I don't really know much about venture capital but this sounds like a gross oversimplification.
More like, the startups that are saved will be a mixed bag of worthwhile startups and dead-end startups. Meanwhile some worthwhile ones will sadly be left behind with the dead-end ones.
The fact whether a startup has positive cashflow or not isn't really reflective of whether that is a worthwhile startup or a bad one, but rather whether it's at an early stage or a relatively mature one.
The most bestest startup in the world would still be relying on investor's money to pay the bills if it's just starting to build its product and the time to make it profitable will come in a year or two or more (e.g. a biotech startup can take many, many years until the product gets approved for patients and earns its first cent).
Yes, if a business has "grown up" from being a startup and is fully self-funding not only its operations but also its growth, then it will survive, but the definition of a startup is something that's still trying to reach that stage and isn't there yet.
> The fact whether a startup has positive cashflow or not isn't really reflective of whether that is a worthwhile startup or a bad one, but rather whether it's at an early stage or a relatively mature one.
For the past 10 years or so none of the "successful wrothwhile startups" have positive cash flows, and those that seemingly do still manage to post hundreds of millions of dollars in losses yera after year after year.
The whole modern startup business is either "work at a loss until a successful exit for the founders" or "work at a loss forever with no expectation of profitability for some reason".
> whether a startup has positive cashflow or not isn't really reflective of whether that is a worthwhile startup or a bad one
A start-up that fails because of this mismanaged their treasury, didn’t pull money in time, couldn’t borrow against their claims and couldn’t convince anyone to advance payroll. That’s reflective on leadership. It’s a teachable moment. But it points to deeper naivety.
Depends on your perspective. One of the articles of faith in this industry is that good startups get investment and succeed, while bad ones fail. To whatever extent that's true, it won't be particularly worse here. Startups who made treasury management errors and are experiencing cash crunches can make very good cases for bridge loans and extra investment from their existing investors. If their investors are like, "nah, pass" then that's a pretty good reason to question their potential generally.
> One of the articles of faith in this industry is that good startups get investment and succeed, while bad ones fail.
Is it? I thought it was that startups with exciting books and good networks get a chance to ratchet into the next round of funding.
Great startups drown all the time for not being a VC rocketship, when they they could have grow into a perfectly successful cruiseliner under traditional fundraising or bootstrapping.
If investors are “nah pass”, it’s more about making a quick decision about near-term finance opportunities than the mid-term or long-term strength of the underlying business. VC investors inherently care more about 10x exits than sound business practices.
I'm normally very against the HN norm of just naming a fallacy and considering an entire argument dismissed but in this case I think it does apply. This is not a Just World, some unworkable companies will get bridge funding because of their connections and no other reason.
Aside from that timing is always a thing. There's certainly a company out there that is 8 months away from proving the soundness of their idea that now only has six months of funding, or whatever.
The idea that in every case, "the market" or whatever will arrive at the most perfectly correct conclusion is silly at any time, but particularly in one of uncertainty and upheaval.
Yeah, I'm not arguing that "whatever will arrive at the most perfectly correct conclusion". (And I don't think that sql-spy was arguing that either.) What I'm saying is that I don't think this particular circumstance is going to be any less just than usual.
Indeed, I think there's good reason to expect it to be more just given that what we're talking about is mostly a short-term cash crunch that's easily explained. E.g., one company is raising $1 bn for bridge loans: https://techcrunch.com/2023/03/11/brex-ceo-is-trying-to-rais...
That kind of support is not something marginal startups have access to in normal times.
Running a startup means time is never on your side. If you are still 8 months away from proving "soundness" of your idea then you are already too late.
ok but I mean that means that whatever outcome arrived at is necessarily the correct outcome. you're establishing correctness post hoc and so you will always find it. have fun tho.
By design, venture-backed startups are about sticking a plate of spaghetti to a wall to look for the sticky bits. There are few sure tells of what startups are “worth saving” until they’re already quite successful.
Assuming that the SVB unwinding is more than a hiccup in cash availability, what will determine who gets saved will mostly come down to affinity and luck. Promise and value are a sort of first pass filter, but startups are just plain noisy and chaotic field.
"Startups that are worth saving will be saved" feels like the same category of statement as "It's always in the last place I look". They both describe common sense behavior (save things worth saving, or stop searching once you found what you're looking for). But they are not tautologies in the strict sense, you can make them false; and quite frequently they are false in practice, mostly due to imperfect information.
From a pure financial point of view Uber would never be viewed as a startup that was worth saving… for it’s investors the whole point of the IPO was to cash out and leave someone else holding the loss making baby
He is (likely self-interestedly) angling for a system-wide guarantee on uninsured deposits.
He's pretending something like this is true: SVB's failing will have a contagion effect on other banks (though some mechanism that he doesn't explain or have evidence for, although guys like him menacingly gesture towards MBS or something to remind us of 2008, even though it's completely different). By stopping the SVB run, we'll nip this contagion in the bud. There's some merit to this argument.
However, there's really no reason whatsoever to think that SVB's failing will have some causal impact on other banks' liquidity/solvency. To the extent that other banks are in trouble, it's because they have long duration assets that lost value when rates rose. Whether SVB survives or not has no impact on that. So the only mechanism through which an SVB bailout has any effect is through sending the implicit signal that the government will bail out all uninsured depositors.
Even if it doesn’t create contagion it may wipe out a generation of start ups and destroy trillions of dollars of value that will be created in 10 years, destroying the most valuable ecosystem the world has ever seen and all just at the time AI is about to lead to the next revolution and economic transformation.
Given these implications, the policy choices are easy. Why allow these long term consequences in the name od stiffing depositors?
Calm down. No it won't. We have financial markets. Good startups/innovations will get funding elsewhere. This is already happening. The current equity holders will lose a bit. No big deal.
Urgency is warranted when indecision is an accelerant to a fire. Capital markets in the US are dysfunctional and getting worse. Banks don’t lend to small business in any meaningful amount. Going public takes forever. And if you think there is any financial institution except the Fed that could move fast enough to prevent every SVB client company from missing payroll, I would love to know who and how you know they could and would act.
I believe the mechanism he's talking about is that large, uninsured depositors will wire funds out of regional banks that are "small enough to fail" to more diversified national banks that are designated "systemically important banks", which means they're too big to fail.
That's the rumor and I imagine they got to pull the same tricks as SVB as regards to buying risky MBS without alerting the FED. But is there any evidence to support this?
Long-duration fixed income assets go down in value when interest rates rise. This is true whether they're long-dated treasuries or agency MBS. Banks that finance with short term liabilities and own long-term assets are risky because of this: when rates rise the value of their assets declines while the value of their liabilities remains mostly the same.
This is a very different phenomenon than what happened in 2008. In 2008, banks owned a different kind of MBS that was poorly-underwritten, poorly documented, and truanched in a way that made their value extremely sensitive to various model assumptions. This made them extremely illiquid, meaning that if you tried to sell them in volume you would have to sell at a large discount relative to the value of the expected discounted cashflow of the security. (This is not true of 2023 MBS. These MBS are a totally different species. In 2023 rates rose, the value decreased, but we can be extremely certain of the value and they are extremely easy to sell at little discount to this value).
Contagion happened in 2008 because when there was a run on bank A, bank A had to sell its illiquid MBS at a large discount. This reduced/made uncertain the value of bank B's similar MBS, which triggers a run at bank B. In that sense, the bank A run causes the bank B run. There's no spillover mechanism in this 2023 scenario: SVB's selling its treasury or MBS portfolio doesn't meaningfully impair some unrelated bank's assets. To the extent that some unrelated bank is in trouble, it's because they face correlated macro shocks, not because there's a causal spillover.
Of the information available right now, most of it says that First Republic is in a completely different position. At least based on their disclosure on Friday (https://ir.firstrepublic.com/static-files/295faa27-f208-4936...), their risk of a run due to un-insured deposits and sector exposure is much lower:
> Consumer deposits have an average account size of less than $200,000 and business deposits have an average account size of less than $500,000
… and far less of their assets are likely to share SVB's duration exposure:
> The investment portfolio is less than 15% of total bank assets.
They didn’t buy risky MBS. They bought standard vanilla MBS and Treasury Bonds. The problem is the speed of interest rates rising which cause 2 unrelated circumstances to hit at the same time. 1. The net present value of the long term MBS/treasury’s went down. 2. Start ups had trouble raising capital so their normal business activities shifted from net inflows to SVB to net outflows.
So instead of being able to hold to maturity, SVB had to sell assets they bought for $100 for $80. Perhaps they could have hedged against interest rates rising better than they did or had a more short term securities or capped account balances. But the fed could have been faster to act in raising rates to allow for more gradual in raising rates as that would have been less disruptive.
Now the Fed should set up a program to take these long term assets off of member banks balance sheets. Do so at a discount, make the members pay for their bad investments but prevent failures.
*> ... make the members pay for their bad investments ...
SVB was a $209 billion dollar balance sheet with only $16 billion of shareholder equity. That means an 8% decline in the value of their assets makes them insolvent.
That also means that 8% is the maximum shareholders will have to "pay" for the bank's bad investments.
But that’s a very standard ratio in banking. And to be blunt treasuries don’t decrease that much. In fact that’s not really what happened here. Instead, SVB had significant deposit inflows over the last 10 years as their VC back clients raised massive rounds. Their deposit base went from something like $60b to $180b. Then all in unison, as interest rates increased, the same inflows reversed and nearly 100% of their depositors started withdrawing. so SVB had to come up with massive amounts of cash and had to sell things at a loss. That would have been fine if panic hadn’t set in and a Run initiated.
To play devils advocate, what would you have done as the CEO of SVB? Imagine over the last 10 years your clients are successful in raising large rounds and deposit the money in your account, you are required to keep those deposits safe and have to buy something. Would buying US treasuries and investment grade MBS be an unacceptable risk? They could have and should have hedged interest rate risk more perhaps but this isnt some irrational exuberance at work.
To your point about skin in the game, a shareholders skin in the game isn’t the percentage of equity in the firm, it’s what that equity represents in their portfolio. If a shareholders entire net worth is worth
Yes, thank you. I feel like people are throwing around "MBS" because it's vaguely menacing and reminds people of 2008. 2023 MBS are a completely different animal; any comparison to 2008 is a total red herring from people angling for free money from the taxpayers.
They didn't buy MBS, but they have very similar assets/liabilities. They have $17B more "assets" than liabilities, but $166B are in loans and only $4B in cash, meanwhile they have $176B in deposits that are about to be withdrawn heavily. They are going to need to liquidate those loans and you want to guess how much of a % haircut they're going to take on a liquidation of that scale, for similar assets to the MBS SVB purchased last year?
None of the mortgage backed securities are particularly risky. This is purely interest rate risk from what I understand, the mortgage debt assets have not meaningfully deviated from their predicted earnings. They just have low interest rates.
Insured deposits are paid on first day the bank opens. More than 50% of uninsured deposits are paid within a week. Another 20% or so gets paid within a year or sooner in quarterly installments. Remaining amount gets paid in yearly installments and in all cases was paid within 3 years.
Haircut is guaranteed in this political climate since there is no appetite for a bailout. At least not for SVB. The later ones could be bailed out but SVB is a goner.
> Haircut is guaranteed in this political climate since there is no appetite for a bailout. At least not for SVB. The later ones could be bailed out but SVB is a goner.
SVB stock and bond holders will lose everything but it is far from guaranteed that depositors will take a haircut.
> More than 50% of uninsured deposits are paid within a week. Another 20% or so gets paid within a year or sooner in quarterly installments. Remaining amount gets paid in yearly installments and in all cases was paid within 3 years.
The data does not support these statements. E.g. for a random bank I selected on the FDIC site [1], "American National Bank", uninsured depositors got paid 77.8% in three installments: the first 57% two weeks after bank closure, 7.4% after three years and the last 13.3% after five-and-a-half years.
If SVB is acquired, the acquirer also takes on the liability to depositors (most likely all of it, but a haircut could be negotiated) so everyone should get everything back (unless a haircut is negotiated) and handling the shortfall is a cost to the acquirer. Perhaps they believe the future value of the business justifies that, perhaps they don’t and the government pushes them to do it anyway.
If it’s not acquired depositors will take a haircut (get paid less) in the unwinding process so that the amount paid out doesn’t exceed the assets available.
A buyer might be willing to pay a premium (above the assets alone) for the business, which was worth $15.5B to shareholders as recently as Wednesday. Levine's column on this failure is great, you should check it out: https://archive.is/cN3CD .
Thank you. Yes I understand this needs an explanation and I am working on it. I agree with you though, I should have held off on sharing here. Just a start and I was too excited to share.
For those who are still confused: You can upload your .sql file or copy paste your sql to generate a database documentation.
