Is Silicon Valley Bank the turkey in the coal mine? Elon Musk and the short sellers think so
Did the VCs spark a run on the bank? Yes. As a founding member of the SVB team, do I blame them? No. SVB has become the symbol of the end of the banking system that no one trusts.
One of the most thrilling events of my young career was driving over to a new startup, now a public company called Cadence Design Systems (CDNS NASDAQ), to pick up a $2 million check to deposit in the then 6-month-old Silicon Valley Bank. The $2 million represented a VC investment into the company by the late Don Lucus, famous for giving Oracle founder Larry Ellison his only VC money (which is why the boot-strapping Mr. Ellison remains one of the wealthiest people on the planet).
To be sure, my boss Roger Smith, the founding CEO of SVB, was just delighted. This single deposit bumped up the bank’s assets a whopping 10 percent to $20 million. Under Roger, the late great Ken Brenner and I were his early wide receivers of business development — the Jerry Rice and John Taylor of banking — and Roger was our Joe Montana. Under his tutelage and powered by his Rolodex, we and the growing team of cowboys that followed (shout-out to bank cofounder Old Lady Titus, Ms. Butler, The Log, Lambo, Correy, The Ped, Harvey, the illustrious Leslie Leonetti, who watched all our backs, and, of course, the late Bill Biggerstaff, another SVB founder who named the bank), created a culture that powered SVB for the next 40 years.
Roger’s formula for success was brilliant but not that complicated. Follow the top VCs, leverage their due diligence to identify the best startups, and accept that those companies were losing money — on purpose. The job of an early-stage startup is to invest their VC dollars into building their intellectual property and positioning themselves for explosive growth. Roger also taught us VC backed companies have a third source of repayment on their loans — more VC money. The rest of the banks of our time had signs in their windows saying, ‘Talk to us when you are profitable.’ It was like shooting fish in a barrel. For the five years I was at SVB, we were on record as the fasted startup bank, and we never wrote off a loan to a VC-backed company.
Roger’s other genius was to get in on the upside of supporting these companies. While Glass-Stegall prohibited commercial banks from making equity investments with depositors’ money (a smart rule), there was nothing wrong with giving out cheaper loans with no fees in exchange for stock warrants. So, for example, I received loan committee approval for a prime rate, asset-backed, $1 million line of credit to Oracle competitor Sybase, with no fees and a stock warrant equivalent to a $300,000 equity investment. Five years later, when Sybase went public, that warrant was worth $15 million and helped maintain that bank’s record of quarterly profit growth through a Silicon Valley real estate downturn.
One of the hidden assets the regulators and new owners will find when they sort through Silicon Valley Bank’s wreckage is equity positions in over 5,000 VC-backed companies that resulted in the form of the initial warrants-for-fees program developed by Roger and the original team.
In return for our support for VC-backed companies, we built a loyal and symbiotic relationship with the top investors on Sand Hill Road. Sequoia Capital, Kleiner Perkins, IVP, Hummer Winblad, and Draper Associates were all part of the SVB family. As Mr. Lucas demonstrated, when they funded a startup, they would tell their company founders to go down to SVB and deposit the check. We could relate to entrepreneurial companies because we were a startup too.
In addition to minding your deposits, we connected our clients to a broad network of companies and investors they could learn from and partner with. As Michael Moritz of Sequoia Capital once observed, ‘Who you know, what you know, and when you know it is the currency of Silicon Valley.’ In retrospect, was it a startup’s most secure financial strategy to keep their money at a startup bank? Probably not. But if it were going to happen, it would happen in Silicon Valley, where sharing risk is the pathway to prosperity.
The once mighty Silicon Valley Bank was, poof…gone!
The impressive part of the story is SVB was able to create, maintain and prosper from its initial dominant market position for 40 years. Then, in just 72 hours, the SVB dream and all the hard work it took to make it come true evaporated.
The frantic 72 hours that crashed three banks
On Tuesday, March 7, SVB CEO Greg Becker gave a bullish report on SVB’s status to investors, Wall Street analysts, and technology executives at Morgan Stanley’s annual technology conference in San Francisco. ‘In the confident, almost bombastic, style that was his signature, Mr. Becker told the audience that the tech industry’s future was sparkling — and so was Silicon Valley Bank’s place within it,’ according to the New York Times.
On Wednesday, March 8, SVB announced that it had sold over $21 billion worth of securities at a $1.8 billion loss, borrowed $15 billion, and would hold an emergency $2.25 billion treasure stock equity sale to shore up its balance sheet. The plan was to sell $1.25 billion of its common stock to investors, $500 million in convertible preferred shares, and $500 million of its common stock in a separate transaction to the private equity firm General Atlantic. Despite this announcement by the bank, Moody’s Investors Service downgraded SVB’s credit rating on the bank’s long-term local currency bank deposit to Caa2 from A1 and issuer ratings to C from Baa1. Crypto-friendly Silvergate Bank also announced it was winding down its operations.
On Thursday, March 9, SVB’s stock plummeted 60 percent, raising a red flag that spurred several VCs — led by partners at Peter Thiel’s Founders Fund, Union Square Ventures, Y Combinator, and Coatue Management — to urge their portfolio companies to pull their SVB deposits. By the close of the day, SVB lost $42 billion in deposits, leaving the bank with a negative cash balance of almost $1 billion and an expectation that another $100 billion of deposits would be withdrawn the next day.
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