Axios Pro Rata
March 11, 2023
Welcome to another weekend edition! I'm signing on from Austin as I'm here for the annual SXSW festivities.
- 👋 Reminder: Feel free to send me tips or comments by replying to this email or on Twitter @imkialikethecar.
- Also, send me any commentary or stories about how startups and investors are managing through the current situation with SVB as we continue to cover this fast-developing story.
Today’s Smart Brevity™ count is 1,185 words, a 4.5-minute read.
1 big thing: The bank of Silicon Valley
Given how deeply and widely its roots run across the industry, Silicon Valley Bank — dramatically seized on Friday by the federal government amid a crippling bank run and a swooning stock — couldn't have a more apt name.
Why it matters: The stunning events of the last two days couldn't have unfolded as dramatically as it has without such a deep entrenchment. The venture capital industry is well known for its tight-knit network, and propensity to circulate information (and opinions) at the speed of tweets.
Flashback: Conceived by Bill Biggerstaff and Robert Medearis over a poker game, Silicon Valley Bank opened its first office in Santa Clara in 1983, providing banking and credit services to venture-backed startups.
- In 1986 it merged with National InterCity Bancorp, and went public on the Nasdaq in 1988, raising $6 million.
- By 1992, its real estate loans resulted in a $2.2 million loss after a California market downturn, leading the bank to diversifying its portfolio (by 1995, real estate was less than 10% of its loans, compared with nearly 50% previously).
- It provided early banking services to Valley stalwarts like Cisco Systems and Bay Networks.
The big picture: SVB is not just a bank for startups — it has several divisions and business lines, all intertwined with the startup world.
- It not only takes startups' cash, but also provides them with venture debt and other loans, and provides banking and loans to VC firms. A number of publicly-traded tech companies are also customers, like Roblox and Roku.
- It's also an investor itself into a number of blue chip venture funds, as well as tech and health care startups.
- It also operates globally, with offices in Canada, Europe and a joint venture in China.
- While its best knowns as a bank for startups, 56% of its loans (as of the end of 2022) were actually to VC and private equity firms, secured by their limited partner commitments.
- 14% of its loans were mortgages to wealthy individuals and legacy Boston Private clients.
- 24% were to various tech and health care companies, including 9% of all loans going to early and growth-stage startups (whose repayments depend on their ability to raise more capital or exit).
- The bank also claims it banks nearly half of all U.S. venture-backed tech and healthcare startups.
Between the lines: One of the key reasons SVB is so deeply seeded within startup-land is because of venture debt, its specialty. That's dependent not only venture financing, but on trusting the assessment of VCs backing a certain company.
- “[V]enture debt emphasizes the borrower’s ability to raise additional equity to fund the company’s growth and repay the debt,” SVB explains in a blog post.
- So in addition to counting on VCs to back startups that have a shot (though it does its own diligence and credit assessments, to be sure), SVB also depends on venture funding's circle of life to get its money back from its startup clients.
Yes, but: While SVB was among the country's top 20 banks, a number of smaller challengers have sought to provide alternatives to startup clients.
- Brex, Ramp, Arc, and others have cropped up to provide venture-backed startups with corporate credit cards and a growing number of financial services. Meanwhile, more traditional banks have rolled out startup friendly brands and services to appeal to that cohort of customers.
The bottom line: It's unclear whose name will be on the door when SVB's offices open on Monday morning, but it's not surprising so many VCs and tech entrepreneurs are rooting for it to survive this ordeal with minimal destruction.
2. What they said (last week)
Last week, Silicon Valley Bank CEO and president Greg Becker was interviewed on stage at the annual Upfront Summit in Los Angeles, by The Information reporter Kate Clark. Here's what he said when asked about the simmering concerns (lightly edited for clarity):
There are some concerns about the liquidity health of the bank … because you parked a bunch of money when interest rates were low in a bad bond portfolio. … Are those valid concerns?
I’ll start with the story I tell our employees. This has been the case for the last 30 years. When you have a cycle and its going really well we get praised to the extreme. Conversely, when the market is down, people pile on because it's like, "Oh my God, the credit is gonna be bad, and liquidity and deposits and all that stuff."
So, to me, what are the important things? The important things are: We have a very low loan-to-deposit ratio, which is important when you think about it.
Credit quality is incredibly strong and actually prepared even if it gets a lot worse, and we expect it to get worse.
And the third thing is liquidity. When you go through liquidity—and banks have different ways to calculate it—but it's like, you can look at your cash, your borrowing availability and what your securities are that you could sell.
So the question that came up in that article you referenced is basically, if you were to sell all your securities, would there be a large loss? And the answer is true. But what we’ve been publicly saying, and we said that last quarter, is that we have is zero intention to sell those securities.
So, it's like a loan portfolio that you lent money when the rates were low, and now if you mark those to market, it would actually be lower than the valuation, so it’s the same thing.
You know, most importantly, we have a stable structure, strong capital ratios to support our clients pretty much no matter what happens
I think the criticism is that you should have seen those interest rates rising. … Do you think you made a mistake in not predicting that we were going to enter this downturn?
If anyone can say that they forecast a 5.5% interest rate from last year, when they were zero, please let me know what your next forecast is.
I really thing that's the fundamental — we expected the following: We expected the rates to increase, but when you do scenario planning, you think about up rates 100 basis points, up 200 basis points.
Then you create your balance sheet in a way that is structured for pretty much no matter what happens, you can manage through that.
So, when I think about it, it’s more of a headwind to what level of profitability we have than any other issue, and that’s really what this storyline is about.
📚 Due Diligence
- Silicon Valley Bank collapse is causing a financial crisis for California’s wine industry (San Francisco Chronicle)
- How Silicon Valley Bank became a pre-IPO play—then became a top-performing stock itself (Fortune)
- Startups fear delayed payrolls amid Silicon Valley Bank’s collapse (Axios)
- SVB’s debacle is causing panic in China’s startup industry (TechCrunch)
This is the second-largest bank failure in U.S. history.
- Question: What the total amount of capital customers withdrew by the of Thursday? (Answer at the bottom.)
🧮 Final Numbers
🙏 Thanks for reading! And to Javier E. David and Lisa Hornung for editing. See you on Monday for Pro Rata's weekday programming, and please ask your friends, colleagues and startup bankers to sign up.
Trivia: "Despite the bank being in sound financial condition prior to March 9, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank. As of the close of business on March 9, the bank had a negative cash balance of approximately $958 million," according to California regulators.