The fall of SVB and how I tried to save as many straps as I could | Hacker News Reader

The fall of SVB and how I tried to save as many straps as I could

startupdreams.substack.com

31 pointsgsibble78 comments

What is this post? Someone who can casually raise $300M in a weekend? Gets rescued by a government bailout and then said the whole experience is fun? Talks about trading deposits and making loans against them, asking startups to take a haircut while he profits? Is this what the startup universe is now about? Sometimes I feel like I'm in another universe.

It was incredibly fun and a wild experience. We also weren't going to make much profit. We were offering 90-95c on the dollar compared to 60-70 from banks and hedge funds. This was about saving companies and jobs. Thought I'd share.

How has the startup world devolved to the point that it's primarily about financial movements and shenanigans and not related to technology innovation? I feel we're so far past where technology innovation has come from, and now we simply trade startups as financial products.

I don't think it has. This was a once in a lifetime kind of thing. My other companies are all innovative technology companies, like you said.

> Iridium Development - Iridium Development focused on making revolutionary iPhone apps

> Distribute- Distribute aimed to be the Alibaba of the US, mostly with wholesale drop shipping.

> Materialist - an e-commerce solution, [...] trying to bring wholesale housing products to market.

> Dave - personal financial management app

> Vizit - Image Analytics

> txtsmarter - Communications Surveillance Service

We might have different opinions on what counts as "innovative" I guess.

I really don't think personal attacks are called for.

Only Iridium was my company, which built a pretty unique app that was featured in the App Store in its very first year (of the App Store).

You conveniently left out Omnivore.io, the only other company I built. Ask anyone in the restaurant industry in the US what it is.

All the rest were just employers.

edit: Since I can't reply below:

Omnivore was the first company that offered API access to over 80% of the installed point of sale systems in the US, including direct injection of web orders into the POS instead of needing a tablet next to the POS with manual order entry. We allowed over 1,000 partner companies to bring unique and innovative solutions to the restaurant space. Thanks for not reading my LinkedIN profile, just what sector my company was in.

Ah, sorry...

> Omnivore - PoS + hospitality services

Definitely haven't been done before, you got me there :)

> I really don't think personal attacks are called for.

I don't think it's a personal attack, you brought up "My other companies are all innovative technology companies" so I was curious to see what you consider "innovative", thought others might be curious too, so listed what I found here.

You don't think adding

> We might have different opinions on what counts as "innovative" I guess.

might have made it seem like you were doing more than "simply listing" what you found?

We might have differing opinions on what constitutes a personal attack, I guess.

Thank you.

> edit: Since I can't reply below:

For brand new comments that you want to comment on you want to click on the timestamp and comment from there. Otherwise you have to wait a couple of minutes.

Got it. Thanks.

Just want to say that as a startup founder, running tech companies for the past many decades, this post makes me sad, not grateful or joyous. It makes me feel like there's plenty of money on the sidelines to fund $300M+ at-a-whim larks to bail out Startup founders who are mostly going to go bust anyways (those are just the facts of startup life), but meanwhile startup founders outside of that bubble can't raise a penny and go bust / layoff anyways. Layoffs.fyi tracker hasn't been slowing down.

So it's just a feeling, but it's not of happiness - it's of profound sadness and disappointment.

Then you aren't getting the concept.

This isn't equity funding for a business idea. It's basically buying a claim on a bank in receivership. It doesn't matter if that claim is held by nextbigthing.com or Apple. Those claims are backed by SVB's portfolio of T-bonds and MBS so they are very solid. The benefit to users is acceleration of receipt and certainty. It's hardly a lark.

The OP was planning to target this offering to startups, which are only fraction of SVB's depositor base.

Someone saw their community in distress and thought to use their connections to put together a solution, for a modest profit. Sounds fine to me.

I understand the concept of this particular fund raise / action. I totally get it.

You don't understand my sadness. The money is there from wealthy individual investors to rescue SVB depositors who might miss a payroll or otherwise risk solvency, but it's not there to rescue other startups who are already going bust. Amazing that $300M just can appear like that over a weekend to save startups in one case, and yet doesn't exist in the other case. And it makes me sad. It's a feeling, and you might feel joy or even excitement. But I feel sadness, and that's just how I feel.

These seem to me very different cases but of course you have a right to your own take

Startups rely on a lot of infrastructure that society provides. Things like supply chains, energy grids, financial systems, and defense.

When the infrastructure we rely on functions well, our community can be ignorant to the fact that we are reliant on this infrastructure.

This past week we saw a breakdown in one of our critical inputs. As a result, you are now hearing stories from people that helped work to fix the problem at a layer in the stack we don't usually think about.

Think about this more as a glimpse into a technical domain that has always been there, but you are generally able to be gleefully ignorant about. It's interesting!

Thank you :)

now we simply trade startups as financial products

Suddenly it strikes me that "startups" could fill a similar finance niche in this decade as "subprime mortgages" (of mortgage backed securities) once did.

Only, the risk of subprime mortgages is knowable if you dig, whereas the risk of a startup is unknowable.

This might be very attractive if you're a financier trying to create the illusion of high-grade securities.

Bad news: Technology is so deeply embedded in society, now, that it invariably gets tied up in "financial movements and shenanigans", not to mention politics, sociology, ethics, and myriad other seemingly-unrelated topics.

This is what success looks like.

Because our society operates on money. The brilliant startup founder working on the next revolution in computing still needs to pay for breakfast, still needs to pay for drinks, still needs to make rent. Even if they don't pay out of their own pocket, there's money moving around somewhere. So when the money side has problems, thanks to the modern miracle of the Internet, you're gonna hear about the money side's problems. That doesn't mean the startup world's devolved, it just means that theres a big of problem on the money side of things. There was never a world where money wasn't involved in some way, even way back in the day when Apple started. They needed money to buy the parts to build the original Apple I and the money for that came from investors like Mike Markkula who was at Intel before he was at Apple. There is some cognitive dissonance that occurs when you realize your VC has investments in other companies that are very similar to yours, and that the money people are in it for the money, but that's nothing new.

The worst thing about this is how many comments I read saying that startups shouldn't have kept their payroll money in a bank in excess of $250k. When your startup is a handful of people, who's really got time to focus on that, unless what you're really focusing on is financial movements and shenanigans, to the detriment of technological innovation.

I think it's reasonable post

> Clearly shows the consequences of missing payments:

  > personal liabilities to directors/officers

> What a private sector solution could look like

> What were the alternatives (Hedge funds offering 60/70%)

> How quick this solution would be up and running

Maybe the author can add more details but it's interesting enough already

What details would you like to hear?

The only one I've been adding is that our terms were 90-95 cents on the dollar.

Since most of us don't know any HNW or UHNW individuals, what's the reality of what it's like to have a relationship with them? Do you call their assistant's assistant to schedule a phone call routed through a satellite phone? How does that conversation go? Do you causally bring up the need? "Hey, umm, can I borrow $3,000,000 for a couple days?" If the FDIC hadn't made depositors whole, would you just drive to the homes of UHNW individuals' living rooms and wait while they moved money via Venmo on their phone, like regular people, just with bigger numbers? And then, what would have been involved with the solution if it had needed to go live? A Excel/Google sheets with a bunch of rows on who's borrowing what, and where, and a room full of people texting around?

What's mundane and obvious to you, isn't necessarily for the rest of us.

if you read the post, this is not a loan for a couple of days

> Brian McDanial (fantastic attorney) at Wilson Sonsini figuring out exactly how to structure the fund

it's a gamble/bet that the deposits will either be made whole or paid more than they're offering (90-95%)

But with such a nice offer, the fund was most likely to make little to no profit so it would be more like "public-benefit corporation"

----

If you're around the right circle - founders/VC doing capital raising you probably know a few people who often invest or may have "exited" already

so you can just get in touch " would you like to save SV startups?

I'm planning to make a fund that will buy SVB deposits at 90% or more from companies to ensure they have enough liquidity for payroll and other operational costs

This is mainly in the public interest by helping startups survive through the whole ordeal until something is sorted out so unlikely you'd make a profit here

Pretty much exactly this.

Where and how do you have contacts where you can make a weekend call to get $300M in commitments?

I kind of feel like "Shame it wasn't needed, it would have been fun!" was kind of misaligned with the "I was acting in good faith unlike the other vultures" vibe he was trying to sell.

"Man I wasted a lot of effort but thank goodness it wasn't needed after all!" is the thing that would have rung true to the "good faith" vibe.

I am glad it wasn't needed. I was also offering significantly better terms and not even making much profit at all.

So what were the terms? Sort of pointless to write an article and say you were the good guy without saying.

We were negotiating over 90-95c on the dollar while hedge funds and banks were offering 60-70.

I have no doubt. I was just bringing up your choice of language.

You would have been a hero. It's disappointing when an amazing idea, thrillingly fast and good execution, and the dream of being like a more ethical JP Morgan to the startup world falls through. I can imagine what it might have been like, the ideas and feelings you had must have been even stronger.

Had precisely that vibe to me.

I do think that marshaling the self-motivation required to move fast and solve problems is a trait that not many people have. It requires a single-minded focus and probably raises the adrenaline levels for all involved.

Unfortunately, many times the effort cannot be put to good use (like here) or worse causes harm to the primary actor(s).

In my books, anyone who moves to make or tries to solve problems deserves respect, irrespective of the outcome.

There are too few of these people in the world.

> There are too few of these people in the world.

Many, maybe most, of us don't have either the skills, connections, or the free time necessary to do it in. I think this is what the OP meant by "once in a lifetime opportunity", in that it is once in his lifetime.

That was what I meant.

That's a pretty big compliment! Thank you!

Reading this post makes me realize one thing:

The true insurance on funds above 250k for those who were banking with SVB has always been living and working in Silicon Valley.

Even if FDIC had decided not to intervene there were at least 2 dozens private players ready to fit the bill. It would have been OP consortium at 95%, or the Hedge Funds at 70%, or JPMorgan at 67% or Wells Fargo at 65%.

A regional bank blows up in Mississipi or an Agricultural Bank in Iowa and nobody gives a shit. Public or private , everything above 250k is wiped out.

And many millionaires are having a relief because they got 100% via FDIC as opposed to 95% from OP coalition or 70% from the Hedge Funds.

I suspect your customer use cases would have begun in Week 2. Most depositors would be able to cover payroll with the first fraction returned in the early days. Then it's a question of managing cash flow within the tranches doled out by the FDIC as wind-down proceeded. That's when the companies that had cash needs in excess of the wind-down would emerge.

At which point I think you'd find that you could no longer buy at 90%. That number applies to the WHOLE deposit balance; but after the FDIC has paid out the initial (say) 30% to 50%, the deposit to asset ratio shrinks considerably. You might loan at that rate, but then you're ultimately secured by the depositor's corporate credit.

The story would be even more compelling if the author referred to himself in the third person.

Interesting observation. Thanks.

This is awesome. Someone stepping up to the plate to solve the problem without asking the public to bail out the richest 1%.

Real leadership.

Too bad the whiners got rewarded.

Thank you :) That was the idea.

"even trigger personal liability of directors and officers for payment" How could this happen?

There is a specific california law which pierces the corporate veil specifically for unpaid wages.

https://hunterpylelaw.com/2021/02/alter-ego-piercing-the-cor...

A bank going belly up and temporarily eating deposits of other corporations doesn't strike me as abusive on the part of the depositing corporations. I doubt the corporate veil would be pierced until the business itself goes bust without paying wages. I'm not any kind of lawyer though.

My attorneys made it 100% clear that missing payroll would make the officers and directors liable immediately in this situation. It was news to a lot of the companies we talked to.

What about the investors, who are also owners, and probably pressured the company to take on debt from SVB?

I assume the officers are liable as shareholders? And by the time this liability was pursued in court the SVB replacement should be working well enough to pay everyone. Unless the regulatory agency can demand immediate payment from the accounts of the officers and directors.

Officers are liable as managers basically. Same as directors. Similar to fiduciary duty.

If there are 20m in unpaid wage claims and they see that there were 20m in bonuses paid out in the last 30/60/90/whatever days, I think a decent prosecutor could make an argument that it abuses the corporate liability shield to pay yourself bonuses when you could have or should have known that the company was not healthy.

Even if you can't make the argument that they could or should have known that the company was unhealthy, I think the argument can be made that the individuals who are missing base salary deserve to have that paid even if it requires clawing back some extraordinary compensation for executives.

People don't like not being paid for work done in the past so long ago they asked politicians to make laws with the aim of deterring wage theft. A good way to create a strong deterrent is to put managers and owners in jail or take their personal money. Absent that bad actors would run up unpaid wage bills then close the corporate entity and escape undeterred.

I think this was a common problem in Hollywood

Kind of why I mentioned it. Most CEOs and Directors don't know they are personally liable if wages aren't paid.

Not a lawyer but this always struck me as exaggerated.

One, the FDIC was always going to provide a meaningful fraction in days which would have covered payroll. Employees and vendors are going to understand a few days delay because of a bank failure. It's embarrassing and bad but not existential.

Two, I expect the law is written such that a payment failure for liquidity induced bankruptcy isn't going to reach directors/officers. It's California so who knows but a law that did would be very badly written.

Why guess, we have the Internet these days.

https://leginfo.legislature.ca.gov/faces/codes_displaySectio....

Or for some analysis

https://www.fennemorelaw.com/california-court-clarifies-pers...

Since the regulations "changed" to enable the bailout, you may have a good case to sue the Fed and the Treasury for some portion of your expected profits, no?

Ha! Now there's an idea.

In a real bailout wouldn't SVB continue to exist?

My POV too. I was listening to Bloomberg radio yesterday and the people were all talking about if this is a bailout, and if voters would see it as a bailout.

I thought the reason people were pissed at the 2008 bailouts because the actual too-big-to-fail corporations (less Lehman and WaMu) were enabled to continue existing, with their shareholders still owning part of the corporations.

Here it's only the depositors who are being made whole.

> I thought the reason people were pissed at the 2008 bailouts because the actual too-big-to-fail corporations (less Lehman and WaMu) were enabled to continue existing, with their shareholders still owning part of the corporations.

Struggling to take you in good faith, you're wrong either way. Working people were pissed about the 2008 bailout because they were left empty-handed while Wall Street banks and CEOs got bailed out. Your comparison falls flat because there are no working people involved in the SVB situation.

Well sure, of course. I don't understand why you are "struggling" to take me in good faith because I left out the part about struggling people. I don't remember it off the top of my head because my financial situation at the time was such that I was so low I didn't have to worry about losing a home or other assets (all I had was a really cheap car, a low end computer, my bed and couch were inflatable).

> Your comparison falls flat because there are no working people involved in the SVB situation.

Sure there are plenty of people dependent on SVB deposits for their paychecks. And it sucks to be an SVB employee. But the shareholders are effectively wiped out, unless and until SVB's assets are eventually sold for more than its liabilities.

You can think whatever you want, but regular working American people, in aggregate, do not consider themselves as having anything at all in common with anyone remotely associated with Silicon Valley startups, which are universally despised by the American people at large. The fact that nobody in Silicon Valley has ever appeared to care what they think until now makes it even worse. These sentiments are so entrenched that this will not change for at least a few generations in the best case. It's just way too late.

Being pissed off or feeling despite takes more effort than just not caring.

I'm annoyed at the support for Carnival and other cruise lines during the early days of the COVID pandemic. I even sent an email (which was answered) to the local Fed branch saying that they should backstop consumer credit card debt the way they were backstopping corporate loans.

A "bailout" is a mitigation of consequences, generally supported by an injection of cash or a guarantee thereof. It can apply to any class of interests in an enterprise. "Shareholders were bailed", "bondholders were bailed out", "depositors were bailed" -- these are all possible sentences.

Shareholder bailouts are the worst but there are negative consequences to all cases.

And where does the government get money from?

In this case, from assessments on other banks insured by the FDIC.

It can be reasonably presumed that these costs, like any other business cost, will somehow be passed on to those banks' customers.

That's what I was implying.

sorry

The man built a plan to buy other people's money at a discount while they're in distress. He can frame it as pro-socially as he wants, but the taxpayer is absolutely not on the hook for that kind of vulture hedge fund shit.

I'm definitely not saying I need a bailout. And we were offering 90-95 cents on the dollar while banks and hedge funds were offering 60-70.

Good! That'd keep most businesses in one piece.

That was our goal. Not to make a profit but to save the ecosystem.

Regulations didn't change. The fund they tapped to protect all depositors exists since the financial crisis of 2008. To avoid another global meltdown.

I've read that what changed was the definition of "systemically important" which allowed access to that fund. I put quotes around "changed" for that reason.

However; if FDIC insurance is not now effectively unlimited, if the next bank that folds get the old limits imposed, then there's going to be some real shouting. And this method of raising those limits sucks and will almost certainly see court.

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