Investor Mark Suster says a ‘handful’ of bad actors in VC destroyed the Silicon Valley bank

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Around noon yesterday in Los Angeles, investor Mark Suster of venture firm Upfront Ventures began urging: “quieton Twitter. The Silicon Valley bank on Wednesday botched its messages to bolster its balance sheet, and startup founders began to worry their deposits at the tech-friendly, 40-year-old institution were at risk. “More in the VC community must speak out publicly to quell panic over @SVB_Financial,” Suster wrote, saying he believes in the health of the bank and arguing that the biggest risk facing startups is VCs, which the bank has long catered to for SVB itself would be “mass panic”.

As we now know, Suster was already too late. The industry was on edge and the bank’s CEO Greg Becker, who calmly addressed the bank’s customers on a Zoom call late yesterday morning, managed to scare them further as he uttered the words: “The last one what we need from you is panic.”

This morning, after the Silicon Valley bank halted trading to halt the freefall in shares — they had already fallen more than 80% between Wednesday and Thursday — the California Department of Financial Protection and Innovation shut down the bank. Then it brought it under the control of the FDIC, which is working out next steps while the bank’s customers grapple with how to pay their bills in the meantime.

Today we asked Suster about his advice from yesterday and whether he regrets it or not. During our conversation, he also echoed a growing number of others in the startup world who are getting started point with the finger What they insist on was a small number of venture capitalists sounding the alarm throughout the startup ecosystem – bringing SVB down but also possibly spreading contagion. Here’s the interview, edited slightly for length and clarity.

TC: You were on CNBC this morning where you said that you think portfolio companies should diversify all the time where they hold their money. But I understand that Silicon Valley Bank required many startups to have an exclusive relationship with them.

MS: The SVB basically doesn’t ask for exclusivity, unless you take on debt. The problem is that a lot of people get into debt and we have warned against this [portfolio companies] about it for a year.

What percentage of your startups do you think have diverse banking relationships?

About half have a relationship with the SVB. Maybe half of them have alternate accounts.

They gave very visible support to the SVB yesterday as everyone else raced around the exits. Is SVB an investor in your venture company?

NO.

Did Upfront get its money from the SVB?

NO.

Worried about not getting your money out?

No. I heard about $12 billion exited SVB yesterday and SVB has a little less than $200 billion in assets so that’s 6.5% to 7% [its assets] that was in one day. It’s not catastrophic, but the Fed knew it would accelerate. They don’t want a bank run so I’m guessing in a perfect situation the Fed would want someone to buy SBV and I suspect they’re talking to every bank and conducting a review as we speak.

Are you surprised nobody has responded yet?

Imagine you have a whole bunch of people looking at buying a bank. How do you rate that if you don’t know how much is on the run? How do you catch a falling knife? From [shutting down SVB this morning], the Fed kept the knife from falling; Now I think we’ll see an orderly sale by Sunday. JPMorgan, Bank of America, Morgan Stanley, [someone will step in to buy it]. Then I think the panic will stop because if you pull out of the SVB because you are worried about the SVB then that’s no longer a problem.

How is SVB rated by a buyer? Its market cap was about $6.3 billion when it closed this morning.

A bank’s valuation is correlated, but largely uncorrelated, with its assets. You have creditors and shareholders, and when a company goes bankrupt, the creditors get money before the shareholders. At SVB, people bet that the common shareholders would get nothing because SVB would go bankrupt; [its market cap and assets] were uncorrelated because they did not believe that SBV would survive.

The decisive factor is: Are there assets and is there value here? SVB is a lender to a very liquid and well run technology industry and these customers are in high demand. The SVB not only looks after startups, but also VC funds and PE funds. Imagine gaining access to them in one fell swoop? So a number of companies are working with the Fed and trying to find out [what’s what] now, including a number of hedge funds and other large PE funds, as well as banks.

Would a major bank face antitrust problems here if it tried to take over SVB?

The Fed has one goal and that is to avoid contagion. Every other regional or non-scaled bank is currently impacted. That’s why they’re going to force something by Monday.

Don’t think bankruptcy is the next step? Didn’t that happen at Washington Mutual? Buyers want to buy the good assets and leave all the liabilities with the government, right?

That’s not an official bankruptcy, but it’s as close as you can get. will [a buyer] give money to shareholders? I think these shares could go to zero; An acquirer might well choose not to bail out shareholders, but shareholders are different from depositors.

Speaking of which, does Upfront give bridging loans to any startups that have lost access to their money at the SVB for the time being?

That’s 24 hours old. We’ll probably start those talks next week. We’ve told our CEOs that if you need a bridging loan in the next two weeks, you should assemble your board because it’s a decision that needs to be made by a board. If people believe in your prospects, it shouldn’t be hard to get money for a paycheck or two. If they don’t, it may hasten your downfall, though [going out of business] would probably happen anyway.

I have to wonder if you publicly tried to reassure your colleagues while privately advising the founders to take their money out of the SVB just to be on the safe side.

I assure you I didn’t. Every single VC I know has told people, “We believe your deposits are safe with SVB. It would be wise to take some money with you because you could have a liquidity crunch for a week, but we don’t think a run on the bank makes sense.’ Experienced, professional Silicon Valley VCs know that a bank run hurts everyone.

Are you saying that Founders Fund and Coatue and Y Combinator’s partners are not experienced, professional VCs?

I said a handful of people told people to run to the door and congratulate themselves for it. What that does to the SVB is aside. If the Fed didn’t step in, how many bankruptcies and other aftermath would there be? These VCs congratulate each other. I see emails from VCs to their LPs — which I’m on a few companies from — and they forward things like, “Aren’t I super smart?”

How many of your businesses will not be able to process payroll because of this closure?

I suspect this will be resolved by Monday or Tuesday and very few people will be affected. If it lasts longer than a week or two, it will affect many companies across the industry. Anyone with payslips today or Monday needs investors to make quick investor bridging loans or delay payslips by 48 hours.

Can this really be solved that quickly?

What gives me confidence is that the Fed knows [the implications if it doesn’t].

Who is hit the hardest here?

SVB employees who had large amounts of money in the company’s equity because they believed in their employer. shareholders.

Who benefits from this situation? Where will you move your money?

I think you’ll probably see that people trust bigger banks more than smaller banks. I would personally advise that. Personally, I already have my money in bank accounts because I’m subject to FDIC limits and I’m a cautious person. I’m already heavily invested in T-Bills and other safe, high-yield assets. As for Upfront, we have banking dealings with SBV and we have accounts tied to Morgan Stanley. Next week we will probably open two or three accounts in other banks.