All-In PodcastE119: Silicon Valley Bank implodes: startup extinction event, contagion risk, culpability, and more
EVERY SPOKEN WORD
150 min read · 30,393 words- 0:00 – 1:57
Bestie intro!
- DSDavid Sacks
Hey, guys, I got a little friend here.
- JCJason Calacanis
What? Aw.
- DSDavid Sacks
Yeah. I think I'm gonna start a new podcast.
- JCJason Calacanis
Is that a bulldog?
- DSDavid Sacks
And I'm gonna have a bulldog as my mascot.
- JCJason Calacanis
You brought a bulldog? (laughs)
- CPChamath Palihapitiya
(laughs)
- DSDavid Sacks
(laughs)
- JCJason Calacanis
Oh my God. You got my mascot.
- DSDavid Sacks
Yeah. I took over-
- JCJason Calacanis
Oh my God.
- DSDavid Sacks
... your mascot.
- JCJason Calacanis
Well, look at that. Now you're actually likable, Sax.
- CPChamath Palihapitiya
Sax, are you trying to improve your image? (laughs) Oh my God. I was about to say, Sax is so unlikable-
- DSDavid Sacks
(laughs)
- CPChamath Palihapitiya
... that he has gotten a bulldog. Oh my God, Sax. Show me his face again.
- JCJason Calacanis
Oh, such a good bulldog.
- CPChamath Palihapitiya
Is it him or her?
- DSDavid Sacks
Him.
- CPChamath Palihapitiya
What's his name?
- DSDavid Sacks
His name is Moose.
- CPChamath Palihapitiya
Oh my God.
- JCJason Calacanis
Oh my God. You got a bulldog. He's so cute.
- DSDavid Sacks
Yeah, it's gonna be my mascot now, Jacob. I'm going solo with my podcast. I'm gonna call it This Week In Technology.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Uh, it already exists. It's Leo Laporte's podcast. Please don't start any more trademark lawsuits.
- DSDavid Sacks
(laughs)
- JCJason Calacanis
All right, everybody. It's an emergency podcast. Silicon Valley Bank, uh, has been taken over by the FDIC. I am-
- CPChamath Palihapitiya
Sorry, is this the-
- JCJason Calacanis
... Twist live stream? Am I on the Twist live stream?
- 1:57 – 17:53
Overview of the SVB collapse and bank run
- JCJason Calacanis
everybody. It's been a wild 36 hours here. We're gonna get into Silicon Valley Bank imploding. The FDIC has shut down Silicon Valley Bank and there's many different things we have to discuss with me today, as always, the dictator himself, Chamath Palihapitiya, the Rain Man, David Sachs, and the prince of panic attacks no more, his wire's cleared, David Freiberg, the sultan of science.
- CPChamath Palihapitiya
(laughs)
- JCJason Calacanis
Welcome, boys. How is everybody, just to start this off, contextually, the last 24 hours, can you, uh, can you recall a time in our careers where it's felt this acute or insane or intense?
- CPChamath Palihapitiya
Uh, 2008 and COVID.
- JCJason Calacanis
Okay.
- CPChamath Palihapitiya
And I think that this is right up there, could be two, probably three, in terms of the level of panic and concern. The problem is we're in the middle of it. We don't know what's gonna happen this weekend, so there's a lot of anxiety right now, a lot of panic going on. And a lot of, like, unlike COVID and '08, really acute effects that many companies and investors are actively dealing with right now, like not just a few, thousands of companies that are really in a state of, like, distress right now. So, it is, um, potentially from a Silicon Valley perspective, worse than '08 or COVID.
- DSDavid Sacks
Oh, for sure. For sure. I mean, this, this is basically a Lehman-sized event for Silicon Valley. Remember when Lehman Brothers went out of, basically, uh, filed for bankruptcy in 2008, started the whole financial crisis? The federal authorities thought that the best plan for Lehman was to file for bankruptcy. They didn't try to save it. And that basically led to a cascade where the whole financial system almost collapsed. I think that SVB, this is a Lehman-sized event for Silicon Valley and there's, there's two big things happening. One is the impact on the startup ecosystem, so 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, which is now under receivership. So, if you wired your money out yesterday, you're good, and a lot of people managed to do that, but there are a lot of people who were, had wires in the hopper, didn't make it today, logged into the website, can't log in. Their money's just frozen and we don't know when they're gonna be able to get their money out or how many cents on the dollar they're gonna get. So, basically the whole startup ecosystem is in peril. I think Garry Tan called it an-
- JCJason Calacanis
Extinction level event.
- DSDavid Sacks
... yes, exactly. That was a good term. And just to be really clear, this is not big tech at risk. I know there's a lot of people out there who don't like the idea of bailing out big tech.
- JCJason Calacanis
This is not Google. It's not Amazon.
- DSDavid Sacks
Exactly. Those companies have plenty of cash. They're fine. This is small companies, companies with 10 to 100 employees and you're looking at maybe thousands of them just being wiped out for no reason, they didn't do anything wrong, because of this. This could have a very damaging effect on the startup economy and the whole United States economy. This is little tech. These are the future companies that will keep the United States competitive, uh, versus China and the rest of the world. And then the other big thing that's happening, and this is all happening in real time, is a regional banking crisis because when depositors see that their money was not safe at SVB, which was a top 20 bank that as far as everyone knows was in regulatory compliance. Nobody has said that SVB wasn't compliant. As far as we know, they had a regulator's seal of approval. And now you find out your money was not safe and it's not FDIC insured above $250,000. So, the conversations we're all seeing in our chat groups with leading investors is, why the hell would you keep your money anywhere but JPMorgan or a top four bank? And so, I think that unless the Fed steps in here over the weekend, we're gonna see potentially a, a run on the regional banking system, a cascade like we saw in 2008.
- CPChamath Palihapitiya
Well, Sax, let's, let's just take a step back before, because I think you're right, but we should talk about why that happens, the contagion drivers.
- JCJason Calacanis
And just so people know, Silicon Valley Bank is used by 50% of venture-backed startups and, I would say, the majority of venture firms.... also have their money there. So this morning, I got a note from a fund I'm an LP in. They had millions of dollars that they can't access to invest in startups. So Chamath, there are many products and services that Silicon Valley provides. One is, uh, you know, banking services to startups. Another is to venture capitalists. They do the mortgages for banker, for venture capitalists, and for founders as well. They provide those kind of white glove services. But you also mentioned in our group chat, they also provide loans to GPs, general partners, the people who run, uh, venture firms. So the impact could also hit there. Maybe you could explain what that is, and then we'll get into what happened here.
- DFDavid Friedberg
Yeah. Well, I think it's important maybe actually just for Friedberg to just explain what's happening but-
- JCJason Calacanis
Okay.
- DFDavid Friedberg
... can, and maybe, maybe let me just do the lead in and then Friedberg can do the details. But for, for those that are far away and aren't even sure what's going on, the basic problem that we have right now is in the last 36 hours, a key part of the financial plumbing of Silicon Valley has basically been turned off. And as a result, billions of dollars of deposits have basically, um, been frozen. It means that people can't pay their bills. It means that people can't access their deposits. It means that credit lines could be in default. It means that payroll can't be met. And so as a result, we have this potential contagion on our hands. But in order to understand it and unpack it, I think it's important to explain exactly how this came to pass. So let me just hand the ball to Friedberg, and then we can talk about some of the implications, of which there are many.
- JCJason Calacanis
Yeah, before Friedberg starts with the why, just the what that's happened as well. This all started on Wednesday evening when Silicon Valley Bank's CEO published a letter to shareholders announcing that the bank was rebalancing its balance sheet by selling tens of billions of dollars worth of mostly US securities, I'm sorry, Treasuries. Uh, and then they announced they would raise some money and sell some shares in Silicon Valley Bank. The, then the shares in Silicon Valley Bank as a publicly traded entity dropped 60% on Thursday, then another 60% on Friday. Of course, then the entire world got focused on this, and then every venture capitalist started telling, or I would say the overwhelming majority of venture capitalists told their founders to get their money out of SVB. Then you had a classic run on the bank, a small number of venture capitalists gave advice to say, "Hey, we should support Silicon Valley Bank." I understand that, but it turned out to be really bad advice. Um, and then trading, uh, was halted on Friday morning, pending news. And then finally, the FDIC shut down Silicon Valley Bank at noon on Friday. And there's a lot of speculation of what will happen on the we- uh, over the weekend, but maybe you could walk us through technically what happened to Silicon Valley Bank and why they had this cash shortfall and this ru- yeah, we explained the run on the bank basically, but what led up to this?
- CPChamath Palihapitiya
The irony is, it really was, and is, prior to the, quote, "run," a financially solvent business. So I, I have a few slides, if we're on YouTube you can see it, um, that we pulled. One slide that was kind of made by us and the other set that come from Silicon Valley Bank's actual presentations. But if you look at their balance sheet, this is from the end of the year 2022, um, you can kind of look at the w- you know, stuff that they owe, their, their liabilities, which is what they owe their customers that sits in deposits, 'cause when customers give you cash in a deposit, you owe them that money back. So that sits as a liability. And then they had, uh, some other debt. So in total, Silicon Valley Bank, at the end of the year, had about $195 billion in liabilities, 173 billion of customer deposits that they owe to customers and 22 billion of other debt. And then they take those customer deposits and they invest it in, in a number of securities. And the way that a balance sheet business like this bank would operate is, you know, the customers have access to their cash, um, anytime they want, but in order for the bank to make money, they make longer duration investments, and those longer duration investments give them the ability to earn money on those longer duration investments, um, more than they're paying the customers for the deposit. So if you look at their longer duration investments, they had about $208 billion, um, of total assets sitting on the balance sheet. Uh, so compare that to the 195 billion that they owe customers and, and, and other debt holders. So, you know, the difference here between 208 and 195 is about $13 billion. That's kind of the net, what people would call book value of Silicon Valley Bank at the end of the year. And of the 208 billion of assets that they had, ni- 74 billion were loans and they've got a breakdown of the loan portfolio here in a minute, 91 billion were these h- hold to maturity securities where they don't actually adjust the value of these on a quarterly basis, and 26 billion is what triggered this panic, which is available for sale securities, mostly Treasuries. And what happened is Silicon Valley Bank's deposits came in so quickly over the last couple of years that they went out and they bought a bunch of Treasuries, you know, with, with the cash that they got. And the problem is, that very quickly-
- JCJason Calacanis
Friedberg, it's actually MBS.
- CPChamath Palihapitiya
Yeah.
- JCJason Calacanis
They bought a bunch of MBS, ten-year duration MBS. And important to note, of the 208 billion that they have, the book value, Friedberg, there was a, a, uh, whatever, 10% of it's in cash or something. So they do have some cash there, but-
- CPChamath Palihapitiya
That's right. Yeah, sorry, it's a good point. If you go back, so like, you know, let's say that of the 100, of the 173 billion of customer deposits, you know, they've got 14 billion of cash and then they've got all these Treasury securities they can sell, call it 40 billion. So if 25% of customers said tomorrow, "Hey, we want our cash back," theoretically they could just dump those Treasury securities, distribute the cash, and give it all back to customers. The problem is, if suddenly more than 25% want to get their cash back, well, now they have a problem. And that is effectively what triggers the run on the bank. As soon as some folks think that others might be pulling money out, then everyone rushes to be the first money out the door, and that's what triggers a classic run on the bank. There's a, uh, a statistic, I think, in the 1920s, there were several hundred banks that had runs every year for almost the entire decade. Um, and these, this was, like, a regular kind of occurrence that happened in the 1920s that ushered in a lot of our modern securities laws that are meant to kind of-... create the necessary liquidity provisions and how these banks are able, able to operate to make cash available to customers. But what happened is, so much so-
- JCJason Calacanis
So much so, by the way, Friedberg, that they made a movie, It's a Wonderful Life about the bank run.
- CPChamath Palihapitiya
That's right. So basically, the, one of the bigger problems that Silicon Valley Bank, they ran into two big problems. Number one is deposit decline, where, uh, VCs were not investing new money and when they were not investing new money and startups were burning more money than Silicon Valley had modeled they would be burning, because they thought everyone was going to reduce spend and reduce burn, and they didn't. So deposits were going down, while all these startups were burning money. No VCs were investing. So total deposits were on the decline. Meanwhile, their bond portfolio, the assets that they hold on the balance sheet, also declined in value. And I, and I kind of just put a really simple illustration here on why. If you have $100 kind of face value bond that earns 2%, uh, which is basically, you know, where these treasuries were a year ago, and you, and you hold that for 10 years, that 10-year bond yields $122. If the interest rate goes up to 5%, then the, that, that, that bond should yield $163. So the value of the first bond actually goes down by 25% because of the market conditions. That's how significant the value changes with just a 3% change in the interest rates. And that's effectively what happened with that available for security segment of the Silicon Valley Bank portfolio, uh, balance sheet. They had this bond portfolio that suddenly got devalued, and they had declining deposits. So when deposits start to decline, you gotta make sure you have enough assets sitting on the balance sheet. So they sold a bunch of them, said, "We're going to raise more money," and at that point everyone kind of perked their head up and said, "Oh my gosh." What's crazy is in Q4, by the way, Seeking Alpha, this website you guys know, they had actually done an analysis and said, "Is S- SVB about to blow up?" And they put together a bunch of slides that highlighted why this might be the case, because they saw that deposits were declining, that their, um, their assets that they hold were basically declining in value because of the massive and very quick rise in interest rates, and that SVB had bought a bunch of bonds that were long, long-durated bonds. So it led to a, you know, obviously, a real short-term problem. If you look at the rest of SVB's loan portfolio, there's also a question of how distressed that all is. So 10% of their 70 billion-plus dollars of loans is in venture debt, and venture debt is very questionable in this market, right? Because historically, the way venture debt makes money is that they assume that VCs are going to keep funding the companies that they're providing debt to, and if the VCs stop funding the companies, then the venture debt defaults. And so if you go to the last slide in the stack, you'll kind of see SVB's performance on their venture debt portfolio. Yeah, so look at this. This is the, the performance results on just the warrants that they get on their venture debt. So when you, when you issue venture debt, you take a write-down, um, or you get paid back, and then you also get some warrants. You get some, a right to buy shares in the, in the winners, in the, the startups that work. And so the way that SVB has made money on their venture debt portfolio historically is, hopefully they get paid back on all their loans. Some of them they don't, but then they'll make a bunch of money on selling their warrants or, or the pub- company's going public or getting bought. And in Q4 of 2022, it just fell off a cliff, and their venture debt portfolio really started to show distress. And that's 10%.
- DFDavid Friedberg
Are these realized gains or these are mark-to-market gains?
- CPChamath Palihapitiya
This is the net gains on, on their warrants. So they don't mark to market warrants. I think this is what they actually exercised and got out. So there was e- there was obviously a ton of exits in 2021. So they made $560 million in profit on their warrants that they had in their venture debt portfolio in 2021. That number collapsed to 148 in 2022. And you better believe most of that was in the early part of 2022. Um, so, you know, they, they didn't do a quarterly breakdown on this. This was like their full-year numbers, but their venture debt portfolio, which is another $7 billion of capital, also distressed. Um, certainly wasn't going to perform as everyone had modeled. So when you kind of start to add this all up, and remember if you go back to the beginning, they only had $15 billion of true net book value, which is the difference between their assets and their liabilities. And so if you really start to adjust what are those assets really worth? Are they really worth what they're holding them at the book at? And if people start to pull money out and you got to sell them at a distressed price in order to give people their cash that they're owed on deposits, that's when you have a classic run-on-the-bank problem, and then everyone tries to be the first out the door. And that's basically like what triggered this this week.
- DFDavid Friedberg
Can I give you guys my little version of all of this? I think there are three buckets, but before I go into the three buckets, I just want to say, to all of the employees at these companies, I think we, the four of us, are so truly sorry for what's going on and what you guys are going through. And then to founders that are trying to navigate this, it must be unbelievably tough. There are a few founders in our portfolio. So, you know, from all of us, just know that we're thinking of you guys and, um, hopefully everybody ends up on the other side of this by Monday or Tuesday with not a lot of damage. So let, let's just put that out there as sort of like goodwill and kind of good juju in the world for the next couple of days here.
- JCJason Calacanis
This is going to be a really difficult weekend for people who are trying to navigate this.
- DFDavid Friedberg
Yeah.
- JCJason Calacanis
I think it's well said. Yeah. I mean, I, I-
- 17:53 – 37:11
Who or what is to blame? Debating venture debt
- DFDavid Friedberg
and Friedberg just mentioned this, is w- we, the four of us have been talking for the last 18 months about the impact of rising rates. And, you know, we talked a lot about, for example, like in our portfolio, my partners and I walked into every company and made them have at least enough money to get through mid-2025, right? I've said this a bunch of times.And so that was about having very difficult conversations about making sure that you were husbanding cash so that you had enough to weather any storm that came on the horizon. But it turns out that there was some group of VCs and companies that just didn't get that memo and just kept spending like nothing had changed. But when other VCs have stopped giving you money and you're continuing to spend like it was 2020, that's what caused this mismatch, and it was really the spark that lit the fuse. So, I think it's a really sad commentary at some level about the lack of governance that we have inside of some of these companies where folks are just not doing the job that they're supposed to at these board levels. I think people, and we've talked about this, have made venture too much of a popularity contest where they are, you know, glad handing and smiling and not doing the hard work of holding folks accountable. And so some handful of VCs and some handful of founders just didn't get this memo and it made what could have been a slower train wreck faster unnecessarily. So, I think that that's worth talking about. Then I think if you look at what actually practically happened over the last year and a half at SVB was that they were so desirous of profits that they basically had a duration mismatch. So wh- what is that? Imagine you get a job and, you know, somebody's like, "Hey, Freidberg, I'll pay you $100,000 monthly over some number of months, right? In, in, in normal pay every two weeks, or I'll pay you 200,000 but you only get paid once a year." Well, the problem with that second thing is you still have monthly bills that you have to make up for before you get paid, and so most people wouldn't take that job even if they paid you a lot more because you have this durational mismatch. You have to pay rent every month, you have to pay bills on a monthly basis, you have credit card bills, all these things, and so you need to match the timing of your cash flows. And so I think somewhere along the way the risk folks at SVB just made a really large miscalculation. They basically went and bought 10-year risk in order to pay back money that could be called on a daily or weekly basis. That fr- obviously in hindsight was not a good idea.
- JCJason Calacanis
But, but more importantly, Chamath, they didn't-
- DFDavid Friedberg
And then, and then-
- JCJason Calacanis
... they didn't adjust fast enough.
- DFDavid Friedberg
Well, they can't because they have these mark-to-market assets that were just getting clobbered in the head as rates got raised. And then the third, the third thing is around regulators. You know, after the great financial crisis, we went through a period where there was hundreds of bank failures. And then for the last decade, there've been virtually none, right? There've been like a few here or there, and the last one was just during COVID. And so the, the regulators I think have done a really good job with Dodd-Frank and all of these other things to clean up the banking laws and the reporting requirements and the capital structures so that runs on banks are more and more infrequent. But they kept this crazy loophole around the accounting treatment of assets and they allow these durational mismatches to appear in a bank's balance sheet. And so I think there's a piece here for the regulators which is here's an opportunity that's glaring and obvious now and screaming about how we need to tighten some more of the transparency that's required. It shouldn't be a group of armchair sloots on Seeking Alpha that sniffed this out three months before it happened. It should have actually been a regulator that said, "Hey, hold on a second. Something is happening here that we don't like." And so we n- I think we need to figure it out. But I think those are the three actors that are in play, and they each share a bit of the blame here.
- JCJason Calacanis
Freedberg, Sacks, what do you think? Who, who, who is to blame here most for this blowup or is this just the extragenous event of the rate hikes happening in such a short compressed period of time?
- DSDavid Sacks
No, I mean, look, I think that SVB's risk management was terrible obviously. They signed up for these long dated securities when th- the market they serve is incredibly volatile, like Chamath says, duration mismatch. Really good point. I would also say that there's a weird regulatory treatment where apparently if you buy these 10-year bonds, these 10-year mortgage-backed securities or 10-year treasuries, you don't have to recognize the loss until you sell them which is just bizarre. So in other words, they should have been marking the, the positions to market and instead they just were allowing these losses to accrue. I don't understand how the regulators can allow that kind of system. I also don't understand how the regulators can allow a bank to take customer deposits and loan them out to startups with this venture debt that we've been talking about on the show, where 10% of their portfolio is basically being loaned out to startups who have no credit. That's crazy. We talked on the show a few months ago-
- JCJason Calacanis
We actually, it's a good time to play the clip here because what we saw and Sacks and I, you know, seeing at the series A level, you have a lot of times founders would get this basically free money in their minds. "I raise 10, I get five in venture debt, I can extend my runway." Um, but that money comes due. And, and here's the clip for when Sacks and I were talking about it just a couple episodes ago.
- DSDavid Sacks
Whoosh. What I don't trust is whether the, the return models on venture debt that were created over the last five to 10 years will be a good predictor of what the returns will be in the next five, 10 years when a lot of the mortality that should have happened in the past now happens in the future. Whoosh.
- JCJason Calacanis
Yeah, I mean, this is just-
- DFDavid Friedberg
... four or five episodes ago, we kind of nailed it.
- DSDavid Sacks
Startups have no collateral. They have no- there's no security for that loan. How does that make sense-
- DFDavid Friedberg
No, not, not true.
- DSDavid Sacks
... to make a loan to a creditless startup?
- DFDavid Friedberg
No, no, not true.
- CPChamath Palihapitiya
Guys, look, I, I, I disagree with you on this point. Look, if you pull up the, the slide that, that breaks down ... So, w- w- let's talk about venture debt for a second, 'cause I've actually invested in a venture debt fund and I've seen the economics on it. The way that the, the venture debt model typically works is the lender loans money to the startup, and what they underwrite is what the current VCs in the startup say they're gonna do to support the company in the future. So their ability to get paid back in the future is largely predicated not on underwriting the company and the performance of the business or the assets they have, but it's underwrited by the fact that the VCs are committed to continuing to put money in and hopefully see that this thing has a big outcome.
- DSDavid Sacks
(laughs) There is no commitment.
- CPChamath Palihapitiya
And, no, and yeah, I, I get it, but Sachs, l- let me, let me just finish.
- DSDavid Sacks
There is no commitment. I've signed 100 ... No, let me tell you, I've, as a VC-
- CPChamath Palihapitiya
Hold on, let me just finish. I, I get it. But the, but the asset as a, as an asset class, we can make fun of it all we want, it's actually performed pretty well. These guys have generated typically 18% as an industry, kind of returns.
- DSDavid Sacks
In a bull market. In, in a bull market.
- CPChamath Palihapitiya
And, yeah. And, and you're right. It's the same as venture-
- DFDavid Friedberg
They sold boats.
- CPChamath Palihapitiya
And the way those, and the way that they generate those returns is that they're loaning money to the startups. A bunch of those startups fail, they don't get paid back. And then the ones that succeed, they actually take warrants in the startups, so they have some equity upside in the startup. And that's the way the model works. We can make fun of it all we want. It actually works as an industry, and historically, they-
- DSDavid Sacks
Okay, so let me tell you, let me tell you why that broke, is, um, it goes back to the point you made earlier in the show, which is the, the, the lender has this expectation that the VCs are gonna keep investing. Well, what if they don't? Now, we've been in a generally up into the right bull market since the last crash in 2009.
- CPChamath Palihapitiya
That's right. 2009. Yeah, 14, uh, 14 years ago.
- DSDavid Sacks
So I believe that the data for all these models is, is skewed, because it assumes, again, an environment in which companies keep r- raising up rounds.
- CPChamath Palihapitiya
That's right.
- DSDavid Sacks
And as soon as you get into a crisis, in which that breaks, then the whole asset class breaks.
- CPChamath Palihapitiya
That's right.
- 37:11 – 1:00:36
Contagion risk, second- and third-order effects, government backstops
- DFDavid Friedberg
crazy to me.
- JCJason Calacanis
This is the challenge, Sax, I think you can speak to this as well, is we did all this portfolio management over the last year. These were the troubled companies and then you had the companies, uh, a large portion of them who did the right thing. They had a big war chest and they had, uh, set the burn at the right pace, and now they, the other portion of our port- portfolio that had big war chests, they're now at risk. So if you're a capital allocator right now, you're looking at a group of companies that you tried your best to save and they're, and they're ankled, and they're wounded, and now the strong ones are wounded too. This is cataclysmic for Silicon Valley. If this does not get stopped this weekend, not only ... And I- I- I- I don't want to be hysterical-
- DSDavid Sacks
You're right, this is a meteor hitting the dinosaurs, it's extinction level event. You're right, J-Cal. Listen, we have portfolio companies that had tens or, you know, millions or more in-
- JCJason Calacanis
Yes.
- DSDavid Sacks
... Silicon Valley Bank, and their account showed that their money was in the safest money market funds, money market funds with a publicly traded ticker symbol that were managed by BlackRock or Morgan Stanley, okay? That's what their accounts showed them they had. And then, they're told all of a sudden, "No, you're only protected up to $250,000. Everything above that, you got your- your money market fund is just an asset of SVB, which is in receivership."
- DFDavid Friedberg
You get a certificate. (laughs)
- DSDavid Sacks
Yeah, you get a certificate. Do you see this announcement? By the way-
- JCJason Calacanis
I mean, and then they kind of-
- DSDavid Sacks
... I think the California regulator made things worse. The California regulators stepped in and they froze everything. So, our companies were in the process. We have companies that submitted a wire yesterday. By the way, we spent all day yesterday on the phone with our portfolio companies trying to get them out. We had wire requests that went in before the deadline and for some reason weren't in queue.
- DFDavid Friedberg
Same. They didn't get through. Yeah.
- DSDavid Sacks
And they didn't get out.
- JCJason Calacanis
Same.
- DSDavid Sacks
They didn't get through.
- JCJason Calacanis
Same.
- DSDavid Sacks
And then the California regulator steps in this morning and freezes everything. And what do they announce? They said, "Oh, you're good. You're good for your insured amounts." How much is that? $250,000. "For your uninsured amounts," which is everything above 250, "you're gonna get a certificate." A certificate? What does that mean? That means you're a creditor in bankruptcy. So the mutual fund that you thought you owned was actually not hypothecated in your name. It was in SVB's name at BlackRock, and so our companies have been calling BlackRock and calling Morgan Stanley saying, "Hey, do you have my money market fund?" And they're like, "No, sorry, that's SVB." So now-
- JCJason Calacanis
So this is the crazy thing.
- DSDavid Sacks
... they're sitting in a- in a creditor line in bankruptcy.
- JCJason Calacanis
We got to explain this.
- DSDavid Sacks
Yeah.
- JCJason Calacanis
These are called sweep accounts. So what Silicon Valley Bank did with, uh, some of these large portfolio hold- holders, let's say Sax and a bunch of other VCs gave you 30 million bucks. Yes. And they would s- they took your money and they said, "You know what? Just to be safe, we're gonna take your money, we'll automatically sweep it and distribute it across two other accounts." So we got this BlackRock over here for you, great. We got this Morgan Stanley over here, great. Whatever it is. You could only get to those through the Silicon Valley Bank interface. And so it was supposed to protect you, but there is no recourse, it seems. Those are frozen too, so the only thing you can do that's logical ... And I had a mentor 30 years ago when I had the magazine and we started hitting millions of dollars in revenue. And he said, I said, "How much money do we have in the bank?" He's like, "Which bank account?" And he had four bank accounts and he would load balance them, and he did it every Friday. God bless Elliott Cook. He did it every Friday for me, and I've always done that. I've always had multiple bank accounts and load balanced them. But in this case, Silicon Valley Bank did it through one interface. I have multiple startups today who did this exact thing, Sax, and they- they couldn't even log into Silicon Valley Bank today to even see where they're at. I mean, I think you can log in now-
- DSDavid Sacks
Yeah, you're right, everything got frozen. And the California regulator froze them and they brought in the FDIC. So there's a couple of problems now with the working out of this. This is basically a bankruptcy proces- receivership process. It's that we've got all these companies that need to make payroll in the next few weeks, right? And so these processes don't work at startup time. If you could just figure out, like, over the weekend, "Okay, SVB lost 30 cents on the dollar and everyone's just gonna be prorated. You're gonna get 70 cents on the dollar and you're gonna get your money on Monday," it would be a hit to the startup ecosystem, but people would recover and move on. But the fact of the matter is, it's not gonna be on Monday. It could take weeks or months to figure out how many cents on the dollar you have. And that's the real problem-
- JCJason Calacanis
Are they liquidating Silicon Valley Bank? Are they selling the debts?
- DSDavid Sacks
Oh, yeah.
- JCJason Calacanis
Is everybody getting laid off?
- DSDavid Sacks
No, FDIC's gonna, FDIC's gonna liquidate everything.
- DFDavid Friedberg
Well, you have two paths here. Path number one is y- if you actually try to sell these assets, but the problem is, who do you think the buyer is? The buyer are the sharpest sharps on Wall Street who will purposefully underbid these assets. And so that then takes you to path two, which is then the only other real solution is for the Fed to warehouse them and guarantee them. And that's an equivalent version of what they had to do during the great financial crisis, which was this thing called TARP, which is the Troubled Asset Relief Plan. It was just a backstop and a mechanism so that these, at the time, those toxic assets, which were a bunch of mortgage-backed loans, could be cleared through the system over time, which effectively meant that the Fed basically warehoused that risk. So, I think what we need to see now is, is ... Sax, it could be 50 cents on the dollar. It could be 60 cents if you want immediate liquidity. You know, a friend in our group chat was mentioning that there was one claim-... a company that had a $100 million inside of SVB was offered 60 cents on the dollar today for that claim. Now, that's a really-
- JCJason Calacanis
From a third party?
- DFDavid Friedberg
From a third party who said-
- JCJason Calacanis
Wow.
- DFDavid Friedberg
... "I will take y- I will give you 60 million today in return for that certificate, plus the (laughs) 250,000 that says you're owed $100 million." Because they're willing to take the risk that they'll get, you know, 80 million-
- 1:00:36 – 1:12:44
What does this mean for the VC industry? Silicon Valley panic cycle, advice for founders
- CPChamath Palihapitiya
What do you guys think this means for VC?
It is a killing effect. I, I talked with some LPs in the last two days in the VC world. I'll give you a couple anecdotes. Uh, I have a friend, runs a fund. He looked at his portfolio, they have $270 million, or sorry, $350 million tied up at Silicon Valley Bank. They need $27 million, uh, for cash for the next 30 days. So he's called his LPs and he's trying to get his LPs-
- JCJason Calacanis
Wow.
- CPChamath Palihapitiya
... uh, to front him money, to wire money, so that he can front his companies money, so they can actually pay their operating expenses and, and cover their payroll. And then I spoke with a couple of LPs in the last 48 hours, um, they have gotten dozens of calls, uh, from, uh, various venture funds. Everyone is asking the same question, "Can we do a capital call? Can we get money delivered early? Can we use that money to support our companies 'cause their cash is stuck?" Coming out of this, the, the, the uncertainty that this creates in the investment environment, um, I think is gonna have a real chilling effect, not just with the GPs and their, you know, uh, proclivity to sign term sheets right now and wire new money over. But also with the LPs as they're making capital commitments and actually following through with, with, uh, capital commitments that have already been made, um, given, uh, you know, where's the capital actually gonna end up? That was never a question mark before. It was never anything that anyone even considered, that capital could be disappeared, or locked up, or tied up. Um, and the fact that this is adding this unique friction in the market, um, is, is a layer on top of an already distressed and challenged, uh, environment, uh, for fundraising, for GPs, for LPs, uh, and it seems to, um, be exactly the icing on the cake we did not need right now, uh, no matter how this gets resolved.
- JCJason Calacanis
I, I think private markets and VC could cease. I think you're gonna see people pull term sheets, maybe half as many fundings are gonna occur as people try to do triage.
- CPChamath Palihapitiya
Another VC friend of mine just sent me a text, he can't make payroll next week. He has a fund, small fund-
- JCJason Calacanis
For his VC fund?
- CPChamath Palihapitiya
His VC fund, their employees cannot... He cannot pay his employees on Monday.
- JCJason Calacanis
Oh, my lord.
- CPChamath Palihapitiya
And so, um, yes, I do think funds could shut down, uh, coming out of this. It, I, I think that companies that were, call it, you know, 75% distressed are done for now. No one's gonna step in, and bridge them, and fund them. Uh, it's gonna accelerate a lot of shutdowns, uh, because people are now cash is king, now cash is king-er. Right? It's like-
- JCJason Calacanis
Right.
- CPChamath Palihapitiya
... uh, a big shift.
- DSDavid Sacks
I think that was really well said. I think you're, you're right about all that. J Cal, you tweeted that you think this is gonna cause a 60-day freeze in, in deal-making activity. I think that's more or less right. You're right, because, you know, all, all the VCs out there have to think about shoring up their existing portfolios.
- CPChamath Palihapitiya
Exactly.
- DSDavid Sacks
What if you got companies that are now in distress that are perfectly good companies? You gotta focus on maybe you're gonna make new investments in them.
- CPChamath Palihapitiya
You're picking a, you're picking a few winners.
- DSDavid Sacks
Yeah.
- CPChamath Palihapitiya
You're picking one or two winners, you know, you're... And you're gonna focus on that and you're gonna say, "You know what? The rest of them could be good," but I can't... It's, it's gonna be a tough decision.
- JCJason Calacanis
I have three-
- CPChamath Palihapitiya
Pretty for everyone.
- JCJason Calacanis
... open deals right now, um, that we're doing. I now have to figure out how to get those deals done, and I have four companies that are in this payroll situation in a major way. So now I've got capital and I've got to... And we're not personally affected by the Silicon Valley Bank thing, thank God. But now we have to do triage the known winners in your portfolio that did nothing wrong, or do you make the next three investments or four investments? And I'm gonna make good on those three investments, but next month, maybe not. Maybe next month I'm taking off and I'm focusing on the portfolio. And I think that's what's gonna happen writ large. We're in triage mode now, full-on triage mode if this doesn't get resolved, if they can't get those...
- CPChamath Palihapitiya
Chemath, what do you think?
- JCJason Calacanis
It's dark.
- DFDavid Friedberg
I had a meeting three weeks ago with, uh, US LP. And, you know, you guys know how I run this business here, but it's, there's, there's like, a lot of risk management. You know, we think about this stuff a lot. And the message that came back to me was, "I don't think risk management is worthwhile in venture." I didn't understand where that was coming from, um, because if you're investing your money across a very risky asset class, you have to be always thinking about how you could lose money. And I think that venture has always romantically been described as like, buying lottery tickets. And so it doesn't matter if you lose, but when you have that kind of attitude, you just become super complacent and you don't think about left tail risk, you only think about right tail outcomes. And this is an example of like, left tail risk that came out of nowhere that could wipe out entire portfolios. So you had, you know, folks invest into funds that spent a few years, probably 2019, 2020, 2021, really, uh, misallocating money, right? Writing ginormous checks into companies at valuations that didn't make sense, who then went and burned it. And now what little cash they had left may also be gone, which means those valuations are even more impaired, which means that the LPs that gave them the money are even more underwater. And that cycle, I think, is really terrible. That'll take a... So maybe this is the wake up call where now risk management is actually en vogue and cool and it's important to know this stuff. I don't know.
- JCJason Calacanis
We have breaking news. Uh, while we're taping this, the Department of Financial Protection and Innovation of the State of California has published findings on SVB, we'll pull it up on the screen for the besties to respond to. On March 8th, 2023, the bank announced a loss of approximately 1.8 billion from the sale of investments. Uh, we've talked about that already. Uh, on March 8th, 2023, the bank's holding company announced it was conducting a capital raise. Despite the bank being in sound financial condition prior to March 9th, 2023, investors and depositors reacted by initiating withdrawals of $42 billion in deposits. So that would be over 20%, I think, of the, of the total deposits from the bank on March 9th, or even more, 2023, causing a run on the bank."As of the close of business on March 9th, the bank had a negative cash balance of approximately $958 million. Despite attempts from the bank, with the assistance of regulators, to transfer collateral from various sources, the bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the bank to be incapable of paying its obligations as they come due."
Right. This is what we said at the beginning.
And the bank is now insolvent. We-
- CPChamath Palihapitiya
$42 billion of withdrawals (whistles) ...
- JCJason Calacanis
42 billion.
- CPChamath Palihapitiya
... uh, is 25% of total deposits. But $42 billion is greater than the $14 billion of cash they had on hand and the $26 billion of liquid securities that they had. So you add those two up together, you're at $40 billion. And then to get more cash, they're gonna have to sell a bunch of loan portfolios. And selling loan portfolios, you gotta package them up. It takes weeks or months to do that. Then they're gonna be sold to distress prices. So this is where a classic run-on-the-bank problem actually causes a decline in the asset value of the business, uh, and the assets that they own. Because if you have to go and turn around and sell those assets in the market super fast, you're gonna take a huge loss. You guys remember that movie, Margin Call, with Demi Moore and, um, what's his name? And they, they make this plan to go on market and they're like, "We gotta sell-"
Episode duration: 1:29:26
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