💵The Bulletin #27: Weathering the SVB Storm: What Happened, How We Responded, and What We Learned
💵The Bulletin #27: Weathering the SVB Storm: What Happened, How We Responded, and What We Learned
A special edition of The Bulletin, where we break down the SVB saga and how we responded here at our fund.
The collapse of Silicon Valley Bank, or SVB, exactly two weeks ago is not something that happens every day. Most of you probably heard about its whirlwind collapse and its broader impact on the entire financial services industry. Here at VWV, we learned a lot from experiencing a bank run for the first time, including how to respond to and during a crisis. Now that the dust seems to have mostly settled, here’s the TLDR of what went down.
💥What Happened To SVB?
To understand what happened two weeks ago, we have to look back to 2020. During the pandemic, government stimulus turbocharged the tech industry and investors poured capital into startups. In turn, many startups deposited their funds into SVB, which led to the latter’s deposits growing from $60 billion to $200 billion between 2020 and March 2022.
SVB decided to invest this fresh flood of capital into government bonds and mortgage-backed securities (MBS). Although these assets were pretty safe, SVB made one mistake: they put their money into long-term, fixed-interest-rate bonds. When the Fed suddenly increased interest rates in 2022, SVB was stuck with long-term bonds that earned them significantly less than everyone else. Because of this, combined with the fact that startups were draining their SVB accounts in the latter half of 2022, SVB was running out of cash.
Against this backdrop, here’s a play-by-play of what quickly went down during the week of March 6th:
Wednesday, March 8th. SVB said that they had to sell $21B worth of all these long-term bonds, losing $2B on the sale. At the same time, the bank also announced that they would try to raise more money by selling stock. But instead of reassuring customers, these announcements caused a frenzy in the startup and VC ecosystem.
Thursday, March 9th. The day of the bank run. As depositors frantically rushed to retrieve a total of $42B in deposits from SVB—which SVB did not have the capacity to deal with—the bank quickly collapsed.
Friday, March 10th. On Friday morning, the FDIC seized SVB. Depositors suddenly lost access to their funds, and many customers had deposits over the federally insured level of $250,000. SVB customers spent the majority of the weekend fearing that they would not be able to make payroll, pay their vendors, or renew their software subscriptions. Many were worried that they would never get their funds back.
Sunday, March 12th. On Sunday evening, the government announced that all SVB depositors would be made whole, meaning that anyone with deposits over the federally insured level would still get their money back. It wouldn’t be an exaggeration to say that a sigh of relief rippled across the entire startup and VC community.
🏃♀️How VWV Responded
After being notified that some of our portfolio companies were exposed to the crisis, members of VWV met on Saturday, March 11 to figure out what to do. We decided to take the following measures:
Reach out to all our advisors and Investment Committee members for advice and resources. We knew that many people in our network—VCs and founders alike—were dealing with the same crisis, so we wanted to find out how to best approach this dynamic situation as student investors. Special thanks to Troy Henikoff, Zach Aarons, Todd Markson, Ashley Aydin, and Richard Lee for their great input!
Email all our portfolio companies to figure out exposure. This was a time where transparency was paramount, and we had to know how much of our founders’ funds were at risk and which resources could be most helpful for them.
Send founders our compiled resources. We quickly put together a Notion doc with all the resources and advice that we received from our advisors. (Note: the information in this doc was pertinent for the situation two weeks ago, but is no longer applicable as of now.)
📜What We Learned
While the SVB crisis seems to be mostly behind us, there was a lot to learn from this experience. Here were some of the lessons that our advisors, Investment Committee members, and mentors shared with us:
Have diversified banking relationships. Bank with tech banks, mega-banks, as well as local community banks (also a great way to support your local business), because you never know when a bank run will happen. Back in the day, people used to literally run into the bank branch to retrieve their money! Nowadays, one damn tweet and it’s all over.
Having good lawyers is crucial. The SVB collapse was an unfortunate example of how bad lawyering can be your undoing when you least expect it. As a banking customer, make sure your loan/equity documents contemplate a situation where something like what happened to SVB happens to your bank. Read the documents before you sign everything—just because a document is fancy doesn’t mean it is well drafted.
Contemplate your mortality as a company. All companies, even the ones that seem immortal, don’t last forever. Startups and VCs alike were given a rude awakening when SVB, one of the most trusted institutions in the startup ecosystem, collapsed within 48 hours. Many depositors spent the weekend wondering if they will follow suit and die out as well.
Moments of crises reveal character. There are two types of VCs: those who worked closely with their portfolio companies over the weekend to weather the storm and those who didn’t care. Diligence can go both ways, and startups should start asking their prospective investors how they supported their portfolio companies amid the SVB crisis.
We have not seen the end of it. While many depositors at SVB got their money back earlier last week, the crisis is not over: First Republic is still treading water, Signature Bank was seized by the government shortly after SVB’s collapse, and Credit Suisse is in the process of being taken over by UBS. We believe that there will be a fork later down the road that will lead to new regulations and uncertain outcomes. There is a good reason that banking activity was curtailed after 2008—similarly, the banking industry will go back to a certain level of regulation and government management.
Overall, everyone in the startup world has learned a lot and been humbled by the SVB saga. Most importantly, we all learned a painful and emotional lesson: SVB was not the first and will not be the last financial institution to collapse. We hope these takeaways can strike a chord with both investors and founders and inform how we all make decisions and manage relationships down the line.
A huge Thank You to Troy Henikoff, Bob Place, Zach Aarons, Amy Wolf, Ashley Aydin, and Todd Markson for your input.
What we’re consuming in Venture
🌎Technology over the long run: Zoom out to see how dramatically the world can change within a lifetime
🐳VC: An American History by Tom Nicholas: A super cool book on the history of VC, with an interesting analysis on the similarities between modern-day VC and whaling ventures in 19th century New England.
💪"The Power Law: Venture Capital and the Making of the New Future" by Sebastian Mallaby, Will Damron, et al: An insight into the extreme ratio of success and failure, that is the power law that drives the VC business, all of Silicon Valley, the wider tech sector, and, by extension, the world.
🎙️This Week in Startups: A podcast by Jason Calacanis where he talks startups, tech, markets, media, and all the hottest topics in business and technology.
Opportunities
🎤 Apply to Pitch@Brown: The Brown Entrepreneurship Program’s Pitch@Brown competition is now accepting applications from students of all grades. Pitch@Brown is a two-day startup pitch contest where students in teams compete against each other to see who can create and pitch the most innovative business idea to a panel of judges. This event offers access to guest speakers, networking with top firms, and a chance to win a cash prize of $1,000!
Breakfast, lunch, and merch will be provided. Apply by Sunday, April 9th to be considered.
🏆 Sign up here.
That’s it for this week, feel free to email me at zyn_yee_ang@brown.edu with any inquiries!
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Twitter: @VanWickleV