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Lending to startups was not the problem at Silicon Valley Bank

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Lending to startups was not the problem

If you’re like our team at Levr.ai, you’re carefully absorbing what’s happening today for Silicon Valley Bank (SVB), a trusted bank internationally for tech companies, and the 15th largest bank in the United States.  

How these events are being interpreted may impact the startup ecosystem and could have a rippling effect across the lending market, at least in the short term. For this reason let’s clarify some misconceptions, and get the SVB story straight! 

I’ve already seen comments and reports suggesting that some of the blame lies with SVB’s client base for being “volatile” or “high-flying startups”. Let’s be careful not to blame lending to startups as the reason for SVB’s demise because it’s simply not the case and here’s why.

SVB’s senior decision makers invested a huge amount (~$21 billion) of startups’ deposits and locked them into long-term bonds, despite their clients’ short-term banking needs for access to capital. This seems like a massive oversight, on top of rising interest rates, which lowered these investments’ value. As such the problem was poor deposit management at Silicon Valley Bank.

“It’s a great business model, and the fact that SVB was awash in billions of extra deposits as VC funding levels hit all-time highs in 2021 / 2022 is not the problem; the disaster is what SVB’s C-suite did with those excess client funds.”

Mark McQueen

Mark McQueen also touched on this concept in his blog, stating this was about what was done with the excess client funds. It is not that SVB is holding a poor-performing book of tech-sector investments. The lending activities of SVB should be completely decoupled from the conversation, as these financial losses have absolutely nothing to do with its lending business. 

While this situation is quickly being considered the worst mistake on the part of a financial institution since the financial crisis of 2008, it’s important to recognize the 2008 system failure was due to the deeply flawed underwriting process. 

Silicon Valley Bank’s book of loans to everyone’s knowledge is stable. In fact, the startups they lent to, SVB’s account managers, and credit underwriters did not fail in doing their job.

The Bank Run

Imagine if your money was at risk. The first thing most people do is run to the bank and withdraw so it’s safely back in their hands. Most of SVB’s clients did just that and withdrew funds. They did so on the advice of their boards, investors, and advisors. It’s important to understand that the bank run on the part of these clients doesn’t absolve SVB of their bad management of the deposits. 

If you’re not familiar with the term bank run, it’s a pivotal scene in the classic Christmas movie—It’s a Wonderful Life. The scene explains with compassion the intricacies of banks leveraging cash deposits to power the flywheel of economic growth. 

It's a Wonderful Life—The Bank Run scene.
It’s a Wonderful Life (1946)

There were noticeable early signs of poor deposit management discussed in SVBs most recent financial earnings report and accompanying press release. This was highlighted when Gregory Becker, SVB’s CEO asked for clients to “stay calm” despite the bank’s shifting financial position.  Founders have more than enough risks to manage. The bank they chose to hold their deposits shouldn’t have been one of them.

“Just don’t f*cking dance”

The compare and contrast illustrated by some financial reporting outlets about “wealthy investors” as victims held at the mercy of bloated tech companies who burn cash frivolously is not the reality.  

No one is winning here. Especially an already embattled tech sector that has laid off thousands of its employees, faced challenging fundraising environments, and is experiencing selling to tighter budgets from customers. If deposits are not fully recovered the largest cost and purpose for lost deposits is employee wages and salaries.

Still image taken from The Big Short (2015)
The Big Short (2015)

Since we’ve established we love a good movie to make a point, there is a very powerful scene in The Big Short, where actor Brad Pitt playing Ben Rickett tells a couple of junior analysts “Just don’t f*cking dance.” Emphasizing that there are real consequences and victims when banking systems collapse. 

Seeing The Financial Times posting its story with captions like “What’s happened with Silicon Valley Bank? You’re going to laugh.”

I suggest they keep these people in mind before smirking or laughing and take Brad Pitt’s advice. While the story will generate a lot of attention “just don’t f*cking dance”.  Remember who is impacted, it’s the entire startup ecosystem, venture capital deposits, and credit lines (all that “Dry Powder”) and the 6,500+ SVB employees with jobs at risk.

So now what?

The FDIC has stepped in and suspended some of SVB operations to mitigate further damage. Many account holders have millions of dollars not secured. FDIC has opened a hotline at 1-866-799-0959 to speak to any deposit holders with more than $250,000, as they are still determining the value of uninsured deposits at risk. 

Many SVB banking customers will be looking for a new bank; Levr.ai recommends our partners at Arc Technologies, Mercury, and Brex in the US, and RBC Royal Bank and CIBC in Canada.

If your financial team is looking for some help with deposit management, we recommend our partner Yield Exchange, as they will shop for the best GIC rates and you can spread the risk across multiple institutions.

If you are looking to access capital to grow your business, at Levr.ai we work directly with dozens of lenders to get the right lending options available for both high-growth startups and growing small and medium businesses. 

For anyone on the outside looking in, I hope this post clarifies some misconceptions. I’m active on LinkedIn if you feel otherwise or agree—I’d love to hear from you. 

Our team at Levr.ai knows the startup ecosystem will recover quickly. We’re also hopeful that deposits are not lost, and that SVB’s downfall is not used as an excuse to pull back on impactful lending and funding for startups.

Disclaimer. This article is an opinion, and its information has been gathered referencing various trusted news publications. This is a developing story, and as more information becomes available we will update our perspective and opinions accordingly if not supported by new information. You are solely responsible for any decisions or actions you take based on this opinion. Levr.ai does not accept any liability for any losses or damages arising from the opinions shared in this article.

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