E119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more

In the weeks immediately following SVB’s shutdown in March 2023, probably thousands of startup companies that banked with SVB will be unable to make payroll because their funds are frozen in receivership.

“you're seeing probably thousands of companies now cannot make payroll in the next few weeks because their money is trapped and tied up at Silicon Valley Bank” View on YouTube

As a consequence of the SVB failure, potentially thousands of small venture-backed companies could be wiped out (fail or shut down) even though they did nothing operationally wrong.

“you're looking at maybe thousands of them just being wiped out for no reason” View on YouTube

If the Federal Reserve does not intervene over the weekend of March 11–12, 2023, there will be runs on US regional banks the following week, creating a cascading regional banking crisis similar in dynamic to 2008.

“I think that unless the fed steps in here over the weekend, we're going to see potentially a a run on the regional banking system, a cascade like we saw in 2008.” View on YouTube

By Monday or Tuesday following this March 11, 2023 recording (i.e., March 13–14, 2023), most affected portfolio companies and employees will be on the other side of the immediate SVB crisis with relatively limited damage.

“hopefully everybody ends up on the other side of this by Monday or Tuesday with not a lot of damage.” View on YouTube

Over the weekend of March 11–12, 2023, regulators will either arrange a takeover of SVB by a large bank such as J.P. Morgan (similar to Bear Stearns/WaMu), or, if they fail to do so, the banking and startup funding crisis will continue to cascade during the following week.

“either this weekend they place SVB in the hands of a JP Morgan. They do basically a Bear Stearns or a WaMu. They either do that this weekend or this thing keeps cascading next week.” View on YouTube

Depositors at SVB will not know their exact recovery or receive full distributions by Monday, March 13, 2023; instead, determining and paying out their cents-on-the-dollar recovery will take weeks or even months.

“it's not going to be on Monday. It could take weeks or months to figure out how many cents on the dollar you have.” View on YouTube

In the immediate aftermath of SVB’s failure (around March 10–11, 2023), distressed-debt buyers will be offering SVB depositors approximately 60 cents on the dollar for their uninsured claims.

“a company that had $100 million inside of SVB was offered $0.60 on the dollar today for that claim.” View on YouTube

If by 48–72 hours after the end of the March 11–12, 2023 weekend all SVB depositors do not have 100% of their deposits made available in cash, there will be a serious crisis characterized by a massive run away from institutions that hold anything other than fully liquid cash.

“every depositor needs to get paid 100% of their money, and that cash needs to be made available to them by early next week. And if that money is not available to them within the first 48 or 72 hours of the end of this weekend, then we are going to have a real crisis on our hands... that's going to cause a massive run.” View on YouTube

The only way to avoid a broader crisis is for a buyer to take over SVB over the March 11–12, 2023 weekend, with the federal government guaranteeing 100% of SVB deposits so that all depositors have immediate cash access next week.

“What has to happen... is if someone takes over Silicon Valley Bank this weekend and that the federal government... has to say we will guarantee 100% of those deposits... But we need to make sure that there's cash here today for all of these depositors to get paid.” View on YouTube

A government backstop to resolve the SVB crisis would likely require roughly $25–50 billion (around 5–10% of the original TARP size), and if structured with seniority and warrants in SVB and/or affected companies, could plausibly return at least 50% and potentially up to 100%+ profit on that capital to US taxpayers over time.

“This would require maybe 25 or $50 billion, 10%, maybe five, 10% of the totality of Tarp would be enough to cover what's happening here with Silicon Valley Bank and work this out... the American people could get some warrants on those companies or warrants and ownership in Silicon Valley Bank and make at least $0.50 on the dollar, maybe even double.” View on YouTube

There is a significant risk that, due to political unpopularity of ‘tech,’ the government will not intervene in the SVB situation, in which case a series of failures (“dominoes”) and broader systemic financial risks will unfold afterward.

“there's a big risk here that precisely because tech is unpopular and people I think are confusing big tech with small tech, that the government doesn't step in here and the dominoes start falling and we start getting all the systemic risk playing out.” View on YouTube

If the U.S. federal government does not step in to protect depositors after the Silicon Valley Bank failure, then over the following months the U.S. regional banking system will be largely wiped out, effectively consolidating into roughly four remaining large ‘too big to fail’ banks.

“So I think there's a chance that if the federal government doesn't step in here, the whole regional banking system could be decimated, and you're just going to be left with four too big to fail banks.” View on YouTube

If Silicon Valley Bank depositors’ funds are not made available (i.e., are effectively lost), then many of the affected startups will run out of money and shut down within approximately one month of the SVB failure in March 2023.

“If allowed to deploy that, it's going to return a multiple and a venture multiple 2345X. But if we destroy that money, these companies are going out of business next month.” View on YouTube

In the immediate aftermath of the Silicon Valley Bank collapse (over the next few months of 2023), private markets and venture capital activity will contract sharply: many VCs will pull existing term sheets, and the number of funding rounds closed will fall to roughly half of the pre-SVB pace as investors focus on triaging existing portfolios.

“I think private markets and VC could seize. I think you're going to see people pull term sheets. Maybe half as many fundings are going to occur as people try to do triage.” View on YouTube

Following the Silicon Valley Bank collapse, some venture funds will shut down, and many portfolio companies that were already heavily distressed (roughly ‘75% distressed’) will not receive bridge financing and will instead shut down at an accelerated rate over the subsequent months of 2023.

“yes, I do think funds could shut down, uh, coming out of this, I think that companies that were call it, you know, 75% distressed are done for now. No one's going to step in and bridge them and fund them. Uh, it's going to accelerate a lot of shutdowns because people are now cash is king, now cash is king.” View on YouTube

Following the Silicon Valley Bank failure in March 2023, there will be roughly a 60‑day freeze in venture deal-making activity, during which new investments and term sheet signings drop to minimal levels as VCs focus on supporting existing portfolio companies.

“Jacob, you tweeted that you think this is going to cause a 60 day freeze in, in deal making activity. I think that's more or less right.” View on YouTube

In the days and weeks after the Silicon Valley Bank collapse in March 2023, there is a significant risk that depositor flight will spread to other U.S. regional banks, causing substantial cash outflows and potential runs at multiple regional institutions.

“And I think there is a risk now of contagion spreading to these other regional banks, because people aren't sure. And there's already huge cash outflows leaving these other banks, because why take a chance?” View on YouTube