What Silicon Valley Bank teaches us

Eric Franklin

Mar 12, 2023

This is meant to be “Chicken Little” and a metaphor for putting all your eggs in one “nest?” Photo by ROMAN ODINTSOV on Pexels.com

Two things to get out of the way, prior to discussing the broader impact of the precipitous Silicon Valley Bank (SVB) collapse:

  1. Prospero Wealth has no direct exposure to the bank or its equity. We bank locally, none of our investment strategies hold the $SIVB security directly, nor do any of our clients hold the $SIVB security directly in any of the accounts we manage.

  2. Everything we talk about in this post should not be considered investment advice. This is one person’s opinion on the takeaways and action items related to this debacle. Talk to us if you want to explore any substantive change to your allocation.

Diversification matters, whether you’re a bank or an investor

It’s impossible to state how big of a deal SVB was within the startup and venture world. The startups I have personally been a part of have all used SVB as their main bank and the CEO’s of those companies were loathe to move their business elsewhere (one of them even risked a lucrative partnership to maintain the SVB relationship). SVB is essentially part of a standard tech startup template.

SVB has pushed their expertise and services connecting founders to capital for decades, quite successfully too. But here’s the problem if you’re SVB; you became super successful within a lucrative niche, but the deeper you get into that unique territory, the more your risk profile starts to behave differently than other banks.

[…] as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups.

Matt Levine, “Startup Bank Had A Startup Bank Run”

So SVB benefited from a very long run of low interest rates and an incredible number of deposits. As interest rates rose and startup funding grew more difficult, the growing disparity between deposits and withdrawals caused a cash crunch. When SVB attempted to remedy that crunch through emergency funding, it sparked a run on the bank that made it insolvent inside 48 hours. Wild.

Behavior rules everything around me

It didn’t have to be this way, of course. While I’m certain there are things that SVB could have done better to assess and remediate the risk of their somewhat idiosyncratic risk profile, the thing to recognize is that a much better outcome for nearly all parties (other than the initial people who triggered the run and got all of their assets out unscathed) would have been to allow SVB to fund its operations as it was trying to do earlier in the week. This would have meant taking some short term pain in share price, but the business was within its balance sheet to suck it up and get it done—if it hadn’t have been for those pesky humans.

By Wednesday and Thursday, prominent VC’s were telling their startup founders to move their money out of SVB post-haste (at a minimum advising them to get their accounts under the $250k threshold for FDIC insurance). A cascade of depositors hitting that withdrawal button threw the company into insolvency and FDIC receivership on Friday. The FDIC has already told account holders that they will have access to their insured deposits of $250k by Monday. Fat lot of good that will do for most people…

Idle speculation on what’s next

The vast majority of assets ($165B, or >95% from what I’ve read) at SVB are uninsured (in excess of the $250k covered by FDIC). That’s an awful lot of money, and a large segment of an important part of the economy (tech venture) to be “up in the air” at present.

Most of the speculation I have seen has indicated that the FDIC will likely find a buyer and look to make account holders whole, at least on a timeframe measured in weeks or months. Anything other than this outcome could tip off further runs on banks with susceptible balance sheets.

If you are investor in $SIVB, you will not be made whole. You will go for a ride from here and probably end up taking a pretty severe beating on your stock valuation through any distressed acquisition.

If you are a customer of SVB, you probably will be made whole—sometime—but you are going to learn a hard lesson about eggs and baskets and have to write some letters to your investors that nobody wants to write. As an investor in many startups and a couple of VC funds, I started getting these today.

(Again, this is all speculation on my part. I reserve the right to be wrong as often as Jim Cramer and have people start selling an inverse-Franklin fund).

What should you, as an individual investor, do?

Buy the dip. These types of problems almost always create compelling buying opportunities—not for $SIVB stock, mind you—but Chicken Little’s are going to run around telling you about how this “contagion will spread,” markets will crater, and that General Zod will soon rule the Earth (I may have made up that last one).

The above headlines are indicative of the way that most investors over-react to news in the short-term. You are not most investors. For those of you with assets you intend to keep invested for more than 5-7 years, the last several days of market drop, especially in tech stocks, creates a compelling buying opportunity.

I would look at deploying capital immediately into the markets as a whole (but specifically in growth if you are not over-exposed there) while keeping some cash available for other possible buy-ins in the weeks ahead.

If you are already over-exposed in growth/tech investments, deploying more broadly to the market would likely require less Pepto-Bismol and still produce better than average returns for you.

Diversify (more than SVB did). This principle applies to many things in life, but your portfolio should be created out of a broad range of statistically uncorrelated assets. At Prospero Wealth, we like to build a broadly diversified core strategy with opportunistic satellite strategies that we attach when the right opportunities present themselves. We have to look at your holdings to do this but the paragraph directly above this one is how you might start to think about that framework.

If you can’t bring yourself to do either of the things above, the next best thing to do is “nothing.” The last thing you want to do is to try to remove risk (AKA “sell your current bag”) while the market is being pressured down by erratic investor behavior. The best time to shift an allocation is after you have given it a full cycle to play out (regaining a new high in the benchmark).

If any of you are interested in chatting about any of this in more detail, we’re here for you!

This is meant to be “Chicken Little” and a metaphor for putting all your eggs in one “nest?” Photo by ROMAN ODINTSOV on Pexels.com

Two things to get out of the way, prior to discussing the broader impact of the precipitous Silicon Valley Bank (SVB) collapse:

  1. Prospero Wealth has no direct exposure to the bank or its equity. We bank locally, none of our investment strategies hold the $SIVB security directly, nor do any of our clients hold the $SIVB security directly in any of the accounts we manage.

  2. Everything we talk about in this post should not be considered investment advice. This is one person’s opinion on the takeaways and action items related to this debacle. Talk to us if you want to explore any substantive change to your allocation.

Diversification matters, whether you’re a bank or an investor

It’s impossible to state how big of a deal SVB was within the startup and venture world. The startups I have personally been a part of have all used SVB as their main bank and the CEO’s of those companies were loathe to move their business elsewhere (one of them even risked a lucrative partnership to maintain the SVB relationship). SVB is essentially part of a standard tech startup template.

SVB has pushed their expertise and services connecting founders to capital for decades, quite successfully too. But here’s the problem if you’re SVB; you became super successful within a lucrative niche, but the deeper you get into that unique territory, the more your risk profile starts to behave differently than other banks.

[…] as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups.

Matt Levine, “Startup Bank Had A Startup Bank Run”

So SVB benefited from a very long run of low interest rates and an incredible number of deposits. As interest rates rose and startup funding grew more difficult, the growing disparity between deposits and withdrawals caused a cash crunch. When SVB attempted to remedy that crunch through emergency funding, it sparked a run on the bank that made it insolvent inside 48 hours. Wild.

Behavior rules everything around me

It didn’t have to be this way, of course. While I’m certain there are things that SVB could have done better to assess and remediate the risk of their somewhat idiosyncratic risk profile, the thing to recognize is that a much better outcome for nearly all parties (other than the initial people who triggered the run and got all of their assets out unscathed) would have been to allow SVB to fund its operations as it was trying to do earlier in the week. This would have meant taking some short term pain in share price, but the business was within its balance sheet to suck it up and get it done—if it hadn’t have been for those pesky humans.

By Wednesday and Thursday, prominent VC’s were telling their startup founders to move their money out of SVB post-haste (at a minimum advising them to get their accounts under the $250k threshold for FDIC insurance). A cascade of depositors hitting that withdrawal button threw the company into insolvency and FDIC receivership on Friday. The FDIC has already told account holders that they will have access to their insured deposits of $250k by Monday. Fat lot of good that will do for most people…

Idle speculation on what’s next

The vast majority of assets ($165B, or >95% from what I’ve read) at SVB are uninsured (in excess of the $250k covered by FDIC). That’s an awful lot of money, and a large segment of an important part of the economy (tech venture) to be “up in the air” at present.

Most of the speculation I have seen has indicated that the FDIC will likely find a buyer and look to make account holders whole, at least on a timeframe measured in weeks or months. Anything other than this outcome could tip off further runs on banks with susceptible balance sheets.

If you are investor in $SIVB, you will not be made whole. You will go for a ride from here and probably end up taking a pretty severe beating on your stock valuation through any distressed acquisition.

If you are a customer of SVB, you probably will be made whole—sometime—but you are going to learn a hard lesson about eggs and baskets and have to write some letters to your investors that nobody wants to write. As an investor in many startups and a couple of VC funds, I started getting these today.

(Again, this is all speculation on my part. I reserve the right to be wrong as often as Jim Cramer and have people start selling an inverse-Franklin fund).

What should you, as an individual investor, do?

Buy the dip. These types of problems almost always create compelling buying opportunities—not for $SIVB stock, mind you—but Chicken Little’s are going to run around telling you about how this “contagion will spread,” markets will crater, and that General Zod will soon rule the Earth (I may have made up that last one).

The above headlines are indicative of the way that most investors over-react to news in the short-term. You are not most investors. For those of you with assets you intend to keep invested for more than 5-7 years, the last several days of market drop, especially in tech stocks, creates a compelling buying opportunity.

I would look at deploying capital immediately into the markets as a whole (but specifically in growth if you are not over-exposed there) while keeping some cash available for other possible buy-ins in the weeks ahead.

If you are already over-exposed in growth/tech investments, deploying more broadly to the market would likely require less Pepto-Bismol and still produce better than average returns for you.

Diversify (more than SVB did). This principle applies to many things in life, but your portfolio should be created out of a broad range of statistically uncorrelated assets. At Prospero Wealth, we like to build a broadly diversified core strategy with opportunistic satellite strategies that we attach when the right opportunities present themselves. We have to look at your holdings to do this but the paragraph directly above this one is how you might start to think about that framework.

If you can’t bring yourself to do either of the things above, the next best thing to do is “nothing.” The last thing you want to do is to try to remove risk (AKA “sell your current bag”) while the market is being pressured down by erratic investor behavior. The best time to shift an allocation is after you have given it a full cycle to play out (regaining a new high in the benchmark).

If any of you are interested in chatting about any of this in more detail, we’re here for you!

This is meant to be “Chicken Little” and a metaphor for putting all your eggs in one “nest?” Photo by ROMAN ODINTSOV on Pexels.com

Two things to get out of the way, prior to discussing the broader impact of the precipitous Silicon Valley Bank (SVB) collapse:

  1. Prospero Wealth has no direct exposure to the bank or its equity. We bank locally, none of our investment strategies hold the $SIVB security directly, nor do any of our clients hold the $SIVB security directly in any of the accounts we manage.

  2. Everything we talk about in this post should not be considered investment advice. This is one person’s opinion on the takeaways and action items related to this debacle. Talk to us if you want to explore any substantive change to your allocation.

Diversification matters, whether you’re a bank or an investor

It’s impossible to state how big of a deal SVB was within the startup and venture world. The startups I have personally been a part of have all used SVB as their main bank and the CEO’s of those companies were loathe to move their business elsewhere (one of them even risked a lucrative partnership to maintain the SVB relationship). SVB is essentially part of a standard tech startup template.

SVB has pushed their expertise and services connecting founders to capital for decades, quite successfully too. But here’s the problem if you’re SVB; you became super successful within a lucrative niche, but the deeper you get into that unique territory, the more your risk profile starts to behave differently than other banks.

[…] as the Bank of Startups, you were unusually exposed to interest-rate risk. Most banks, when interest rates go up, have to pay more interest on deposits, but get paid more interest on their loans, and end up profiting from rising interest rates. But you, as the Bank of Startups, own a lot of long-duration bonds, and their market value goes down as rates go up. Every bank has some mix of this — every bank borrows short to lend long; that’s what banking is — but many banks end up a bit more balanced than the Bank of Startups.

Matt Levine, “Startup Bank Had A Startup Bank Run”

So SVB benefited from a very long run of low interest rates and an incredible number of deposits. As interest rates rose and startup funding grew more difficult, the growing disparity between deposits and withdrawals caused a cash crunch. When SVB attempted to remedy that crunch through emergency funding, it sparked a run on the bank that made it insolvent inside 48 hours. Wild.

Behavior rules everything around me

It didn’t have to be this way, of course. While I’m certain there are things that SVB could have done better to assess and remediate the risk of their somewhat idiosyncratic risk profile, the thing to recognize is that a much better outcome for nearly all parties (other than the initial people who triggered the run and got all of their assets out unscathed) would have been to allow SVB to fund its operations as it was trying to do earlier in the week. This would have meant taking some short term pain in share price, but the business was within its balance sheet to suck it up and get it done—if it hadn’t have been for those pesky humans.

By Wednesday and Thursday, prominent VC’s were telling their startup founders to move their money out of SVB post-haste (at a minimum advising them to get their accounts under the $250k threshold for FDIC insurance). A cascade of depositors hitting that withdrawal button threw the company into insolvency and FDIC receivership on Friday. The FDIC has already told account holders that they will have access to their insured deposits of $250k by Monday. Fat lot of good that will do for most people…

Idle speculation on what’s next

The vast majority of assets ($165B, or >95% from what I’ve read) at SVB are uninsured (in excess of the $250k covered by FDIC). That’s an awful lot of money, and a large segment of an important part of the economy (tech venture) to be “up in the air” at present.

Most of the speculation I have seen has indicated that the FDIC will likely find a buyer and look to make account holders whole, at least on a timeframe measured in weeks or months. Anything other than this outcome could tip off further runs on banks with susceptible balance sheets.

If you are investor in $SIVB, you will not be made whole. You will go for a ride from here and probably end up taking a pretty severe beating on your stock valuation through any distressed acquisition.

If you are a customer of SVB, you probably will be made whole—sometime—but you are going to learn a hard lesson about eggs and baskets and have to write some letters to your investors that nobody wants to write. As an investor in many startups and a couple of VC funds, I started getting these today.

(Again, this is all speculation on my part. I reserve the right to be wrong as often as Jim Cramer and have people start selling an inverse-Franklin fund).

What should you, as an individual investor, do?

Buy the dip. These types of problems almost always create compelling buying opportunities—not for $SIVB stock, mind you—but Chicken Little’s are going to run around telling you about how this “contagion will spread,” markets will crater, and that General Zod will soon rule the Earth (I may have made up that last one).

The above headlines are indicative of the way that most investors over-react to news in the short-term. You are not most investors. For those of you with assets you intend to keep invested for more than 5-7 years, the last several days of market drop, especially in tech stocks, creates a compelling buying opportunity.

I would look at deploying capital immediately into the markets as a whole (but specifically in growth if you are not over-exposed there) while keeping some cash available for other possible buy-ins in the weeks ahead.

If you are already over-exposed in growth/tech investments, deploying more broadly to the market would likely require less Pepto-Bismol and still produce better than average returns for you.

Diversify (more than SVB did). This principle applies to many things in life, but your portfolio should be created out of a broad range of statistically uncorrelated assets. At Prospero Wealth, we like to build a broadly diversified core strategy with opportunistic satellite strategies that we attach when the right opportunities present themselves. We have to look at your holdings to do this but the paragraph directly above this one is how you might start to think about that framework.

If you can’t bring yourself to do either of the things above, the next best thing to do is “nothing.” The last thing you want to do is to try to remove risk (AKA “sell your current bag”) while the market is being pressured down by erratic investor behavior. The best time to shift an allocation is after you have given it a full cycle to play out (regaining a new high in the benchmark).

If any of you are interested in chatting about any of this in more detail, we’re here for you!

7724 35th Ave NE #15170

Seattle, WA 98115-9955

(971) 716-1991

hello@prosperowealth.com

Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.

© Prospero Wealth 2024. All rights reserved.

7724 35th Ave NE #15170

Seattle, WA 98115-9955

(971) 716-1991

hello@prosperowealth.com

Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the States of Washington, Oregon, and California and in other jurisdictions where exempted. We are conditionally registered in Texas.

© Prospero Wealth 2024. All rights reserved.

7724 35th Ave NE #15170

Seattle, WA 98115-9955

(971) 716-1991

hello@prosperowealth.com

Prospero Wealth, LLC (“PW”) is a registered investment advisor offering advisory services in the states of Washington, Oregon, California, and in other jurisdictions where exempted.

© Prospero Wealth 2024. All rights reserved.