Yesterday at around noon in Los Angeles, investor Mark Suster of the venture firm Upfront Ventures began urging “calm” on Twitter. Silicon Valley Bank had bungled its messaging on Wednesday around an effort to strengthen its balance sheet, and startup founders were beginning to fear that their deposits at the tech-friendly, 40-year-old institution were at risk. “More in the VC community need to speak out publicly to quell the panic about @SVB_Financial,” wrote Suster, saying he believed in the bank’s health and arguing that the biggest risk to startups, the VCs to whom the bank has long catered, and to SVB itself would be “mass panic.”
As we know now, Suster was already too late. The industry was nervous, and the bank’s CEO Greg Becker, serenely addressing the bank’s customers in a Zoom call to alleviate their fears, managed to scare them further, telling viewers: “The last thing we need you to do is panic.”
By this morning, after halting trading of Silicon Valley Bank — whose shares had already fallen 80% yesterday and were again in free fall — the California Department of Financial Protection and Innovation closed the bank, putting it under the control of the FDIC, which is figuring out next steps as the bank’s customers grapple with how to pay their bills in the interim.
Today, we asked Suster about his suggestion that startups keep their money at SVB. He suggested he had no regrets. He also echoed a growing number of others in the venture community who’ve begun pointing the finger at what they insist was a small number of VCs who set off alarm bells across the startup ecosystem — and brought down not just SVB in the process but who may have set off an unstoppable contagion. Here’s that interview, edited lightly for length and clarity.
TC: You were on CNBC this morning, where you said that you believe portfolio companies should have been diversifying where they hold their money all along. But my understanding is that Silicon Valley Bank required many startups to have an exclusive relationship with it.
MS: SVB generally doesn’t require exclusivity unless you take out debt. The problem is that a lot of people take out debt, and we’ve been warning [portfolio companies] about this for a year.
What percentage of your startups do you think have diversified their banking relationships?
About half have a relationship with SVB. Maybe half of those have alternative accounts.
You were very visibly supporting SVB yesterday as everyone else was racing for the exits. Is SVB an investor in your venture firm?
Did Upfront get its money out of SVB?
Are you worried because you didn’t get your money out?
No. I heard about $12 billion exited from SVB yesterday, and SVB has a little under $200 billion in assets, so that’s 6.5% to 7% of [its assets] that left in one day. That’s not catastrophic, but the Fed knew that was going to accelerate. They don’t want a bank run, so my guess is that the Fed, in a perfect situation, would like someone to buy SBV, and I suspect they are talking with every bank and doing a review as we speak.
Are you surprised no one has stepped forward yet?
Imagine you have a whole bunch of people evaluating buying a bank. How do you evaluate it when you don’t know how much is fleeing? How do you catch a falling knife? By [shutting down SVB this morning], the Fed stopped that knife from falling; now, I think we’ll see an orderly sale by Sunday. JPMorgan, Bank of America, Morgan Stanley, [someone will step in to buy it]. Then I believe panic will stop, because if you are pulling out of SVB because you are worried about SVB, that will no longer be a concern.
How will SVB be valued by a buyer? Its market cap was about $6.3 billion when it was shuttered this morning.
A bank’s valuation is correlated but mostly uncorrelated from its assets. You have debt holders and equity holders, and if a company goes bankrupt, debt holders get money before the equity holders. What people were betting with SVB is that the common stockholders weren’t going to get anything because SVB was going to go bankrupt; [its market cap and assets] became uncorrelated because they didn’t think SBV would survive.
What matters is: are there assets and is there value here? SVB is lender to a very cash-rich and well-run tech industry and these clients are coveted. SVB doesn’t just serve startups but VC funds and PE funds. Imagine that in one fell swoop you get access to them? It’s why a bunch of firms are working with the Fed, trying to figure out [what’s what] right now, including a bunch of hedge funds and other large PE funds, as well as banks.
Would a big bank face antitrust issues here, trying to acquire SVB?
The Fed has one objective, and that is to avoid contagions. Every other regional or not-scaled bank right now is being hit. That’s why they will force something to happen by Monday.
You don’t think bankruptcy is the next step? Isn’t that what happened with Washington Mutual? Buyers want to buy the good assets and leave all the liabilities with the government, don’t they?
This isn’t officially bankruptcy, but it’s as close as you get. Will they give money to equity holders? I think those shares could go to zero; an acquirer might well decide they don’t want to bail out equity holders, but shareholders are different from depositors.
Speaking of which, is Upfront extending bridge loans to any startups that have lost access to their money for now at SVB?
This is 24 hours old. We will likely start those conversations next week. We told our CEOs that if you are in a position where you need a bridge loan in the next two weeks, you should assemble your board, because this is a decision that needs to be reached by a board of directors. If people believe in your prospects, it shouldn’t be hard to get money for one to two payrolls. If they don’t, it may accelerate your demise, but [going out of business] was probably going to happen anyway.
I have to wonder if you were publicly trying to calm your peers while privately advising founders to move their money out of SVB, just to be on the safe side.
I assure you I did not. Every single VC I know was telling people, ‘We think your deposits are safe with SVB. It would be prudent to take some money because you could have a liquidity crisis for a week, but we don’t think a run on the bank makes sense.’ Experienced, professional VCs of Silicon Valley understand that a bank run damages everybody.
Are you saying the partners at Founders Fund and Coatue and Y Combinator are not experienced, professional VCs?
I said a handful of people were telling people to run for the door and congratulating themselves for it. Leave aside what this does to SVB. If the Fed didn’t step up, how many bankruptcies would there be and other knock-on effects? These VCs are congratulating themselves. I’m seeing emails from VCs to their LPs — which I am in some firms — and they are forwarding these things like, ‘Aren’t I super smart?’
How many of your companies won’t be able to make payroll because of this shutdown?
My guess is this is solved by Monday or Tuesday and it will impact very few people. If it extends beyond a week or two, it will impact a lot of companies across the industry. Anyone who has payroll today or Monday needs investors to do quick bridge loans from investors or to delay payroll for 48 hours.
Can this really be resolved so quickly?
What gives me confidence is the Fed knows [the implications if it doesn’t].
Who is hit hardest here immediately?
Employees of SVB who had large amounts of money in the company’s equity because they believed in their employer. Equity holders.
Who stands to benefit from this situation? Where are you going to move your money?
I think you’re likely to see people trust bigger banks rather than smaller banks. That’s what I would advise personally. I personally already spread money across bank accounts because I’m subject to FDIC limits and a cautious person. I’m already heavily in T-bills and other, safe high-yielding assets. As for Upfront, we bank with SBV and we have accounts tied to Morgan Stanley. We’ll probably open two or three accounts with other banks next week.
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