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Garry has an incentive to say the sky is falling because the sooner this is resolved the less pain it’ll cause, but to say this is an industry extinction event
by phphphphp 4y ago
Garry has an incentive to say the sky is falling because the sooner this is resolved the less pain it’ll cause, but to say this is an industry extinction event is a stretch.
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
- woodruffw 4y agoExcellently said. On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
- sp332 4y agoTo be clear, you think the FDIC will be able to sell enough bank assets to cover 100% of deposits?
- woodruffw 4y agoNo, I think they'll recover a large percentage of it, and that the difference won't matter.
- Danieru 4y agoI don't think "being made whole" means what you think it means.
- JohnFen 4y agoThe FDIC will cover the portion that they couldn't recover from bank assets. The depositors will be made whole (up to $250k), but it may take some taxpayer money to do that.
- deleted 4y ago[deleted]
- Danieru 4y agoThe subject of OP's post is the non-insured deposits. No one, yet, has expressed doubt on the credit of the FDIC. Sub 10% of SVB's deposits were insured. Meanwhile SVB's HTM bonds have taken a 20%+ loss which will, barring an acquisition, cause non-insured deposits to take a 19%+ haircut. Combined with an indeterminate period of waiting. So start ups with cash in SVB should expect to lose 20% and find alternative sources to make payroll, pay payroll taxes, and pay suppliers. I expect we will see many startups close us shop when founders are unwilling to bail out their own company's balance sheet with personal money.
- JohnFen 4y agoAh, my bad. Then yes, I agree they probably won't be made whole by the fed or government. Nor should they, in my opinion.
- time_to_smile 4y ago> there is no meaningful risk that these startups will not be made whole in the coming weeks. Wow, two very bold claims here: 1. they will be made whole 2. in a few weeks For 1. I think this is very unlikely to happen. Absolutely account holders will get some money back, but I would be pretty surprised if it was 100%. Regarding number 2. I would be even more shocked if anything more than the FDIC insured amount was returns within "a few weeks". However you are claiming that there is "no meaningful" probability these will not both happen. Do you care to elaborate on this more because I have heard nobody with any experience in this space making claims like this?
- JohnFen 4y ago> I would be pretty surprised if it was 100% It would be unthinkable that they wouldn't, up to the $250k limit. Beyond that limit, they probably won't be made whole.
- astrange 4y agoIf they sell SVB to another bank, it will probably guarantee 100% of it because the alternative makes all customers of small banks a lot more nervous about their accounts.
- woodruffw 4y agohttps://home.treasury.gov/news/press-releases/jy1337 https://home.treasury.gov/news/press-releases/jy1337
- kweingar 4y ago> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid. Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
- bombcar 4y agoFDIC isn't stupid; they're issuing IOUs and these companies can borrow against the IOUs. It's not like this is a minor bank failure; everyone knows about it.
- sp332 4y agoThey're going to send out some money this week, but the value of the IOUs will depend on how much they can sell the bank's assets for. Certainly less than face value. It's going to be hard to borrow against that.
- bombcar 4y agoI don't think anyone think's that all the money is gone, so borrowing $1m against $100m IOU shouldn't be a major issue.
- kragen 4y agothis week ends in 34 hours, so this is unlikely the ious are actually receiver's certificates, and as i understand it, borrowing against receiver's certificates is a commonplace thing to do in cases like this
- favorited 4y ago> Certainly less than face value Their assets were higher than their liabilities. This is a liquidity problem, not a solvency problem. Everyone got their money from Lehman Brothers, and everyone will get their money from SVB. But not everyone is going to get it right away, because it is invested.
- robbiet480 4y agoDo keep in mind that at least in California unpaid wages are one of the only things that pierces the corporate veil, so management and investors are on the hook for them personally. editing to add citation: California Labor Code Section 558.1
- eddsh1994 4y agoDoes that work even if the companies incorporated in Delaware?
- stingrae 4y agoyes.
- xenospn 4y agoWouldn’t be very effective if it didn’t.
- eddsh1994 4y agoWell an amendment in 2017 to the General Corporation Law of the State of Delaware added Section 115 which explicitly permits Delaware startups to adopt in its certificate of incorporation a requirement that all internal corporate claims are exclusively held in front of a Judge in Delaware. Several cases in California have upheld this. So it's not exactly a crazy question to ask if this would work for YC startups employees.
- deleted 4y ago[deleted]
- dragonwriter 4y agoInternal corporate claims are claims by the corporation against officers and shareholders with regard to their duties to the corporation. It does not apply to claims by employees against the corporation under foreign state wage and hour laws, nor could it.
- stingrae 4y ago> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate. It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
- phphphphp 4y agoYou’re conflating the amount insured and the amount that will be recovered. SVB has failed as a bank, it hasn’t failed as a place to have money. The money still exists, and while there’s a hole created by recovering immediate access to that money, it represents a very small haircut — maybe a few percentage points for each customer.
- stingrae 4y agosure it may (in the long term) be a few percentage points of a loss. The problem is the timeline on which you get access to it. If you are a larger company, 250k won't cover much of your payroll. No banks are going to rush to buy these low interest securities unless they get a steep discount.
- phphphphp 4y agoA company spending millions of dollars per year on payroll will have the relationships necessary to weather a storm like this. SVB made some very poor investment decisions but they didn’t light the money on fire: it’s not going to take years to liquidate. There is huge upside opportunity for buyers of assets from a distressed bank: the assets are worth less than what SVB paid (hence the crisis) but are not worthless. We will have to wait and see, and perhaps my optimism is naive, but I struggle to see a situation in which these remaining assets can’t be liquidated in the coming weeks. Even pre-crisis, SVB held less than $200bn — that’s a small amount of money in the context of the US banking system. Apple alone has, what, $100bn?
- gordon_freeman 4y ago[flagged]
- te_chris 4y agoSVB’s failure is only a symptom of the wider environment in as much as it failed because of a focus on handshakes over proper management. The comments on the FT are illuminating: bankers can’t understand how they didn’t hedge for interest rate risk.
- disgruntledphd2 4y agoAs Michael O'Church often said, the VCs and (SV finance more generally) are the people who couldn't make it in investment banking or private equity Mind you, the FT comment section is always full of people who predicted stuff like this, rather like the comments on breaches around here.
- JumpCrisscross 4y ago> will see many startups fall in the next few weeks + months A lot of start-ups avoiding down rounds just got a great excuse to raise operating capital under the veil of liquidity.
- d136o 4y agoWonder if any of the SVB owned private equity or debt will be sold off or marked down because of all this.
- Asparagirl 4y agoGonna be some new faces at some board meetings soon! And by new I mean a buncha old guys from Wall Street or private equity who are going to buy a seat at some “disruptors” and then explain how things are going to work now.
- the_gipsy 4y ago> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid. I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
- anon291 4y agoYeah, I have years worth of runway and could probably retire if I wanted to live a more frugal lifestyle, but I don't work if I'm not getting paid period.
- icedchai 4y agoYep. I didn't get paid for a month once and road it out. I did get paid eventually, but in retrospect, I should've just left. There were bigger troubles down the line.
- JohnFen 4y agoThis. A company being unable to make payroll, even only one time, is a pretty huge flashing warning light that the company is very close to the edge of a cliff.
- jonahbenton 4y agoSmells like blame shifting to me. He shouted the sky is falling. Maybe it was, maybe it wasn't. SVB was a pretty big bank and was clear in its representations. Maybe he shouldn't have played Chicken Little, initiating the precise scenario the bank warned against.
- muzz 4y agoI wonder if he even realizes what much of the rest of America _already_ thinks of Silicon Valley, and how much more he damaged the perception of SV / YC by basically asking for a government bailout while the ink was still wet and before any payrolls etc were missed (and which may not even happen)
- batmansmk 4y agoIn 2008, when startups started to fail, many colleagues left to work for large old established firms. Some others left banking on ne started new ventures. Turnover accelerated. If we go through an event of the same magnitude, the economy and people will adapt, because history taught us so.
- muzz 4y agoI don't doubt your claim, but in retrospect that was the best time to join a startup
- justinzollars 4y ago> Even if the extremely unlikely scenario plays out and companies are unable to make payroll Likely event. 30% of YC companies will not make payroll in the next 30 days. Their bank accounts literally went to zero today.
- phkahler 4y ago>> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid. Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
- ryanSrich 4y ago> ride out a few weeks waiting to be paid. Or several months, if not years. If SVB isn't bought by Monday those funds are going to be inaccessible for much longer than people realize.
- muzz 4y agoHe really lost a lot of respect from these tweets