svb

Silicon valley bank

Shit hits the fan

 Imagine you have Rs 100 and you
decide to invest it at a fixed interest
rate of 5%.
Sometime later, you find that similar new
investments are now available at 8%.

Ouch!

If you now want to 'sell' your 5% investment,

people will not buy from you at Rs 100
but rather at ~ Rs 97* because they will atleast
want an 8% return since that is what is now
available in the market.

*(0.05 X 100 + 100-97)/97

So, as the interest rose from 5% to 8%, the
market price of your investment fell from
Rs 100 to ~Rs 97.

And that's exactly what happened with

the Silicon Valley Bank.
Let's understand the timeline
2021 was a spring in the startup ecosystem.
Thanks (no thanks) to COVID - tech companies
were having a red carpet moment.
VC backed funding doubled YoY.

And SVB was their cash magnet.

More than 50% of the tech startups
deposits were with SVB.
Deposit rate at SVB was so huge that it
could not loan out enough and make
money.

So, it invested massively in

US Treasury bonds.

Massive = $91.3bn
That would be Infosys over Infosys over
Infosys over Infosys over Infosys annual
revenue.
Come 2023,

three things happened.

1. The Federal Reserve bank increases
interest rates to 4.75% to tackle
rising inflation. It was 1% in 2020
when SVB invested in US Treasury
Bonds.

2. Funding winter

3. Cash burn of the startups did not

adjust according to the funding winter. It
continued to happen
 Cash burn of startups
Federal bank increases was still 2X of pre-
interest rates to tackle covid levels
inflation

4.75% $345bn $160bn

$238bn
$80bn
1%

2020 2023 2021 2022 2020 2022

Funding winter, VC
investment activity.
The demand for withdrawls
>
demand for deposits
On March 8th,

SVB had to sell $21bn worth of

bonds at a loss of $1.8bn to meet
customer withdrawls.

Loss because interest rates had risen from

1% to 4.75% and therefore the market price
of bonds that SVB invested in fell as we saw
in the illustration in the beginning.
This caused widespread panic

Peter Thiel's Founders Fund, Coatue

Management, Union Square Ventures,
Founder Collective et al advised startups to
withdraw funds in anticipation of a collapse

2500 VC firms including Bain Capital,

Lightspeed Ventures, and Insight Partners
use SVB.
This in behavioral science is called as
the self fulfilling prophecy.

What you do to prevent an outcome further

fuels that outcome rather than prevent it.

Massive withdrawls one after the other

fueled the collapse. $42 billion worth of
money was withdrawn in 24 hours.
It is a bank run.
The stock crashed by 62% and trading
on the stock has been halted.

Market capitalization of US banks have lost

a combined US$100 billion in two days and
European banks lost US$50 billion.
What happens next?
Deposit Insurance National Bank of Santa
Clara, a new entity has been created by the
Federal Deposit Insurance Corporation to
manage insured SVB deposits.

The insurance limit is $250k per account which

is expected to be disbursed on March 13th.
Anything over that amount (89% of total bank
deposits) will have to wait till the asset sale.

The Bank of London is considering a rescue

bid for the UK arm of collapsed U.S. bank
Silicon Valley Bank
Is it an onset of recession?
"This is an extinct level event for startups"
says Garry Tan, CEO of Y Combinator.

30% of YC companies cannot make payroll in

the next 30 days.

Overall, SVB assets are less ~0.5% of the

total asset size in the US. Banking experts
say that fundamentals of the US banking
system have become stronger since the
2008 crisis, so a recession is unlikely.
Sigh!
Is the India growth story in danger?
Interestingly, SVB was open to banking with
Indian startups registered in USA even if they
did not have a social security number.

Over a dozen Indian SaaS unicorns are

headquartered in the US and are exposed to
SVB. Over 80 Indian startups backed by YC
have funds in SVB amounting to ~$50 million

Sensex crashed 670 points driven by Indian

banks but this is expected to be an emotional
reaction than a fundamental one.
What are some pertinent questions
that arise from this fiasco?
1. Isn't an exposure of greater than 50% to
one sector a gamble for a bank?

2. The market was uncertain. Startup money

is uncertain money anyway, did it make sense
to lock it in a 10 year US Treasury Bonds
when the interest rates were already so low?

What do you think?