Investor Mark Suster says a “handful” of bad actors in VC destroyed Silicon Valley Bank

by Ana Lopez

Around noon yesterday in Los Angeles, investor Mark Suster of venture firm Upfront Ventures began pushing for “calmon Twitter. Silicon Valley Bank had messed up its coverage on Wednesday around an attempt to strengthen its balance sheet, and startup founders began to fear their deposits at the tech-friendly, 40-year-old institution were at risk.ore in the VC community must speak out publicly to quell the panic @SVB_Financial,” wrote Suster, who said he believed in the health of the bank and argued that the biggest risk to startups, the venture capital funds the bank has long served, and to SVB itself would be “mass panic.”

As we now know, Suster was already too late. The industry was jittery and the bank’s CEO Greg Becker, addressing the bank’s clients serenely on a Zoom call late last night, managed to further frighten them when he uttered the words: “The last thing we want you do is panic.”

This morning, after trading in Silicon Valley Bank was halted to halt the free fall of its shares — they had already fallen more than 80% between Wednesday and Thursday — the California Department of Financial Protection and Innovation closed the bank. It then brought it under the scrutiny of the FDIC, which is figuring out next steps as the bank’s clients grapple with how to pay their bills in the meantime.

Today we asked Suster about his advice from yesterday and whether he regrets it. During our conversation, he also echoed a growing number of others in the startup world who have started pointing the finger what they are pushing for was a small number of VCs that set alarm bells ringing in the startup ecosystem – causing SVB to fall, but possibly causing a contagion as well. Here’s that interview, slightly edited for length and clarity.

TC: You were on CNBC this morning where you said you think portfolio companies should have been diversifying where they hold their money all along. But my understanding is that Silicon Valley Bank required many startups to have an exclusive relationship with it.

MS: SVB generally does not require exclusivity unless you go into debt. The problem is that many people go into debt and we have warned here 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 those have alternate accounts.

You visibly supported SVB yesterday while everyone raced to the exit. Is SVB an investor in your company?

No.

Has Upfront taken its money from the SVB?

No.

Are you worried because you didn’t get your money?

No. I heard yesterday that $12 billion has gone out of SVB, and SVB has just under $200 billion in assets, so that’s 6.5% to 7% of [its assets] that left in a day. That’s not catastrophic, but the Fed knew it would accelerate. They don’t want a bank run, so I’m guessing the Fed, in a perfect situation, would want someone to buy SBV, and I’m guessing they’re talking to every bank right now and doing an assessment.

Are you surprised no one has stepped forward yet?

Imagine you have a lot of people who are considering buying a sofa. How do you evaluate it if you don’t know how much flight? How do you catch a falling knife? By means of [shutting down SVB this morning], the Fed prevented that knife from falling; now I think we’ll see orderly sales 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 withdraw from the SVB because you are worried about the SVB, then that is no longer an issue.

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

A bank’s valuation is correlated, but usually uncorrelated, with its assets. You have debt holders and equity holders, and if a company goes bankrupt, debt holders get money for the equity holders. What the SVB was betting on was that the ordinary shareholders would get nothing because the SVB would go bankrupt; [its market cap and assets] became uncorrelated because they didn’t think SBV would survive.

The point is, are there possessions and is there value here? SVB lends money to a highly cash-rich and well-run technology industry and these customers are coveted. SVB not only serves startups, but also VC funds and PE funds. Imagine being able to access it in one fell swoop? That’s why a number of companies are working with the Fed to find out [what’s what] right now, including a bunch of hedge funds and other large PE funds, as well as banks.

Would a major bank face antitrust issues here trying to take over SVB?

The Fed has only one goal, and that is to prevent contagion. Any other regional or non-scaled bank is currently being hit. Therefore, they will force something by Monday.

Don’t you think bankruptcy is the next step? Isn’t that what happened with Washington Mutual? Buyers want to buy the good assets and leave all the liabilities with the government, don’t they?

This isn’t officially bankruptcy, but it’s as close as you can get. Shall [a buyer] give money to shareholders? I think those stocks could go to zero; an acquirer could very well decide that they don’t want to bail out shareholders, but shareholders are different from savers.

Speaking of which, does Upfront provide bridging loans to startups that will no longer have access to their money at SVB for the time being?

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

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

I assure you I didn’t. Every VC I know told people, ‘We think your deposits are safe with SVB. It would be wise to take some money with you, because then you have a liquidity crisis for a week, but a run on the bank does not seem useful to us.’ Experienced, professional Silicon Valley VCs understand that a bank run hurts everyone.

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

I mentioned that a handful of people told people to run to the door and congratulated themselves for doing so. Do not consider what this does to the SVB. If the Fed didn’t act, how many bankruptcies and other knock-on effects would there be? These VCs are congratulating themselves. I see emails from VCs to their LPs — some of which I’m in companies — and they forward these things like, “Am I super smart?”

How many of your businesses will be unable to pay payroll due to this shutdown?

My guess is that this will be resolved Monday or Tuesday and it will affect very few people. If it lasts longer than a week or two, it will affect many companies across the industry. Anyone who has payroll today or Monday needs investors to quickly take out investor bridging loans or defer payroll for 48 hours.

Can this really be resolved that quickly?

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

Who will be hit the hardest here?

Employees of the SVB who had a lot of money in their equity because they believed in their employer. Equity holders.

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

I think you’ll probably see people trust bigger banks rather than smaller banks. I would personally advise that. Personally, I have already spread my money across bank accounts because I am subject to FDIC limits and am a prudent person. I’m already heavily into T-bills and other safe high yield assets. As for Upfront, we bank with SBV and we have accounts linked to Morgan Stanley. Next week we will probably open two or three accounts with other banks.


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