SPEAKER_00: okay everybody welcome to a live emergency pod if you're not following us on youtube you could have listened to this live this came out shortly after we taped it on youtube youtube.com this week in no spaces no dashes we'll get you to our channel hit the subscribe button next to the subscribe button is a bell if you click the bell if i go live you'll get an alert just to give you a fair warning we don't go live that often like once a week right now and today i'm going to talk a little bit about silicon valley bank shutting down yes that's right if you're catching up to the story this is the fastest moving story i've seen in the history of silicon valley and this could be one of the most impactful stories in the history of silicon valley because so many successful companies and successful venture firms are being impacted by this shutdown and i have not seen this much chaos in silicon valley since the 2008 financial crisis and the dot-com crisis now is it going to be as bad maybe maybe not i think there's an 80 or 90 chance that silicon valley bank is rescued this weekend bought by goldman sachs jp morgan somebody and that everything is uh back to normal within a couple of days or weeks and everybody's money in the bank is taken care of there is a non-zero chance and i'm going to just pick a number here 10 20 chance that this could have a severe impact and people will not have access to the funds they have on deposit and that's going to cause a lot of second and third stream or second and third order uh downstream impacts okay so we have 650 people watching this live please give a thumbs up if the thumbs up gets to 50 of the number of people watching live then this will uh trend and more people will get to see it and i've got a lot of important information for founders so uh again the fdic has shut down silicon valley bank that happened this morning for context um silicon valley bank svb i'll refer to it as we go

SPEAKER_07: forward here um they claim half of all us-backed uh tech and life science companies bank with them

SPEAKER_00: and that's true uh every board i'm on yes so uh for context silicon valley bank claims that nearly half of all us venture-backed tech and life science companies bank with them so if you have received money from venture capitalists you're probably uh flip a coin going to be using silicon valley bank you might be using first republic or other banks and i've had a wonderful experience being a customer of silicon valley bank over the years i have been a customer of theirs first republics and many other banks in fact i got taught early in my career by elliot cook who was like my chief operating officer and he was much older than me when i first started having millions of dollars in the bank for different businesses he would always keep it in three different accounts and i said why is that he said one case of a bank run or something we can't access the money it's taken 30 years for me to realize how right elliot cook was i had never seen this happen before where people could not get access to cash they had in a super credible bank and so this is black swan territory of course a bank run you've all heard of if you've seen it's a wonderful life you've seen a bank run before in a movie and so this is so fast moving we just have to recap really quick 36 hours ago silicon valley bank uh was down 60 percent their stock and that was because um they had a bunch of news that they were going to um rebalance right the ceo had announced that they would rebalance their balance sheet basically and that got everybody really interested now there had been some rumblings before this um quietly that silicon valley bank uh had some balance sheet issues and we'll get into those in a moment but uh trading was halted today and today's friday for those of you listening on saturday due to pending news in quotes and around noon eastern the uh federal deposit insurance corporation shut down silicon valley bank and they

SPEAKER_06: basically took it over and this means they went from trading at a 16 billion market cap to being

SPEAKER_00: shut down entirely in two days so just let that sink in a 16 billion company that services half of the venture-backed companies is insolvent it's gone uh and two days ago it was worth 16 billion this is where uh the rubber hits the road all insured depositors and this came from the fdic's press release today all insured depositors will have full access to their insured deposits no later than monday morning okay that sounds great march 13 2023 if you're a startup founder you're like oh i have access but insured deposits is the key word in that sentence the qualifier the fdic will pay uninsured depositors and advance dividend within the next week okay wait uninsured depositors and this is where when you see fdic insured in commercials in fact i've read silicon valley bank first republic and countless other commercials on this very podcast it always ends with that little jingle hey fdic insured so you know your money or some portion of is insured as the fdic sells the assets up and then this is where it gets really critical uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds a receivership certificate okay this sounds like a participation certificate this does not sound like money and here is the kicker as the fdic sells the assets of silicon valley bank future dividend payments may be made to uninsured depositors okay if you're a

SPEAKER_07: venture-backed company the average venture-backed deal the minimum venture-backed deal is typically has two commas in it right a million dollars or more seed investors might put in 250 but when you raise venture capital you know series a on average 5 10 million bucks and sometimes in this hot market it was even more so what this means in just simple plain english as i'm reading it and as you could probably tell if you're an svb client you're one of these startups you're gonna get access to your insured funds on monday fantastic but that's only 250 000 that's the limit of fdic insurance for businesses the rest of the money you're getting an iou a receivership certificate i'm reading that as an iou how long does it take to liquidate a company it becomes the key question well um if somebody buys silicon valley bank this weekend and there's been a ton of speculation about this will goldman jp

SPEAKER_00: morgan whoever come in and buy this very elite crown jewel of silicon valley of banks people really do think this is a real asset right silicon valley bank has a very good reputation and an incredible group of uh customers venture capitalists are also equally exposed to silicon valley bank it is the bank of record not just for founders in silicon valley who are venture backed but the venture capitalists who invest in them and so if this became a large unwind where they were selling assets you know from the desks and office buildings the wine collection they have a famously silicon valley bank service the the wineries um up in napa and sonoma you know if they're liquidating all this stuff how long does it

SPEAKER_07: take now of course there's going to be treasuries equities there's going to be all kinds of loans and this is where unpacking this if it has to occur through the fdic and a and a liquidation

SPEAKER_00: this could take years and could be incredibly painful if somebody comes in a white queen or a white knight comes in and just buys this thing well then everybody should have their money up and running very quickly so i'm hoping that one of two things happens here a large bank with a big balance sheet buys it and make sure that everybody who has cash in there uh has access to it or two uh the government comes in and backstops this now that's quite controversial should the government come in and backstop this i believe that the government should backstop many businesses uh that have second and third order impacts uh so if an airline goes out of business and that basically shuts down atlanta because that's their hub or southwest airlines operates out of what phoenix or something or arizona and that shuts down the whole hub and it impacts all these other businesses and jobs i don't have a problem with those backstops occurring by the government i think it's a good use of government

SPEAKER_07: funds of our funds as taxpayers but it has to be under the condition that it is the senior debt and that they get interest or an equity kicker so if the government does take the risk of bailing

SPEAKER_00: out silicon valley bank or an airline or whatever needs to be bailed out in the world because we think it's a good idea to bail it out because there'll be second and third order effects that we can't even anticipate if that does happen i think they should get paid off like we do as venture capitalists

SPEAKER_07: unlimited upside they get to own 10 or 20 of the company or they get double their money back minimum over 10 years make it i don't want to say painful but make the risk the government has taken by

SPEAKER_00: backstopping something like silicon valley bank or an airline or the car industry the automotive

SPEAKER_07: industry make it so the public gets a big payday in fact all of those obama era um loans that were

SPEAKER_06: given to electric vehicles uh companies like tesla fisker uh there was a solera i think like an energy company some of those didn't work some of them got paid back with interest like in the case of tesla

SPEAKER_00: and i think not fisker so uh we are going to have a crazy weekend i do think majority chance this weekend somebody will buy silicon valley bank that's a guess on my part hopefully it's an educated guess i don't exactly have inside information but i'm on a lot of group chats with a lot of people speculating so and the people who are in my circle are you know in and around the industry right there their customers are silicon valley bank they might have their kids soccer game might be with silicon valley bank executives so i i have no idea of knowing you know uh if these rumors are true or the back channel is true but i suspect that somebody will want to buy this and this is a defcon one type

SPEAKER_07: situation why well if your startup can only take out 250 and you have 10 20 100 million dollars in that bank account you're not going to make payroll you might have 250 or a million in your bank account

SPEAKER_06: typically that's what um folks will do they'll have money at silicon valley bank they might sweep a million dollars automatically so anytime it dips below a million or 500 000 whatever you set in your

SPEAKER_00: checking account or your you know accounts payable payroll account it gets swept put into that account and then goes out if that number goes under 500 it replenishes 500 on top of it right you've probably done this in your own personal life with your personal bank accounts uh perhaps instead of having to

SPEAKER_07: manually do it i think there are many companies out there could be dozens to hundreds uh and they will have collectively tens of thousands of employees who are at risk of not making payroll in the next two weeks to 10 weeks and maybe on average it's four weeks and that is uh what scares me most is that there are companies that were solvent right we spent the last 18 months no five quarters the last five quarters uh 15 months working out in our portfolios in these investments all of the companies that weren't going to make it or needed to cut half their staffs needed to raise emergency funding bridge rounds all of that was for the companies that were broken that didn't have product market fit that were overspending right then we had a group of companies that had either been profitable had 50 months of runway had raised money at the right time and they were sitting pretty with huge bank accounts filled with cash that they now can't access so now they get put in the bucket of troubled startups so if 50 of venture-backed startups are in this bucket and i would say 50 of startups were having a problem that means a full 75 of startups could be in for a world of pain the 50 that didn't have product market fit plus another 25 that were doing just fine but are part of the 50 that were exposed to

SPEAKER_00: silicon valley banks implosion here so um let me give you a little background uh on and then i'll get to what i think founders should be doing this weekend and uh maybe i'll take questions as well uh somewhere in this should i take some questions now maybe i'll pause there nick and we have two more segments to go where i'm going to give you how this happened how silicon valley got so big and then what founders should do so let's just pause levi asked what are your thoughts on emergency funding sources accelerated recaps etc okay great question going to your venture capitalists and

SPEAKER_07: saying i need emergency funding there is a possibility i don't know if it's a probability that they had their lp funds their investment dollars at silicon valley bank this morning i got an email

SPEAKER_00: from a fund i'm an lp in and they said we had x millions of dollars in silicon valley bank we weren't able to get it out of silicon valley bank yesterday we tried we're going to get 250 of that which is a fraction of the amount of money the millions of dollars they have there and now that venture firm cannot fund their companies so let's just pause there and think about what's going to happen a company that has silicon valley bank uh as their treasury can't get access and can't make payroll

SPEAKER_07: their lead vc is also on silicon valley bank and can't get access this money now what happens now that founder would have to go get emergency funds from another venture capital firm those firms are already dealing with the mess of startups during this correction and this is why i believe we're in

SPEAKER_00: the early stages of a contagion or potentially a contagion and if this becomes an acute contagion

SPEAKER_07: where venture where many venture funds are frozen other venture funds don't want to solve their

SPEAKER_00: problems and there's a bunch of problems and people get laid off this could have cascading effects and so i would be lying if i wasn't telling you that this is terrifying um this is a terrifying situation now i do think it's an 80 or 90 chance that somebody buys it or the government comes in and backstops this if that doesn't happen i can tell you in all honesty i would not lie to you i am terrified i am terrified that this is a black swan contagion like effect that could happen now it's not going to affect people who are not in the tech industry largely that would be like a third order fourth order kind of impact like oh people who go to our private school are from silicon valley they got laid off now they can't afford private school tuition now that sounds crazy right i'm on the board of a private school literally uh during the great recession and during other times that can happen you will have parents who've been laid off say hey i'm going to the school i got laid off i and so now you have schools being private schools being impacted for it you could have mortgages you could have um you know people who are domestic staff or work at a small business that's funded by somebody who works in tech so those uh emergency funding sources don't exist levi if this thing goes um the contagion route i think then it's game over i think it's every man woman and startup for themselves and that's scary i mean that is shutdown central uh nick t nick asks how does silicon valley bank affect founders trying to raise seed rounds right now i think this is going to be a huge distraction and i think any funding that was going to occur or that any discussions that were going on are frozen for 60 days yeah because i have multiple deals i'm working on now i am getting pulled out of those deals to deal with my existing portfolio companies what would you do if you were me

SPEAKER_07: try to save an existing strong startup company where i've already made the bet or make another bet so just think that through for a second obviously i have to take care of my portfolio companies first before i do new investments now we have multiple investments that we're in the process

SPEAKER_00: of working on we're going to keep working on them but my time might get pulled away and if this were to become acute yes i might have to stop investing in startups for 30 or 60 days i hope that doesn't happen but i think a lot of vcs when these kind of things happen they do stop meetings with founders and they stop investing all right let's get back to the docket here and go through how we got here it's very simple 2020 and 2021 were the most ridiculous investment year since the dot-com era these were record years not just for startups raising money but also for vcs why well there was a ton of liquidity sloshing around everybody was making money and we were in a zero interest rate environment so money was looking for projects to back whether you know it was crazy things like nfts and crypto or totally legitimate sas businesses that just became uh worth more money they got higher multiples than they should have and lps were making money so of course uh vcs were making money the party was in full swing vcs raised larger funds because their lps are making larger returns and everybody's making bigger bets and that's logical but it obviously got overheated according to pitch book and the nvca 2023 q4 was u.s venture monitor uh that's the kind of the gold standard for fundraising data according to that in 2021 vcs raised a record 154 billion dollars from lps that's up 65 percent over 2020 2020 was also a record year so we had record year on record year and if you look at this chart it just tells the story you know you you see 2015 to 2019 hey we're cooking with oil this the funds are getting larger and

SPEAKER_07: larger especially compared to the amounts raised in 2012 and 2013. what was one of the big reasons uh people were raising all this money well we had a talent war didn't we what caused the talent war low interest rate environment caused google and amazon and then some of the big private companies like

SPEAKER_00: stripe and uber uh and the facebook's to all which obviously was public to double and triple their staffs and the size of their companies in two or three years so you have a talent war going on then what do startups do startups try to compete with 400 800 000 offers that google or meta or amazon are giving to employees so uh they have to raise more money so they're coming to venture capital saying hey you know we would normally raise three million but we really need ten because everybody's salary is

SPEAKER_07: triple what it used to be so this graph you're seeing here is why people started getting paid so much money in tech all of these systems are not independent of each other they form a giant um

SPEAKER_00: super storm these are multiple factors creating an environment low interest rates a talent war lps having amazing exits and then people putting more money to work vcs being more ambitious saying hey

SPEAKER_07: maybe i'll raise a larger fund maybe i'll raise a fund every two years instead of every four maybe i'll start a crypto fund on the side maybe i'll start um a vr fund right everybody got frisky everybody got aggressive that's great for society um it's great that we're making all these investments these are small numbers when compared to the overall economy obviously um but this uh can have

SPEAKER_00: really weird impacts so let's get into what those impacts have been all of that money raised resulted in

SPEAKER_19: a record 344 billion dollars in capital from vcs going into startups in 2021 so as the amount of money

SPEAKER_00: being raised happens vcs are like you know what instead of you raising a seed round why don't we just have you go straight to a or instead of you raising a series b when you get to five million dollars in revenue let's do it when you're at two it used to be i would send a vc a company when they had two or three million dollars in revenue to get their series a then i saw vcs investing in series a's 10 million dollars at a 40 million dollar post a 50 million dollar post for 20 25 of the company

SPEAKER_07: before the company really had product market fit and when you do that weird things happen people start hiring a bunch of people before they have product market fit they get distracted the capital equals distraction and this is why you hear vcs saying like raise what you need raise 24 months of capital

SPEAKER_00: 18 months of capital you don't need five years of capital it's going to distract you right um and that great distraction that occurred and that lack of focus on efficiency and getting fit as brad gerstner would say or managers managing managers manage managers as zuckerberg would say all of that led

SPEAKER_07: to a lack of focus when you have a lack of focus you don't have real revenues underpinning these valuations so if you have a high valuation a high a high burn rate and low product market fit and low revenue there's a big gap and when the market changes like it did during this um what i'll call the speculative asset bubble bursting when the speculative asset bubble bursted people said you know what your company's actually worth a lot less and then you're free-falling between where your company was valued uh and what the reality is and man that could be a large large drop for some companies

SPEAKER_00: some companies were being valued as series b companies at 100 million dollars before they had product market fit before they actually had a product that worked so now you're plowing money

SPEAKER_07: into a product that's not really uh doesn't have what we call market pull in the industry it's getting

SPEAKER_00: pulled along uh and so that is another very dangerous thing that that's what we've been sorting out the last year so now as we were sorting out those problems now we have this a lot of startups were overfunded with a lot of capital in a short amount of time a lot of vcs raised too many funds you might have seen founders fund just took the size of their fund and said we're going to cut they didn't give the money back they just resized their fund to half the size um and all of this

SPEAKER_07: created a ton of new clients for silicon valley bank and very large deposits at silicon valley bank those customers were putting large amounts and here's the stat to prove it silicon valley banks deposits jumped from 61.8 billion at the end of 2019 and this is staggering to 189 billion by the end of 2019 so i'm sorry silicon valley banks deposits jumped from 61.8 billion let's call it 62 billion at the end of 2019 at the end of 2021 two years later they had 189 billion dollars that's a 3x increase in deposits in two years in other words silicon valley bank is now sitting on a large amount of capital so uh they don't have they have to take that money uh and they have to when they have that

SPEAKER_06: amount of cash they build a loan book uh and i'm no expert on this uh and you know we'll we'll talk

SPEAKER_00: about on the all-in pod as well so you get a back-to-back an emergency this week in startups and you'll have

SPEAKER_22: a conversation with the besties talking about this but they weren't able to build their loan book to

SPEAKER_00: generate all those favor favorable yields right that's what a bank does they have a bunch of cash they loan it out and they try to balance those things just like a sports book does i just realized in some ways um so instead they purchased over 80 billion dollars in mortgage-backed securities mbs

SPEAKER_07: like u.s treasuries now these are considered the safest one of the safest places to put your money um so they bought u.s treasuries and as a reward for buying the safest uh thing you could imagine or one of the safest things i mean i guess gold or cash maybe would be safer they bought u.s treasuries

SPEAKER_00: these were not crazy trades where they were buying you know there are no shares or putting their money into peloton or something they they did not jump the fence and do anything crazy with the money

SPEAKER_07: they put it into u.s treasuries and they bought long duration ones at low interest rates and they did this during a low interest rate environment remember we said the the zero interest rate or close to zero interest rate environment created this problem okay and so they bought these and then you know what happened the fed raised rates at a faster pace than anybody could ever have imagined right remember in 2022 they did the 25 the 50 75 75 all of that i don't even it was so many rates i can't even remember

SPEAKER_00: i used to have it committed to memory each of the step ups um now when you see the step ups it's like a little jagged it's parabolic in a way right it's going straight up to uh you know where we think the the actual uh stasis point or where we'll stay for a little while will be 5.x or maybe even 6.x

SPEAKER_07: so when the fed raised those rates those treasuries they declined in value on paper right now when you buy treasuries my understanding again i'm not a super expert on this if you hold them to maturity no problem but you can also trade those right so people will buy them but they would buy them at a discount because obviously you can buy ones with a four or five percent rate so why would you buy the ones with the low rate but and this and this should be no problem unless all of your clients right remember that 189 billion that's sitting there if they all decide to withdraw their funds quickly you may have to rebalance and that's what silicon valley bank was in the process of doing and when they do that those paper losses right those treasuries are worth less now because they're

SPEAKER_00: not as desirable but they would have been made whole if they were held you got to sell them and if you sell them and you start losing money oh my lord this can cause a big big problem because you've now

SPEAKER_06: locked in the losses and the losses were substantial and then people start to worry oh are they going to

SPEAKER_00: be able to pay out all their clients and that's where uh there's a really good um compound 248

SPEAKER_06: on twitter did a good explainer thread he said technically if all the depositors ask for their money back at once svb needs to sell those bonds at the mark to market value crystallizing what would have been a temporary loss and if those losses are big enough svb may not have enough money to pay out all depositors so fast forward to wednesday march 8th uh they announced that they uh silicon valley

SPEAKER_00: announces that they've sold basically all of its available for sales securities with the attention of reinvesting the proceeds basically they were rebalancing their balance sheet and um trying to get

SPEAKER_06: away from those long dated bonds and reuters noted they sold 21 billion dollars uh of its security portfolio which cnbc noted mostly consistent of u.s treasury bonds and all this will come out eventually um long story short that sale and we could probably describe it as a fire sale uh would have a post-tax loss of 1.8 billion in q1 the bank was trying to rework the balance sheet and that i think got everybody panicked so to offset that loss they also announced silicon valley bank that they would raise 2.25 billion uh by issuing shares uh and 500 billion was committed by general atlantic um with this

SPEAKER_00: announcement svb essentially hit the starters pistol for the bank run they basically told the market hey we got problems and that made everybody scared because everybody's been on edge because we've been trying to figure out how long is this going to be a hard landing a soft landing well if you show weakness

SPEAKER_07: then people are going to drop the stock the stock drops 60 percent now everybody's looking at this right and previously only a small number of people were watching this and of course vcs then tell all their portfolio companies to withdraw their money from silicon valley bank another group of vcs says

SPEAKER_00: silicon valley bank's been great to the community true statement why would you do that to them don't take your money out and now you have this basic prisoner's dilemma if you take your money out you're protected and you're protected your team your investors uh your founders your customers your clients all the stakeholders and shareholders in your company but you're not loyal to silicon valley bank if you leave it in silicon valley bank maybe you lose that money because you only have 250k in protection

SPEAKER_06: and most people would say well that's an edge case it's not going to happen i've never seen it happen in fact i had never seen it happen in my career into the great financial crisis um and i think everybody got belled out there and so uh from the information uh one of our favorite

SPEAKER_106: publications new york-based venture firm usv this week sent an email to founders advising them to

SPEAKER_06: only keep minimal funds in cash accounts at svb uh funds up to 250k uh from the usv email svb is in a

SPEAKER_00: severe cash crisis do not accept any offers from svb to keep your money there even if they dangle five

SPEAKER_06: percent interest rates in front of you union square ventures that's fred wilson's venture firm a friend of mine for a long time noted it had reached out to many of its portfolio companies early in the year saying it had expected such a situation according to bloomberg back in november green oaks capital told its portfolio founders to withdraw assets from svb so some people were kind of sensing this um and then via eric newcomer who's just on the show today or we taped yesterday came out today um from newcomer.co he's got a great newsletter you should go subscribe to said he spoke to major investors who told him that 10 portfolio companies had pulled out about 1.5 billion collectively from svb yesterday i was getting reports you know in the group chats from friends from friends of friends that everybody was pulling out at the same time and that some people were getting their deposits out their withdrawals and some people weren't and some people's withdrawal said they had gone out and then they actually didn't make it out so that's the chaos that's going on at startups today um and a friday morning about a dozen founders were

SPEAKER_07: instructed by svb themselves to go get a cashier's check from its new york office if they wanted to move

SPEAKER_00: funds that's like a power move you know oh yeah we're going to just put a little friction here um and or maybe it's good advice maybe that was the quickest way to do it so those founders went to the svb office and were waiting outside for a little while you can see the photo here from newcomer.co uh eventually svb called the police on them and politely asked the founders to leave according to eric's reporting and i've seen other videos of people outside the office um and uh you

SPEAKER_09: know down by santo road so here's what svb's ceo said on a call with some top clients and vcs on

SPEAKER_00: thursday right we're back to yesterday which feels like 10 years ago uh greg becker said that calls from clients started coming in and started panic a little he didn't um use proper grammar there but

SPEAKER_06: i can't blame the guy it's been pretty tough uh 24 hours i would ask everyone to stay common

SPEAKER_47: support us just like we supported you during challenging times and when you hear something

SPEAKER_06: like that uh that is a tell that things are really not good and i think that also when those quotes started coming out like hey support us during challenging times when your bank says that that's

SPEAKER_00: not what the bank's supposed to say so again i think this is another like waving the red flag in front of the bull like get your money out and i know he's trying to be honest with people and appeal to people's better instincts but and i'm playing monday morning quarterback here and we're

SPEAKER_07: it's it's barely monday morning um so i think svb didn't have to do this they were trying to do the right thing and uh that did not go on unpunished they were in the high rate interest environment seems to be what caused this problem and maybe they should have just held on to these treasuries this is above my pay grade and above most people's pay grade i think or this would be really simple they just made a bad trade uh and a panic started and this is where a bank run the term comes from and a panic comes from this exists as a concept in the world because it is so unique and now we get

SPEAKER_06: to witness it uh firsthand and you really don't get to witness things like this happen and you know

SPEAKER_07: a bank run isn't technically a black swan event but i would say for silicon valley you know black swan will be something you haven't seen before obviously we all saw this and it's a wonderful life but what we haven't seen is something like this happen in the tech industry on both sides of the table so when i say this feels black swanish and feels like a contagion the reason i feel that way

SPEAKER_06: is because both parties are being impacted so severely bill ackman uh hedge fund guy um he says the failure and he did this tweet storm the failure of svb could destroy an important long-term driver of the economy as vc-backed companies rely on svb for loans and holding their operating cash and private capital can't provide a solution a highly dilutive government preferred bailout should be considered and he is kind of tipping like i did in my sort of tweet storm he's kind of tipping his cards a little bit saying he knows that this is going to be unpopular saving big tech i'm trying to think of a more unpopular thing to do for the public like why should they get a bailout that's why he's saying a highly dilutive government preferred bailout highly dilutive the shareholders get screwed in uh they lose all their shares and then preferred bailout they are the top of the stack so when this thing does get unwound the government gets their money back um i can't remember who someone

SPEAKER_131: had a really funny tweet earlier today that was like could you think of a name of a bank that the

David Friedberg: government would want to bail out less than silicon valley bank i mean uh billionaire bank yeah right

SPEAKER_06: top one percent bank yeah i think it's like yeah one percenter banker yeah um dictator bank

SPEAKER_07: dictator and billionaire banking services financials uh yeah we probably don't want to bail them out

SPEAKER_06: i think we're good mark sooster yeah i think we're good mark sooster a friend of mine uh he says uh more in the vc community need to speak out publicly to quell the panic about svb i believe their ceo when he says they are solvent and not in violation of any banking ratios and goal was to raise and strengthen balance sheet they announced that they are settling selling long-term investments at a loss and investing in higher yield investments that improve their financial metrics they are raising 2.25 billion to stabilize the balance sheet yada yada um obviously um you know um this advice uh to speak out publicly is fine i i did say i wish them the best but uh yeah this is the problem with a bank run the right thing to do is like a tragedy of the commons or a prisoner's dilemma doing what's right for everybody and doing what's right for yourself these things can sometimes be in conflict and so um and uh mark says i believe svb is one of the 20 largest banks in the u.s i do not believe the u.s government would like to see them fail um and so i agree with him on that um but uh obviously taking your money out was the right move and could be the right move by a long margin if this thing does go belly up okay that's all i got in terms of running you through what happened now we'll just get to your questions and uh feel free to give it a thumbs up if you like uh let's get some questions here what happens to companies with credit facilities are they just void yeah that's a great question if you have a loan that's not void i think whoever acquires this thing would then acquire your loan if you have a credit facility i think that goes kaput i think you no longer have that credit facility which is why i always tell founders don't rely on venture debt lines don't rely on you know these credit facilities to pay for your runway if you have like a factory you're building sure getting a loan to build a factory if you have hardware if you have a bunch of receivables that are guaranteed and you factor them uh you know like those things can make sense to me but my lord um i don't think it's a great idea uh to be living on loans at startups uh nor do i think generally living on loans is a great idea for a country or for an individual or for a company or for a vc and there are vcs by the way this is a little bit of a secret there are vcs who have loans with um silicon valley bank and those loans are against like let's say their carry or their interest in previous funds so let's say i had 10 million dollars in carry profits from my previous venture funds i might be able to go to silicon valley bank or other banks offer this and get you know a five million dollar loan against those 10 million in paper gains to go live a lavish lifestyle and that's how we build our relationship and then vcs are

SPEAKER_00: recommending silicon valley bank and they've got a deep relationship i actually have a mortgage for this office that i'm sitting in i believe is a silicon valley bank mortgage i have like a mortgage for instead of renting office space i calculated that i could buy a a loft in soma and it would be cheaper than we work so i did that so i have a mortgage with silicon valley bank so what is the

SPEAKER_06: impact for startups that have venture debt is a really good question i think whoever acquires this thing owns that venture debt and then i think the founders could probably stop paying it uh until they get some feedback as to what to do so it's you know like a holding pattern situation i think most founders are not going to pay their venture debt while they wait to see what happens with the new owners and the new owners might need to sit down with everybody who owes venture debt and you know restart the relationship and then decide how hardcore they want to be with them and do are all the

SPEAKER_106: employees at silicon valley bank i haven't heard one person talk about that are they all laid off

SPEAKER_07: immediately does nobody work at silicon valley bank now or are they working for free are they working on spec or do they know where their salaries or does the fdic say everybody has their job at silicon valley bank we need you here to do an orderly um sale or shut down i believe the fdic uh post said that

SPEAKER_148: they the fdic said it was going to take over operations but let me double check that no i think that's

SPEAKER_06: what happened so but the question is like for how long and so you know one wonders what's going to

SPEAKER_38: happen there how does this compare to 2008 and what lessons can be taken from that adam asks well

SPEAKER_06: in 2008 you had i guess bear cerns and lehman and other places uh have this risk of ruin and it was outside of our wheelhouse so we weren't exactly impacted but the government did come in famously guardian asks will stripes attempt to raise 6 billion get hurt by this svb fiasco i think that was already

SPEAKER_106: done but if to the extent those vcs have their money in silicon valley bank they now might have to call

SPEAKER_06: down another um um lp request they might have to do another capital call from their investors to fund that and those are big numbers so it's possible do you expect to start uh laying off immediately or will companies wait a few weeks alice asks yeah i think um i did a tweet storm about this so my best

SPEAKER_00: advice for companies is figure out what your payroll is number one stop paying any bills tell all your vendors that you're impacted by the silicon valley bank so you have like the accounts payable department shut down all payments out this way whatever cash you happen to have even it's that 250 you get it on monday you're solid figure out what your payroll is then you got to figure out there's hr laws like you have to let the employees know how much if you're going to be shutting down let's say your burn for the month is 250k uh your salaries your payroll is 250 and you have 250. okay you're going to have to

SPEAKER_07: let people know we have four weeks of salary and that means if you were going to give any severance and in some places if you do a plant shutdown there are laws around the concept of a plant shutdown some places you have to give two weeks notice someplace four weeks notice i'm sorry some places two months notice some places three months notice if you're going to let go of more than a hundred

SPEAKER_06: people or more than x percent of staff and those shutdowns those plant shutdowns you saw come into

SPEAKER_00: effect with um the layoffs at twitter google amazon facebook all of those people got those severance packages and sometimes it was 68 sometimes it was 90s that depends on the state you're in and then then sometimes companies would put a a factor on top of that now for small companies if

SPEAKER_06: you're under i think 100 people or 50 people you have to consult with your um hr company and you're gonna have to get hr involved in this you know uh rippling gusto whoever you use you're gonna have to talk to them and say what what is our liability here and i think there might be people if it they can't get access to their funds and they can't do a bridge around with their existing investors

SPEAKER_00: who would uh be forced to shut down and they would if they were doing this kind of emergency

SPEAKER_06: shutdown the board and individuals might be personally liable uh for those people's salaries

SPEAKER_00: and so i'm not certain of that but there are some things that will pierce the corporate veil and i think these kind of shutdowns are one of them so this could get acute this is where you have to get legal and hr involved will it trickle over to other banks that is a possibility uh and i have that is one of the conversations that is occurring right now there are also some banks you may have seen parker from rippling he's blocking me for some reason i think because i'm friends with david sacks

SPEAKER_07: he um is using rippling which is a payment service like a hr provider he is using svb's rails and had to

SPEAKER_00: move those rails over to jp morgan he said in his tweet storm but that payroll didn't go out so every rippling customer didn't hit payroll this week and they're going to hit it next week uh or maybe early next week i guess so you this is where like second order effects and third order effects you know are hard to predict right um and what started all this was the low interest rate environment running

SPEAKER_06: into uh interest rates going up so quickly and volatility and all this money being put into bank

SPEAKER_106: accounts you get the idea what about companies with more than 250k deposits 97 accounts were not

SPEAKER_06: insured yeah that's the problem um i have multiple portfolio companies that are sitting on treasuries of tens of millions in some cases hundreds of millions of dollars and i'm sure some of them are at silicon valley bank uh venture capital firms and now we are left to wonder what some of our strongest and best companies are going to do uh this is a very terrifying um situation harman asks svb manages over 250 funds on our behalf in a market account at jp morgan what do you think is going to happen with that

SPEAKER_00: okay i've heard about this situation silicon valley bank and people have multiple bank accounts but silicon valley bank is administering them i actually don't know this is a gray area and i wish you luck

SPEAKER_06: trying to figure that out i think you might be okay i think what everybody's going to learn coming out of this is you need to have three or four banking providers and you need to split your money across from them and if they don't like that well that's too bad it's just the way business should work you should always have multiple accounts even if just you know you have a rogue employee on your side changes to password you have don't have access to it and you need to hit payroll or something uh what happens to silicon valley bank shareholders do they get anything back i think they are going to be wiped out but we'll see uh california backyard bites ass what do you think about the realization of 15 million losses for the acquirer i guess you know there's some amount of goodwill in the brand but brand now seems damaged but i think if you keep all the employees you have the relationships so that's a great question what is the value right um what do you think about the ceo of sbv selling 3.5 million in stock in the last two weeks is that true that i don't have confirmation of so i would need to check on that if that was part of an automated it certainly doesn't look good if that was part of an automated plan and he was selling 1.75 million a week uh for the last 50 weeks it wouldn't be a problem because it was automated selling um if that trade was put in you know while he knew that there was problems uh and people were withdrawing funds yeah that that could be actionable um are founders allowed to file a lawsuit against svb yeah you just become a creditor and you're already a creditor even if you were so i think everybody's going to be put in line fdic is going to try

SPEAKER_00: to do this in an orderly fashion bruce says how much is svb in the red that's what they have to

SPEAKER_06: figure out that is the question that is the question that nobody has the answer to um miko asked again what happens to svb loans to tech companies um i don't know the answer to that it depends on if this thing is shut down and then if it's shut down that is the government going to go after those loans and

SPEAKER_07: call those loans or try to recoup those and then slowly give them back to people who have deposits

SPEAKER_00: well there are some people who have 10 million dollars in deposits at svb and they might have a five million dollar loan what happens to that person they don't get their 10 million until they give five million back well that's kind of impossible because you have their 10 million they can't pay

SPEAKER_06: back the loan or do you net it out so this is where i think we're in uncharted territory and a bankruptcy lawyer or an fdic uh restructuring person is going to have to answer these really weird cases because the whole industry is so intertwined here there's so many conflicts that who gets paid when is going to be crazy um and um austin asked what happens to general

SPEAKER_00: lennox 500 million private investment now that the fdic has taken over if they've already paid it i guess they lose it and now they're a creditor and the equity stack i don't know where they stand and we don't have the documents but you know that could have been a loan this is where like the device used to make the investment matters you could be that could have been done in senior debt that could transaction could not have been consummated the money might not have been wired yet so all of this is you know like the minutia that's going to get sorted out i hope this has been helpful to folks and uh we'll see you next time on this week in startups make sure you listen to all in as well and he'll hear the besties talk about a lot of these issues as well thank you for giving me the warm-up here to get out to the founders and capital allocators in my audience at this weekend startups

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