserve warehousing the risk. Such interventions should be structured to protect taxpayers, potentially by taking equity stakes or warrants in the rescued companies or SVB itself, ensuring a return on investment for the public. The current FDIC insurance limit of $250,000 is deemed insufficient for business accounts, necessitating a broader solution.
Mentioned in This Episode
●Supplements
●Products
●Software & Apps
●Companies
●Organizations
●Concepts
●People Referenced
Key Takeaways for Founders and Capital Allocators
Practical takeaways from this episode
Do This
Avoid This
Silicon Valley Bank (SVB) Balance Sheet (End of 2022)
Data extracted from this episode
| Category | Amount (USD Billions) |
|---|---|
| Total Liabilities | 195 |
| Customer Deposits | 173 |
| Other Debt | 22 |
| Total Assets | 208 |
| Loans | 74 |
| Hold to Maturity Securities | 91 |
| Available for Sale Securities (Treasuries, MBS) | 26 |
| Net Book Value (Assets - Liabilities) | 13 |
SVB Venture Debt Portfolio Performance (Warrants)
Data extracted from this episode
| Year | Net Gains on Warrants (USD Millions) |
|---|---|
| 2021 | 560 |
| 2022 | 148 |
Common Questions
SVB experienced a rapid withdrawal of deposits after announcing a significant loss on securities sales. This 'run on the bank' was exacerbated by its exposure to long-duration bonds that lost value due to rising interest rates and its venture debt portfolio, leading to a liquidity crisis.
Topics
Mentioned in this video
These were attached to venture debt loans by SVB, giving the bank equity upside, which proved to be a source of distress when companies failed.
The cryptocurrency market saw a downturn, even during a banking crisis, as investors prioritized liquidity by selling off less stable assets.
Investments held by the bank, including treasuries and mortgage-backed securities, which lost value due to rising interest rates.
Loans provided to startups, often backed by venture capital commitments, which SVB heavily invested in and proved to be risky.
Used to explain the rational decision-making of depositors withdrawing funds during a bank run, even if it exacerbates the crisis.
The Federal Deposit Insurance Corporation, which shut down Silicon Valley Bank and is involved in managing the fallout.
A major asset management firm; SVB clients held money market funds managed by BlackRock, which were frozen as SVB assets.
A major bank catering to startups and the venture capital industry, which collapsed due to mismanagement of assets and a bank run.
Mentioned for coining the term 'extinction level event' for the SVB collapse's impact on startups.
Federal Reserve Chair who testified to Congress downplaying systemic risks in the banking system just days before the SVB collapse.
Co-host of the podcast, identified as 'prince of panic attacks' and 'Sultan of Science', providing technical explanations.
The philosophy of non-violence espoused by Gandhi is mentioned in relation to a January 6th defendant's beliefs and sentencing.
Co-host of the podcast, identified as 'dictator' and 'Rain Man', contributing analysis on the SVB crisis.
U.S. Secretary of the Treasury, whose initial statement about monitoring the situation was criticized as insufficient.
Referenced as a historical example of a major financial institution's bankruptcy in 2008 that triggered a wider financial crisis.
A payroll and HR software company that was affected by the SVB collapse but was able to process payroll due to other banking relationships.
Mentioned as a major, stable bank that depositors would likely move to from regional banks during a crisis.
Another major financial institution whose money market funds were held by SVB clients and became frozen assets.
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