Alright let’s get this over with.
Over the past week, you’ve probably seen tons of articles, videos, reels, and more about Silicon Valley Bank’s (SVB) collapse.
I’ve listened to half a dozen law professors bicker on the topic, attended a Brex meetup at SxSW where Brex held 1:1’s to poach SVB clients, read countless articles, and had multiple conversations with founders, VCs, and Uber drivers on the topic.
^Gif of VCs and Startups racing to withdraw money from SVB on Friday.
A few weeks ago I completed a full review of Silicon Valley Bank’s State of the Markets Report. Well that report failed to mention that they would be taken over by the government.
So today I’ve compiled a walkthrough of what happened with SVB and a guess with what happens next.
Start Here: How Banks Work
A bank takes in money from depositors and keeps it secure for them.
In order to fund their operations, a bank will loan out a portion of that money to businesses and take interest in return.
For example, if you deposit $100 into a bank, that bank will loan out $90 to a business and keep $10 in reserve.
Okay so you can see where the problem may occur.
What happens if you want to take out $11?
Well the nice thing about a bank is that there’s multiple people who have deposited money. So a bank can use the collective reserve to help you withdraw your money without issues.
Okay so what if everyone takes out $11?
BINGO.
This is the problem. If we get enough people to all take enough money out of the bank at once, we will see a bank fail.
This is a pretty rare scenario to get everyone to act in this way - what usually causes it is if there is fear that the bank won’t pay back depositors in the future. This is called a Bank Run and it’s what happened to SVB.
Why SVB?
So in three quick questions we’ve gotten to the root of what caused the SVB collapse. It’s not a complicated problem at it’s core, but there are a lot of complex factors that contributed to SVB facing this issue.
Not all banks are as susceptible to failing through a bank run as SVB, there are multiple failsafes in place at banking institutions to avoid these issues.
However, we’ll look at three factors that make SVB the perfect case for a bank run.
1. Well Networked Clientele
Twitter.
It’s the worst. Isn’t it?
Silicon Valley bank likes to say that they’re the bank for the innovation economy. The majority of their clientele come from the tech sector and Venture Capital.
The thing about VCs is that they are ravenous on twitter. The who’s who of VC is on twitter and VC twitter is one of the most active communities out there.
So if one person mentions a rumor that they believe SVB is going to fail - that rumor will spread like wildfire to all of SVBs clientele.
A side point I’d like to mention is that VCs are notorious for FOMO. They invest and act based on what their peers are doing in the space. Even a whiff of danger from one of their friends is enough to get them going.
I love Naval, but please don’t tell your portfolio companies to put their money in bitcoin.
2. Risky Assets
Remember how banks loan out money to businesses? Usually they loan out the money to local small businesses that have been around for 10+ years and are looking to make some minor investments. You can be pretty confident that these businesses will be around for 10 more years.
Well SVB loans out a lot of money to tech startups - notoriously some of the most risky types of businesses.
The startup I worked at had taken out a loan from SVB as part of their series A round.
That means that SVB had a lot of their assets in companies that may not see a return for 5 years if not ever.
3. Interest Rates
Woah the most boring thing to talk about ever comes back again.
If we look back at 2021 - the tech industry boomed with money.
Startups raised a whopping $200B in funding, and a good portion of those companies banked with SVB.
Not knowing what to do with their deposits growing exponentially overnight, SVB loaned out the money in long-term treasury notes at the rate at that time - 0.7%.
The rate today is near 4%.
In short, SVB lost a lot of money loaning that money out at that time, and to make up those costs, they reached out to investors for help.
Help or Hinder?
What started as a simple ask for help, turned into a frenzy.
Investors got spooked as to why SVB was asking for help, even though it was for less than 1% of their total deposits.
These investors took to twitter and the fear spread far throughout the community. The result is what you see now.
What’s Next
For Startups:
If you banked at SVB and haven’t already opened an account at another institution, do so now. The other most popular institutions for startups are: Mercury, Brex Cash, Chase, and Bank of America.
For Investors:
Please get off of twitter.
For the Market:
A smaller regional bank failed due to fear stirred up by SVB’s collapse. Before this trend became widespread the Fed stepped in and put in backstops for the bank and secured depositors money.
For SVB:
SVBs future is to now be sold to the highest bidders. HSBC already stepped in to buy the UK side of SVB. The government will continue to sell off portions of the banks assets to various other entities to try to make up for the deposit shortages.
A Parting Thought
RIP SVB. You were a valued part of the startup community.
I remember as I was starting up my own business, the SVB reps were always incredible helpful and communicative. They treated me with respect even in the earliest of stages and helped me build confidence as a young entrepreneur.
Even today as I write content on the VC world, it was only two weeks ago I was on a call with employees of the firm to talk about the state of the markets.
I’ll be a little sad saying goodbye. I’m thankful for the impact they had on me and the greater startup ecosystem.
Great piece, Adeel! Thanks for educating us on all things VC.