In this episode, the hosts discuss the recent crisis surrounding Silicon Valley Bank, exploring the implications for startups, the responses from the government and venture capitalists, and the lessons learned from the event. They delve into the interconnectedness of the banking system, the role of public perception, and the future of startup funding in light of the crisis.
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Takeaways
The crisis surrounding Silicon Valley Bank was unprecedented and chaotic.
Government intervention was crucial in averting a potential disaster.
The speed of the response helped mitigate panic among depositors.
Public perception played a significant role in the crisis.
Many startups were caught off guard by the bank’s collapse.
Alternative banking options were available but not widely utilized.
The interconnectedness of the tech ecosystem contributed to the crisis.
Lessons learned include the importance of risk management and diversification.
The aftermath of the crisis has not significantly impacted startup funding yet.
Founders and VCs are still navigating the implications of the crisis.
Chapters
00:00 Introduction to the Crisis
02:02 Understanding the Bank’s Collapse
04:05 Government Response and Systemic Risk
06:59 The Role of VCs and Public Perception
09:59 The Impact on Startups and Alternatives
12:58 Lessons Learned and Future Implications
16:04 The Aftermath and Moving Forward
Transcript
dan (00:01)
Welcome to episode five of the Equidam podcast. I’m here as always with Daniel Faloppa, Equidam founder and CEO.
daniel_faloppa (00:10)
Hello, how’s it going?
dan (00:11)
It’s good. And today we’re going to talk about Silicon Valley Bank, the fun of the last few days, the chaos and some of the responses. How did you fare over the weekend? What were you busy reading?
daniel_faloppa (00:31)
Well, everything. Like we mentioned a few times that as far as equity is concerned, we are pretty much horizontal across industries and across countries. And then, you know, like we can be effective by only very huge shakes that shake the whole industry. And then since I said that, we had like one every three months. Yeah. So, now, so I think like, yeah, the main thing was, was concerned
over like our future, which is like related to the start of scene to some extent and confidence in startup investing and that side, but also just like, yeah, I don’t know, I don’t know of many events that had so much minute by minute coverage. Maybe that’s because of course we are very much
the startups and towards the start of scene. But I was just like, yeah, trying to, to understand minute by minute, what, you know, what, what would be the outcome. And then luckily, I think we heard on Monday morning, it was that, uh, uh, everybody would, would be made whole by the, by the Fed. And so yeah, yeah, crazy weekend for sure.
dan (01:55)
potential disaster narrowly averted or was it? That’s been one of my questions for the whole time really. How likely was it that either the US or the UK would let the bank fail and let the deposits go uncovered and unbacked? Was that ever really a possibility?
daniel_faloppa (02:02)
Yeah.
Yeah, and that’s, and that’s, that’s, I think a question, right? Because, um, I think it was fairly clear from the beginning that they had, they would be able to recoup like 90, 95 cents on the dollar, at least just by market sale, fire sale of the assets that they had, and then to pay back the depositors, right?
I don’t want to get into the conspiracy side, but like in 2008, we saved banks, you know, like, well, the US saved banks, but pretty much all over the world, buying assets that would have been sold at 30 cents on the dollar, right? And still, they bought the assets, they didn’t liquidate the bank and fire management and everything, right?
Yeah, I’m not sure why this time, maybe because it’s less of a systemic risk is less connected. Because I mean, it was isolated to the startup startups and the tax scene. But yeah, you know, why not just helping the bank like what they’re doing with the with credit Swiss now like a massive government loan just to cover the short term panic, let’s
and then restore normal operations. I think my first tweet the other day was, seems a bit strange to let something like this fail for like one and a half billion or what it was at the beginning, the capital that they were asking to cover short-term commitments. Yeah, yeah, good question.
dan (04:05)
I know there’s a list of the systemically important banks and they’re basically the ones that the government, you know, I presume will never let fail under pretty much any circumstance. But the question is, you know, where’s the distinction I suppose there is a definition somewhere of what constitutes a systemically important.
Should SVB have been on there? You know, what would it have taken?
daniel_faloppa (04:27)
Yeah.
looking now at the aftermath after a couple of days. So far, so good, right? Like, it seems everything is still standing. We did see, like other minor banks, of course, having a little bit of trouble. We saw a signature bank, I don’t know if you saw, also, big trouble that one.
dan (04:56)
Yeah.
daniel_faloppa (05:03)
largest bankruptcy in the US. Yeah, but so far it didn’t seem that it was so systemically connected with the rest, at least of large finance, let’s say, stock markets and pension funds and so on, that this was apparently the best decision to save the depositors.
dan (05:33)
Yeah, and it seems like a fairly, a fairly sane decision. You know, they are, but by all means that the analysis I’ve seen of SVP, of the, particularly of the UK version, I’ve read a bit more about that. You know, HSBC got a great deal. You know, it’s, it’s decent assets. They, they have the ability to hold them for the duration that they need to, to, to get the returns in the longer run without liquidity problems. So.
daniel_faloppa (05:34)
Yeah.
Yeah.
Yeah, I
think if anything, the speed at which these things have been handled helped a lot, right? Because the fear, especially when your money is locked away, is like not knowing and no movement for a number of days or weeks or so, and then it becomes a much bigger problem.
And I saw, I think it was today, it was some headline of Europe criticizing the US response to SVB. And I was thinking, well, okay, let’s see if we can do better, you know, that’s because criticizing is easy. But then I don’t know if, you know, if we could have set up or like if Europe could have set up a response that fast. Yeah.
dan (06:56)
Experience
would tell me maybe not, but let’s hope we don’t have to find that out.
daniel_faloppa (06:59)
Mä oon ehkä enää.
Jaa, tietysti.
dan (07:04)
I think the other thing we have to be very aware of is we exist, you know, for better or worse, not really by choice in kind of this tech and VC bubble, not bubble echo chamber. That’s the way I’m looking for. So I knew you had a lot of especially prominent VCs, but other tech figures as well, who seem
with the intention of, you know, they were trying to amp up the danger in order to get a response. Or that was their wisdom, at least after the fact for some of them. You know, do they really move the needle on something like this by venting in all caps on Twitter? I don’t think so. It doesn’t seem very logical to me.
daniel_faloppa (07:45)
Yeah.
I don’t know, I saw what was it? I think Gary Tan at Wycombe as well, like a lot of people. Yeah, it’s a good question. It’s a good question because at the same time, like again, why was this one not saved in the same way that the other ones were? So, because maybe there wasn’t enough shouting and or maybe just it was less systematic risk
on Valley Bank.
Yeah, I’m not sure. I’m not sure. It’s a difficult thing because also we spoke about this before.
hypocrisy of some of them, right, on rooting for capitalism and no laws and, you know, free the AI and free crypto and all these type of things. And then when it comes down to their pocket, then it’s like, okay, we need government intervention, we need support, we need to be
Yes, trade off or line that they’re walking, some of them. Some of them were very, I think,
honest throughout and responsible throughout. But I mean, again, it’s difficult to say and to process the intentions when there is actual jobs and friends and everything at stake. Very, very hard to do.
dan (09:40)
That’s very
true. And I can certainly appreciate ecosystem leaders like Gary Tan, feeling like the weight of some responsibility to be a spokesperson for this and to make sure that he was not only trying to get the response that was needed, but to be seen to be doing that as well, be quite important for someone in his shoes, especially. And I see a couple of funny takes
daniel_faloppa (09:51)
Yeah.
Yeah.
Yeah.
dan (10:11)
the public perception of this would have been if it was called the farmer’s bank of Santa Clara rather than Silicon Valley Bank, because it did bank. And there were lots of stories of this coming out over the weekend, schools had money there, various other kind of very non-tech related little businesses, small businesses were banking there as well. So it was a much wider problem than just the tech industry.
daniel_faloppa (10:17)
through.
Yeah.
Yeah, yeah, I think the
It, the tech industry a little bit lately, especially through COVID created this sort of image of like extremely wealthy sort of first word problems. And that definitely reflected on the bank. But I was thinking just before this recording this about what I thought before, right? And I always thought, you know, city convalli bank was great.
I did have some questions on how are they the only ones in the world to give credits to startups? And they seem to be still the only ones, even now that they are bankrupt, they’re kind of the only ones. So how are they afloat and like those type of questions? But other than that,
comfortable, did not understand that type of risk. And they were doing a great service, I think, for startups and entrepreneurs. And yeah, it’s like sad to see them go like this over three days and over, you know, what in financial terms is relatively small amount.
an emergency loan for 52 billion, right? So that’s what 20x, right? So, and it’s a credit line, they’re not going to use it all maybe, but that just comes down markets enough that they don’t need the loan. And that’s where I see just from a, even just from a utilitarian capitalistic point of view,
a little bit of insurance from the government or from whoever could have done it, would have gone a long way, I think, and saved everybody a big headache.
dan (12:58)
Yeah, that’s very true. I and you know, I think this is kind of a two pronged issue. And it partly comes down to marketing, I think, you know, Silicon Valley Bank was and kind of is still the biggest in this sector under its new Silicon Valley Bridge Bank name, providing for startups and you know, VCs and so on.
other options though, you know, a few other alternatives came out over the weekend that people were suggesting. Mercury is like a fintech alternative kind of a neo bank, I guess, and that was growing at like twice its normal rate, as people tried to open new accounts. Another one was First Republic, bank that really services kind of high net worths, but also
daniel_faloppa (13:45)
Yeah.
dan (13:59)
the alternatives in terms of banks, but the alternatives in terms of accounts. You know, there are account types that are insured up to, I forget the number, you know, 10 million something along those lines, which founders could have used, but I guess they just didn’t know, they never had the reason to question this stuff. And again, there was a lot of conversation about that, you know, to what extent, if you get into kind of victim blaming a little bit,
daniel_faloppa (14:04)
Yes.
Yeah.
dan (14:28)
for putting money in accounts where it’s not fully insured. Should they have known better, you know, it’s difficult.
daniel_faloppa (14:36)
Yeah, I don’t know. I don’t think that cuts it in terms of risks that the founders are losing sleep over. It does for a few days after one of the banks fails, but then afterwards, every other risk is 100 times bigger. I mean, fair enough. And it’s not even thought about much in crypto, where these things fail much more often.
dan (14:46)
Yeah.
daniel_faloppa (15:06)
I don’t know. It’s, I mean, depends what we’re talking about, right? Like normal operations, yes. If you have just raised the funding ground and, you know, let’s say you raised like a five million funding ground or something and you have all that money in one single bank account with one single bank, yeah, that’s a good question. But then also there, then, I mean,
into banks, right? Which is still not great. I think it was, I forgot which company, but they had like 10 banks, but they still had something along the lines of like 5 million locked up in Silicon Valley Bank. The thing is that I think a lot of the panic was also from 2008 where really the percentage
or something. And people applied that rather than a different mentality and then it got very scary very fast.
dan (16:17)
Yeah, it did. The rationality of it all was, I think, what frightened people the most. You had, for example, a guy called Samir Kaji, who used to work for Silicon Valley Bank. His wife still does. He was kind of early on with the commentary talking about how they said seven billion in market cap on the ninth. And then by the 10th, he was kind of shocked, I think, by what was happening and providing some analysis there.
point his perspective was still, you know, SVB has relatively decent fundamentals, you know, some questionable decisions that they’ve made, but like no reason to panic. But then of course, it was out of anyone’s hands and out of the kind of rational influence. And it just went a little crazy.
daniel_faloppa (17:04)
Yeah.
Yeah, yeah. Yeah. And I mean, like, as all accidents, right, there isn’t only one cause. There is like a series of things that could have been prevented, maybe, maybe not. And they all happened in a sequence. And then, and then here’s where we are. I think a lot was was blamed also on the interconnectedness of the industry, interconnectedness of people right now and social networks and social media.
like bank run is a term that everybody knows from way before the internet from way before social media because one way or another news travels and so I’m not super sure about that again it’s difficult to I think it’s easy to say yeah you know you should stick it out and and if everybody
I don’t know if people would know what they would do when put in the actual situation. You know, and so like, you know, can we blame anybody really? Like, I think the question is more okay, you know, how could it have been prevented? And I think that there were a lot of, I didn’t,
reserve ratio and like all the actual management of the bank. I think it was a question. It is at question as well.
dan (18:50)
Mm-hmm.
Yeah, absolutely. I think there’s also…
daniel_faloppa (18:53)
now.
dan (18:56)
of a, you know, I read an article about this earlier today, I can’t remember the title right now, but the, the point the author was driving at was basically the success of Silicon Valley as an ecosystem is that it’s always kind of backed the collective and there’s a lot of trust and people are willing to take risks on each other. And that should have prevented this from, from kind of falling down like a house of cards. There should have
daniel_faloppa (19:26)
Hmm, yeah, there was none of that.
dan (19:26)
but there wasn’t.
Exactly. Yeah. And like this author’s question is basically, this has obviously changed. It’s no longer the case. And if so, when was that? And I suspect it’s kind of crazy and kind of going a long way back, but COVID has had impacts on industries and ecosystems that we don’t really understand still. And this could have been a part of that.
daniel_faloppa (19:37)
fair. Yeah.
Yeah, yeah. Yeah. And I think it started very connected, it started only in Silicon Valley, but now is so mainstream. I mean, we see it for what we do. Like we speak with a lot of companies that maybe have nothing to do with Silicon Valley, have nothing to do with the digital tech unicorn mentality, but they are starting a tech company.
capital from angels or VCs and they are based all over the world. So I think maybe there was, but we’re definitely past that, just maybe in terms of sheer numbers, like the percentage of the economy that is actually digital. And this is something that the community has benefited as well.
available today compared to 10 years ago, but it’s definitely, you know, five to 10x at least. And the same goes for the number of startups, number of advisors, number of investors, number of employees and talent. So you cannot have a close-knit community of, you know, half the world, right? Maybe one day.
dan (21:17)
It’s like
a Dunbar’s number, but for startup ecosystems, a limit in the number of maintainable, healthy network connections you can have. And at some point, it all starts to fragment a bit.
daniel_faloppa (21:23)
Yeah.
for sure.
Yeah. Yeah. I mean, Silicon Valley Bank itself, I think had, like, especially since COVID, a lot of its operations outside Silicon Valley and outside of the of the tech scene as well. And I mean, obviously, Silicon Valley Bank UK is an example of that. So, yeah, yeah, but the good point, probably, yeah, probably 10 or 15 years ago, that the
from the people, depositors and so on of the bank.
dan (22:07)
Yeah, absolutely. And I think another question that’s been on my mind is the, the, the kind of diligence, you know, not on the founder side, I think, you know, we covered that quite well. They have a lot to worry about. If you’re, if you’re thinking about whether your company will exist in, in six months, you’re not going to worry too much about your bank account, but maybe on the VC side, we saw Union Square Ventures was warning,
buy to different banks. And they didn’t mention SVB specifically, I don’t believe, but still, you know, clearly they were aware that there was some risk there. And then back in January, Raging Ventures was looking at SVB particularly, saying, you know, has some questionable decisions pointing to exactly the stuff that, you know, triggered this event. And, you know, this stuff wasn’t a surprise.
The information was out there. Some people were aware of it. But we all carried on anyway, I guess, just hoping it wasn’t going to be an issue.
daniel_faloppa (23:18)
Yeah, but there is always so much societal pressure in these things that nobody wants to be the cannery in the mine and then be wrong. And I think that has a lot to do with this as well. It’s very, very hard to be the first on those things. So I think a lot of people were like, yeah, okay, but nobody else is doing it, but then as soon as
So easy to get everybody on board.
dan (23:51)
Yeah, yeah, that’s very true. And to an extent, some founders were locked into SVB by their terms. They said you basically have to exclusively bank with SVB if you use certain products. I don’t know if that’s something that is common in other banks, I’m not too familiar with it, but is it something that they should be allowed to do?
daniel_faloppa (24:00)
Yeah.
Well, more or less,
yeah, more or less. But the, yeah, and that means of course, if you want to diversify, then you need to start a conversation with your lender about something that is not your loan and that they’re not gonna be happy with. So yeah, how many are gonna start that just on a rumor? Very, very few.
dan (24:36)
Yeah.
daniel_faloppa (24:40)
Interesting, ja.
dan (24:43)
I guess the last piece of the puzzle for me is looking at some of the responses from the VCs themselves. It was very interesting to see how different areas of VC responded slightly differently, how firms had a response that was in keeping with their approach and their brand.
kind of talk about a lot on this podcast. They were on brand, very personal, you know, they had all all their founders on calls and we’re talking to everybody sharing some very practical blunt advice for dealing with crises. That was good to see. Lower carbon. It’s a kind of a climate focused vc. They came out very quickly and said that they were using the
make sure that startups have all their payroll covered with no kind of terms attached to that, which I thought was great. And if we’d seen a lot more of that at the beginning, you know, maybe there would have been a bit less panic. But, but I suppose not every firm is in a position to be able to do that. If you have 800 investments versus a little specialized firm, which maybe has, you know, 10 or 20.
daniel_faloppa (25:47)
Yeah.
Yeah.
Now, of course, yeah.
Yeah, yeah. Yeah. And until you have no idea what percentage of the deposits you can actually get back, then like, it’s a very difficult loan to make, let’s say. Even though, yeah, they said no conditions and everything, like, of course, you don’t need to write conditions.
what’s the probability of that money to come back. Yeah, yeah, no, it’s interesting. And like, I mean, luckily I think the aftermath hasn’t been huge so far. Like at least what we saw in our own data and you know, like processing all the startups that we process is that not much seems to have changed compared to last week, compared to before,
for SVB happened, let’s say. Which I think is nice, like I think is, you know, as always it could be that bad news and extremely good news is overblown on social compared to what it actually is. But I think, you know, I think it’s nice to see, it’s nice also to see again how fast it was handled and how, well, with a good outcome it was handled, right?
depends who you talk to, right? Because obviously somebody has to pay that money and it was the taxpayers, but…
But hopefully we can just move over this crisis in the startup scene and continue more or less business as usual. I mean, bank runs happen, right? And the,
I don’t know. Let’s, you know, fingers crossed. That’s what I’m doing since Friday for sure.
dan (28:11)
There was so much energy behind this topic, so much going on, so much fear that it kind of created a momentum that had strange kind of after effects. Joe Biden came out with this 20 word tweet that basically said, deposits will be there when people need them, shutting down the whole issue, VCs went and had a lie down, founders went and had a drink. But then still like, I saw founders still sending out like updates,
daniel_faloppa (28:16)
Yeah.
Yeah.
Yeah.
dan (28:41)
on their exposure to SVB and all this kind of stuff afterwards. Like, there was a, people still couldn’t quite calm down. There was so much nervous energy behind it.
daniel_faloppa (28:45)
Yeah.
Yeah.
Yeah, and I think for a lot of founders, it was definitely the first time seeing something like this, maybe for the VCs, maybe not, but still, yeah. Definitely one of these very common, one in a lifetime events that we seem to be having every couple of months or so.
dan (29:16)
Yeah. Well, I read more than one person, including a friend of mine who works in a bank over here in the UK, who said that they shouldn’t have been saved at all. The deposits should have been lost. And that actually would have been a better thing in the long term for the ecosystem. It’s a hard argument to make, not one I exactly agree with, but I guess I see the argument for consequences and learning.
daniel_faloppa (29:43)
Yeah, no, yeah, like…
Like for me, right? It’s always like in the US, especially, it’s a bit too extreme on the, on the capitalistic side, let’s say, and then sometimes it isn’t, right? So this time, it isn’t. Normally, I would argue, you know, like we need to remember that like capitalism is a tool for human happiness.
you know, human suffering is not the, it is not the other way around, right? We’re not here to suffer in order to make capitalism happy. We are using it as a tool, right? So in this case, yeah, it’s a good question, but I think in a lot of these cases, if we can step in, if it’s just a crisis of confidence and just by restoring confidence, we save a lot of human suffering,
I would argue why not, right? And then of course, like you have the problem, what you said, like people need to learn and especially if there has been mismanagement or anything like that, then perfect. Like, you know, there are ways to handle that, but the ways to handle that is not to, if it can be averted for not a lot of money, is not to put the whole industry in potential jeopardy.
you know, instead of putting somebody behind bars, like, you know, if that’s if that’s the purpose. So, you know, normally, I would argue, I would argue, if these things can be can be prevented if these problems of capitalism can be can be prevented by coming together, which basically means by the state, then that’s normally good intervention, in my opinion.
dan (31:25)
Yeah.
credit where credit is due to both the US and the UK because we’ve seen from our own data having kind of perspective on fundraising worldwide every time that there’s been an event of this magnitude whether it was the war or COVID whatever it may be there was a pretty quick and noticeable downturn in founders going out and trying to raise rounds you know we’re I guess
as founders kind of really get serious about going out to raise money, that’s when they come to us. So we see right at the beginning of that process. So quite quickly what the impacts are. And this time so far, it seems like things have blown over and you know, we kind of keep going.
daniel_faloppa (32:24)
Yeah.
Yeah, exactly. Yeah, which is great. I do think there is still a lot of founders that waited to fundraise, that waited like the winter. Let’s say they didn’t wanna raise, like from October to the end of January, we saw quite a contraction. But I think what we saw over the years is that at some point, these startups need to raise.
they cannot avoid it. So maybe there is still a lot of that push, but from, yeah, from what we’re seeing so far, it hasn’t been stopped by this event, which is, yeah, which is, which is nice and definitely credit on whoever handled it this fast, because so far it seems, it seems like it’s working. Yeah.
dan (33:26)
let’s hope we don’t have to have another kind of retrospective conversation on a yet another global disaster anytime too soon. As interesting as they are, they’re obviously very tiring and you know, you can kind of feel that from everybody this week, everybody’s tired, even, you know, accelerator partners we’ve been talking to, you know, some of them in Latin America, I saw there’s there was some impact over there too, I was asking them about it. And everybody feels like they dodged a bullet,
daniel_faloppa (33:33)
Yeah.
Yeah, yeah, let’s, yeah, indeed, let’s hope, let’s hope for that.
dan (34:02)
Fingers crossed. Well, thank you very much, Daniel. Until next time.
daniel_faloppa (34:06)
See you next time. Thank you.