> SVB is the bank of choice for nearly half of all US venture-backed startups
Why? What did SVB provide that Citibank, JP Morgan, Wells Fargo, Bank of America, etc. not provide?
Why? What did SVB provide that Citibank, JP Morgan, Wells Fargo, Bank of America, etc. not provide?
When you are a startup, a typical model is you deposit $2mm or $4mm or whatever of VC money and spend it down. You are a brand new company with no income and a bunch of money. You trip all their fraud flags, and all their models for credit are based on income, age of account, etc.
Payments to vendors would constantly get frozen, incoming wire transfers get flagged. Getting a cash-backed company credit card wasn't possible. It has improved slightly recently, but still very tough.
Overall, I'd say very few startups use the big banks today. If they're not with SVB, they're with other mid-size regional banks.
> More importantly, SVB was particularly flexible about lending tech startups money even though they didn’t have free cash flow (because tech startups usually lose money at the beginning of their lives) or much in the way of assets (because startups often don’t have much more than the brains of their founders and early employees when they launch). “If you are a startup company, you don’t look like a normal business,” says Sean Byrnes, a startup founder and investor who says he has used SVB for years. “Most banks, if you go to them and ask for a loan, they’ll laugh at you.” SVB was also often willing to work with founders who weren’t US citizens, which would be an obstacle for more traditional banks.
If I understand this correctly, SVB will be bought by a larger fish, and we’re back to business as usual, albeit more consolidated (enormously bad, imo, but a different bad).
In hindsight, it would have been better to keep cash. Or even better to find an asset inversely correlated with interest rates, even if it would have earned less money when rates were low.
It was a lack of beta that killed them, and while there doesn’t seem to have been wrongdoing, it sure looks like a classic “failed to understand their own business” mistake.
The bank would still exist, and just have been less profitable in previous years, if they had hedged against interest rate increases.
> inversely correlated with interest rates, even if it would have earned less money when rates were low.
I'm not too savvy but isn't that what I-series bonds are for?
Oh what a 2010 thing to say!
2023 startups lose money for all their lives. SVB was running a bad business banking almost exclusively to startups that have never had positive cash flow.
To me this is classic SV echo chamber thinking. There’s a reason traditional banks are more wary of lending to start-ups and it isn’t because they hate money.
It’s not that they catered to high risk clients it’s that they understood that the definition of risk was not universal. What may look risky to Bank of America isn’t actually more risky if you know the nuances of startups.
Or put another way, the odds that a new commercial Bank of America company goes on to become a 10 billion dollar company is probably 1 in a billion. The odds that an SVB customer would go on to become one is probably 1 in a thousand.
But the important thing is that SVB didn’t fail because of bad credit or bad loans - something you’d expect from riskier clients. SVB’s problem was that they had more deposits and cash than they could handle, they literally had too much money and the fed has raised interest rates too fast for them to absorb.
Do you know why couldn't they handle it? Banks usually have to manage their Credit, Interest Rate, Liquidity, Price, Foreign Exchange, Transaction, Compliance, Strategic and Reputation risk. And then from an investment POV, all investors have to handle portfolio risk. So I wonder whether SVB just wasn't sophisticated enough to handle these risks.
If they're the 16th largest bank in the US, it seems to me that they should have had the chops to "handle" large amounts of cash...
1. way more deposits than they historically managed, with no-where good to put it.
2. failure to do what banks do, which is arbitrage their position, putting a huge amount into long-term low interest bonds
3. looking for loopholes in liquidity & stress tests, and reporting exemptions that might have raised earlier alarms
#3 is inexecusable but the other points are in the "bad at your job" category.
It took two factors.
3x the money you manage in 2021 specifically
Have well networked clients that carry out a bank run together.
That’s just not how America has worked for a long time now, and I don’t think most folks would describe American businesses as any riskier than in say Serbia.
This isn’t a “bad guy” story, as far as I can tell.
Funny how tables have turned recently. Now it's other way around more often. If your start up is actually manufacturing something, a physical item, the banks deem the business as non traditional... Go figure...
I agree. There are no bad guys here. There's just a bank that took and chance and it bit them.
It is about having a company checking account for payroll and somewhere your investors can put money.
The big banks refused to even open an account for my startup. Our business model is incredibly common but due to it being "fintech" we could not open an account.
SVB still had a decent amount if KYC stuff and paperwork but would allow us to operate.
Another banking platform we used literally reversed the incoming wire from our lead seed investor, even though i called the bank before telling them to expect a large deposit.
SVB was great to work with. The people are fantastic. The big banks on the other hand...
So the argument that by the mere fact SVB banked startups as customers was more risky than big banks is not quite precisely right, as big banks have business accounts and plenty of startup customers too. But as other comments have mentioned things were often made quite hard for them there, and SVB was the better product to startups...as just a literal checking account for day to day operations.
The giant risk management failure was in how SVB managed the deposits and indeed the mismatch of the assets it held against them. We all know the long dated UST issue now. Their deposits ballooned so quickly over the last 18mo, the mistake was to put them into such long locked up bonds immediately. A better approach could have been to assume that money could "come out as fast as it came in", and to have held shorter duration securities, shorter maturity bonds, money market funds, repo market commercial paper etc. Then as the steady state pattern emerges post this influx of deposits, then make a better risk management based decision of what proportion to now put in longer dated assets, medium dated assets and shorter dated ones.
And above this specific risk, clearly in hindsight, there was an overall systematic risk in having a non-diversified customer base who all consume the same information sources, highly networked and correlated with each other in their behaviour.
I think from their perspective, they thought they understood tech better than other banks, so thought that they could better analyze the risk (thereby not misclassifying many companies as risky) and use that as a competitive advantage. Right now, it does not look like that part of their business model failed at all.
Just because one is conservative, does not automatically mean one is not taking on risk.
In banking, interest rate risk is the exposure of a bank’s current or future earnings and capital to adverse changes in market rates. If they put all their money into govt backed securities, they also took on portfolio risk.
Cash on hand would clearly help with a bank run and could be slowly invested in treasuries over a longer duration.
> Our business model is incredibly common but due to it being "fintech" we could not open an account.
what's the name of your startup?
> In many cases, startups exclusively banked with SVB because doing so was listed as a covenant of their debt!
> So CEOs across the tech sector on March 9 faced a hard choice: You can pull your deposits from the bank in order to save them, but then you would be in breach of covenant, and at risk of default on your venture debt. Of course, the alternative was that you risked losing everything if the bank failed. Many chose to hold tight as SVB’s outright failure seemed outlandish even a few short hours ago.
[this is a copy/paste of a comment I made on another thread]
Would it be fair to characterize most answers as a generally larger appetite for risk? Anybody familiar care to comment?