Ask HN: How is the SVB situation affecting your startup?
It's no news that Silicon Valley Bank is experiencing some trouble.
Since most startups in the US bank with them, would you like to share some details of your current situation?
Since most startups in the US bank with them, would you like to share some details of your current situation?
199 comments
[ 4.0 ms ] story [ 203 ms ] threadBanks are well-regulated and stable and have been for decades. That said, my investors & cofounder have both expressed gratitude that our startup banks with Mercury and not SVB.
> Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust®; Members FDIC.
And everyone is panicking.
Your words are almost the same as what the CEO of SVB said, and then immediately the VCs panicked, telling their portfolio companies to withdraw from SVB.
This is something I've noted in a number of different situations --- not just business or financial situations, though those would be among them.
Not sure if this is what was being referred to above though.
edit: maybe just the raise, and sales talks continue? https://www.cnbc.com/2023/03/10/silicon-valley-bank-financia...
Is this true? And if so, how was this not a major red flag for investors earlier?
From what I gather as an outsider, it sounds like SVB has most of its assets in the form of loans to tech startups and most of its liabilities in the form of deposits from tech startups. This seems like an obvious recipe for disaster in the event of a tech downturn, no?
EDIT: People have clarified that the bonds are the big problem on the assets side, not the loans. They had a bunch of low interest rate bonds that now have to be sold at a loss because interest rates are much higher.
I am very curious whether their poor risk management is new, or if they’ve been playing fast and loose for much longer and only blowing up now.
Old habits die hard.
Depositor concentration is definitely high but that’s not particularly uncommon in banks (though for one of this size it is). But that concentration is what fueled their growth as well.
I believe you know what you're talking about, but if that's the case why are they struggling to raise capital to pay depositors?
(I'm asking as an ignorant outsider to banking in general and SVB in particular.)
Guy lends you 100 at 3%, you buy 100 of bonds than pay you 5%. Guy asks for his money back, your bonds are worth only 80, big problem.
https://en.wikipedia.org/wiki/List_of_largest_banks
Not even amongst the largest banks in the US:
https://en.wikipedia.org/wiki/List_of_largest_banks_in_the_U...
Personally I think they are nuts for having (reportedly) such a long average duration of bonds in their portfolio, but they were also paying a pretty decent interest rate on savings to their customers - that money has to come from somewhere.
They did the right thing by selling out now -- likely because they see more rates raising in the future which would decrease it, so they took the liquidity and then raised a bit of money to cover up that loss (raising 2.25B)
Or you could go back and say they shouldn't have accepted the deposits without having short-term gain solutions in the first place.
in 2021 (when interest rates were low) you might pay 100 cents on the dollar for a treasury that payed 2.5% interest. In 2023, with interest rates much higher, you can no longer sell that treasury for 100 cents on the dollar. People can get much better returns by just buying recent treasury. So you need to sell your bonds lower, at say 95 cents on the dollar. That is an immediate 5% loss.
This is known as 'interest risk' and is really the only risk you have when buying safe bonds like treasuries. The risk is completely avoidable if you can hold your bonds to maturity, so it only matters in a liquidity crunch.
Basically SVB failed basic risk management, and they deserve to go down. You can't promise your customers they can take their money out at any time and then turn around and invest that money in longer duration assets you can't liquidate. Just irresponsible.
Execs selling millions worth of shares in the past weeks is also classy.
Resilient system design doesn't just apply to engineers.
The SVB system would work very well if the interest rates stay low, when they could liquidate their 10 year bonds for same value (and their start up would be more likely to turn profits as well).
These are all systems designed with assumption that turned out to be false.
The issue is that SVB took in a lot of deposits in 2021-2022, and locked them into 10 year bonds at 2.5% interest. Now in 2023, a lot of their customers are burning money (withdrawing funds) and aren't raising money (depositing funds), and so they need to start liquidating the 10 year bonds.
The issue is that the 2021 bonds are discounted because interest rates have grown since, and they're out some money unless they can hold the bonds to maturity. So they're raising money to bridge the deficit to allow themselves to hold more of the bonds.
EDIT: Elsewhere in the comment thread people have clarified that the bonds are the big problem on the assets side. They had a bunch of low interest rate bonds that now have to be sold at a loss because interest rates are much higher.
Most banks dont have the same cash flow in/out profile that SVB are facing thus wont have the same issues.
Banks lend for long periods on the expectations that deposits that are withdrawn by some customers are balanced by new deposits from others.
But of course in the current environment there aren't a ton of startups depositing recently-raised funds.
They lost on multiple fronts, interest rates rose so much that it became a huge loss to sell these bonds, the tech market slowed down meaning that fewer companies were getting infusions of cash and more of them were burning through their cash piles and the final death knell was that word of all this got out and it started a bank run.
The first two are the same thing and the latter is not really an "event" but rather the legally-mandatory observation of the first two? (Unless they want to commit fraud, of course.)
ISTM the issue was that their core product was as shallow as their customers'.
They sell banking services to startups... all companies need some way to manage payroll (for example). Regardless of the balance sheets of their clients, they should have been able to manage assets such that they could fulfill day to day banking needs.
It's that failure to manage assets on the bank side that we're talking about. Startups/clients failing should be a normal event at SVB, given their focus.
They obviously made a bad move in 2020-21 in thinking the public market was going to crash and what would happen to bond yields, but so did lots of people.
If you think SVB is the only bank which is making high risk decisions to get payoffs, I would suggest you level up and look at what ALL these banks are doing. Faith in the system and long-term risk assessment isn't built into the mentality of banks which have so much invested in equity trading vs. boring deposits.
The red flag being......?
There is nothing per se that makes this situation unique to startups.
This would happen to any bank that (1) made bad investments (2) caught the public eye.
IMO there's a very good chance the bank enters FDIC receivership by Monday, and there may not be room to maneuver much anymore.
Edit 10:05 am eastern: David Faber live on CNBC says he's hearing deposits are flowing out too quickly for a sale to be negotiated. Quote: "That may "set up something else" over the weekend"
Edit: I'm realizing now that you probably meant you have put options on other companies through an SVB account that you can't access because of account issues, not that you have puts on SVB, which was my initial read.
Trading was halted in premarket and has yet to reopen. Honestly, it's disgusting. The amount of profit I would have made would be more than life-changing at a time when I could really use the money.
Thing is though, that's the whole point of banking stress tests and also why the Fed should have raised rates much sooner after COVID.
On a side note, the fact that VCs were giving out tons of money to lots of companies at crazy valuation multiples, that had no reason to exist, much less take in millions of investment...is definitely part of this whole mess. Banks and VCs need to do a lot more due diligence before just giving out money.
On that - interest rates need to be reasonable to make sure people who want to save their money get an appropriate return. 0% or near-0% is just financially irresponsible to those of us who remember getting 5-10% annually in our savings accounts.
So... what happens now? It would seem that the obvious thing is you'd make a boatload of money, but will you be prevented from ever collecting that if the stock doesn't trade again?
Better to wait for the trading halt to be lifted, naked puts are the best way to express a short position here.
To let it fail will harm a significant portion of the US startup community and damage the country's ability to continue to innovate. In many ways, it is too big to fail because of its ties to the startup community.
I think there is no other solution right now be a federal rescue of SVB. It is likely insolvent right now if they had to sell their assets at firesafes prices. An orderly unwind would help all involved and preserve a lot of value.
Everything I can see about them is completely overblown. Short and sweet version of research so far:
- They had sold their bond portfolio for 1.8B loss (originally 21B, this is 8.5% loss)
- They decided to raise money to match that loss (news release on 3/8/23)
- Headlines are confusing people with "can't sell" referring to the 3/8 attempt at capital raise, but now people think SVB is trying to sell
- Their Total Equity is around 13B (last balance sheet) -- that means if they completely dissolved and paid off all debts they would still have 13B on the balance sheet. Market Cap EOD 3/9 was 6.5B -- half of their actual asset value
- If they go into cash insolvency and get bought out, they will likely have to sell those illiquid assets at a discount (let's estimate a 40% discount) - it's still worth 6.8B.
Y'all SVB has been through this before, both in .COM and and '08. Also, to be clear -- I do not own any stock (but I want to)
I'm still not confident I was 100% wrong -- in my scenario I labeled above included the fact they could go under (I didn't think they would go under), but now that their assets being are being sold, it will depend on how deep of a discount FDIC sells for.
If it's in 40%, there's a good chance that investors will still get money back (I believe).
If it's 80%, they won't get it all back.
I did make a mistake in previous comment and used the word assets instead of Total Equity. The same principle applies -- FDIC will sell their assets, likely at a discount.
Depending on the discount of those assets will determine how much total equity they have. Currently, their assets over liabilities is large, so there would have to be significant underselling of assets.
My original thesis made it clear I was talking about 40% discount on their equity, I didn't make it clear in the subsequent thread.
I.e. if bought at the last price ($40) their assets priced them in some range between $150-220/share (if they were sold off). So they would have to have a significant discount to their assets in the last 2 months since they reported to lose that much.
In my book and using Graham's term, I was valuing this as a cigar-butt company.
I don't mean to dunk here, I just get nervous seeing someone propose a super-high-variance trade that goes empirically wrong an hour later, and then quote Benjamin Graham. As the responder above said, given the size of the dodged bullet you should really be updating your priors on investing strategy, but you seem to barely even regard your thesis as mistaken.
I accidentally mentioned a discount to assets once, but that was it. I did mention the 7-8% off some of their assets. It is in favor of my thesis because the valuation included that and was still far below the value with the 8% included in it.
It didn't go empirically wrong an hour later -- that is factually false. What happened an hour late is the bank went under -- but that doesn't mean investors don't get their money back (and Benjamin Graham did exactly this, and I'm not trite about my research or reading a quote here and there). He did it with 100+ companies at once after the great depression, many of them didn't end up making him any money, some did, many were about net neutral or small declines after they "failed". Again, you seem to be missing that the outcome was incorporated in my original thesis, but the price dropped significantly lower.
"The size of the dodged bullet" -- is a terrible, exaggerated hyperbole. A bullet would be if I was recommending a trade that would make me blow up, or 100% of my trade. I didn't recommend a trade at all (for one), I mentioned that I was hoping to get into it, and with the portion size, even if it came out to nothing, would be nothing close to a bullet.
While I do think I've updated my priors, it's very unclear what you think I should be updating? Again -- the part that I was wrong about was accounted for in both directions in the investment thesis. I was okay with it surviving or going under, I thought it would survive. I was very wrong in that belief that it would survive, but I was okay with it not surviving.
I could be wrong about any money being returned to shareholders -- which is accounted for in the sizing of the bet I had hoped to place. In the long run, I think that the learning opportunity I would get for 1/60 of my current portfolio and being invested in a class action lawsuit to regain money from a bank in this scenario still outweighs the actual money if it did drop to 0.
They haven't written down all their bonds yet or seen what they could actually get for them. They only sold the AFS ones, they still have $117 billion in other securities.
We were reluctant to move our funds most of the day yesterday. Felt like a lot of dumb panic. We had emails from a few investors, most saying "stay calm" but one saying "move your money to this bank that I'm invested in!" ugh.
We decided near the end of the day to move at least half our funds (in a money market) out, but by then it was too late to initiate anything. Now we're finding this morning nobody at SVB is returning our calls. We are able to log into the online portal just fine. So not sure if/when we'll be able to to move anything.
Annoyingly, we're moving it because everyone else is moving it. I know it's a really dumb, self-fulling prophecy but at this point you don't want to be the last in line.
Note: I'm still not actually worried that our money will evaporate permanently. But I can definitely see a situation where it is inaccessible for several weeks, causing issues with payroll and operations. I expect worst case a large bank will swoop in last second and buy all the dumb investment vehicles/bonds for pennies on the dollar and then our access to cash will come back.
This isn't just a liquidity problem, this is a solvency problem. The bonds they have aren't temporarily worth less because nobody wants to buy them, the bonds are liquid and have a fair market value based on the current interest rate environment.
Your cash isn't at the bank anymore. Your cash has been invested in bonds and those bonds are now worth less than the number you see in your bank account. That's bad.
It is a liquidity issue, which means the money is there, but they can not access the money in the amount of time they need it by.
If you need money but your current assets in whatever form can't furnish that fund for you, I am afraid you're broke.
Obviously the latter is not as good as just having money. But it's clearly better than the former.
Therein lies the difference between solvency and liquidity problems.
Whether you have assets that *you* believe you could draw on in the future doesn't matter when your need is immediate.
You say basic fact. I say oversimplification.
We can argue about the semantics of the word "broke", but the difference here is between losing all your money vs. having to take out a loan now that you're pretty much guaranteed to be able to repay when your bonds mature and only losing the interest payments on that loan.
But the customers are startups that have expenses like payroll and AWS. And the climate for raising money is bad, which means a lot of money is being withdrawn every month, and not much new money is getting deposited.
For one thing, people buy companies that are insolvent, eg svb, they don’t buy magic bean farms, eg ftx.
A 2023 USD is not the same thing as a 2043 USD; those are difference currencies with an exchange rate. (That'd be nice, but we've collectively agreed a little inflation is good.)
Liquidity is a logistical issue.
Solvency is a value issue.
You cannot with a straight face say "It's just a liquidity issue......that lasts many years."
Maybe I’m missing something but couldn’t you just potentially wait for the bonds to mature?
These bonds were most likely purchased when interest rates were near 0 and I don't think anyone is banking on those rates returning any time soon.
That being said, I'm going off of some basic reading I've done this morning: https://www.fbfs.com/learning-center/bonds-interest-rates-an...
That 1.x% on that huge amount would be over $1 Billion per year.
It's a mismatch in terms of the duration, ie your depositors can ask for their money back at any time but the bonds don't mature for many years, but as long as the deposits are kept there the bank can get away with it.
The succinct answer is: Greed.
Hope for the best, plan for the worst.
Edit (epoch time 16784666958): https://www.cnbc.com/2023/03/10/silicon-valley-bank-is-shut-... (Silicon Valley Bank is shut down by regulators, FDIC to protect insured deposits)
Capitalism doesn’t allow planning for the worst. Karl Marx showed us this 150 years ago, and the working class is regularly reminded in blood, but the ruling class just never seems to get it. I wonder why.
Governments bailing out banks is not capitalism.
That's not at all true.. 100% of Lehman customers received 100% of their funds. Secured creditors also received 100% of their funds.
https://www.sipc.org/news-and-media/news-releases/20220928
100% of depositor funds from WaMu (including every penny over the FDIC limit) were safe as well after the Chase buyout.
https://www.fdic.gov/resources/resolutions/bank-failures/fai....
> Distributions to unsecured general creditors with allowed claims totaled over $9.372 billion, representing a 41.2841 percent recovery.
That sure sounds like 58.7259% didn't recover what they were owed. Mind explaining why that isn't the case?
And what about IndyMac? IndyMac depositors only got 50 cents on the dollar.
https://www.depositaccounts.com/blog/indymac-depositors-are-...
Indymac is an interesting case - their insured depositors were made whole at $100k and then the uninsured amounts were paid out immediately at 50% -- but then that is indeed when Dodd Frank did the retroactive FDIC raise to $250k -- so all of their depositors were fully reimbursed at $250k and presumably there were some losses of uninsured beyond that. It was a weird entity, they didn't have any debt or secured creditors so there wasn't anything else for an acquiring bank to buy once it was bankrupt. Very different than SVB but fair enough, a case where uninsured depositors lost some money in a bank run.
The largest failure to-date was WaMu in the 2008 financial (approx $300B in assets). Depositors were paid back 100%. The largest failure prior to WaMu was IndyMac (approx $100B in assets). Depositors were paid back 50%. No additional dividends have been paid out to depositors.
According to Wikipedia [1], the last three >$1B failures were Guaranty in 2017, Doral in 2015, and First National in 2013. Depositors in each of these three cases received less than 100%, averaging around 80%.
[0] - https://closedbanks.fdic.gov/dividends/ [1] - https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...
A lesson everyone should have learned from the toilet paper scarcity crisis during the pandemic is that it doesn't matter if it's rational or smart, if you want to keep your ass clean make sure you're in the front of a line when people are panicking.
You could make a pretty compelling argument that the last decade the entire tech sector has been propped up by "dumb exuberance", but people aren't complaining about the money they made during that period.
On the bright side, Ronnie James Dio wrote a song about your current predicament.
https://techcrunch.com/2023/03/13/in-historic-last-minute-de...
I'll start with committing not to withdraw money my company [redacted] holds in the bank.
We stand by SVB.
I invite others to do the same.
To the extent that this is a single bank run and the other actors are mostly anonymous and there is no way to verify whether or not someone has withdrawn their money then yeah this is a classic prisoner's dilemma and your only hope is to quickly get in line.
However, trying to change the game is also a viable strategy! Public non-anonymized commitments like this are exactly how you tie this into our broader iterated game and escape the nasty equilibrium of prisoner's dilemma.
Makes me feel kind of jaded to be honest. But maybe that’s the problem with society. Maybe we all just need to band together and not be swallowed by despair. Screw it - I also pledge to not withdraw any of my 0$ from SVB.
I pledge to not take out another loan.
You don’t get any exposure to any of their potential hyper-growth in the form of debt/equity.
All you get is the deposits but they also don’t grow, the total just becomes concentrated in the accounts of the few survivors while all the other accounts go to zero as most startups die.
Add them to the list lol
By also being tied into the valley and the big VCs you have a fairly consistent stream of new accounts and large deposits throughout the year.
But even if deposits rise how are you going to propel the money multiplier considering that your customer base doesn’t need loans?
Startups are notoriously scared of any debt/loan
I got annoyed with SVB because the online banking feels from the 90s and they charged fees that I found excessive. Switched to Brex a while ago, and never looked back.
I was planning on closing our SVB account for a while, but didn't get around to yet. Now it seems like it might close itself. I wonder what the process will look like to get the $300 back we had on there.
If it were easy to get around the rule, why have a limit at all?
Folks who de-risk by staying within the FDIC limit do it by splitting their money between multiple financial institutions.
It sounds like it's too late to withdraw anyways, so all their customers can do at this point is exercise an emergency plan and line up options for short-term liquidity.
From what I understand since my amount is low I don't have to really do anything. Is that correct? Any advice for me?
they are trying to raise money? that’s cute, maybe they can create a pitch deck and be ridiculed a million times just like all of us
“you need a team” “come back when you have revenue” “we need to see more revenue” “that market is too small” etc
but you know what? they got buddies and you don’t as a founder