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Startups have expenses. SVB had a customer base that was net unprofitable. This means outflows, and tons of it. SVB depended on a continuous stream of new ventu

by gizmo 4y ago

Startups have expenses. SVB had a customer base that was net unprofitable. This means outflows, and tons of it. SVB depended on a continuous stream of new venture capital being shoveled into the ecosystem to compensate for these outflows. They needed new startups to bring in new cash to make up for the cash burn of their current startup customers. This is a textbook Ponzi structure. Not criminal, just a totally irresponsible bet on interest rates staying close to 0 for another 10 years.

otterley 4y ago
If that's a textbook Ponzi structure, then every bank is a textbook Ponzi structure by this logic. It's irresponsible to paint ordinary accepted business models that have been in place for hundreds of years and that work fine the vast majority of the time with a criminal brush.
- gizmo 4y ago
  SVB is not like other banks. Ordinary banks don't have catastrophic interest rate exposure. Regular banks don't have money burning startups as their main customer base. Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work. If you think SVB is a regular bank practicing accepted business models I'm not sure you appreciate how unusual SVB is in terms of their customer base and interest rate exposure.
  - otterley 4y ago
    My point is about banking as a business model being mischaracterized as a Ponzi scheme, not about SVB’s particular level of risk exposure. > Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work SVB chose a way to put that money to work, but they miscalculated what would happen to the bond market. I don't know how or why they overexposed themselves to this risk, but I'm fairly certain it wasn't some decision made without the review of numerous investing and risk experts. SVB was not a fly-by-night operation. It was founded over 40 years ago. My first paychecks from the startup I worked for during the dot-com 1.0 era were drawn from them.
    - otterley 4y ago
      I wanted to add that I learned today that SVB was operating without a Chief Risk Officer between April 2022 and January 2023. And apparently the former CRO sold $4M worth of stock immediately before she left. (Source: https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...) That doesn't look good.
    - gizmo 4y ago
      SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers. Maybe you don't like the word ponzi, but it's an accurate description of the dynamic at play. Other banks don't have this problem because they don't have money-losing startups as their core customer base. VC investment is highly sensitive to interest rates. Always has been, and everybody knows this. Instead of hedging against this risk SVB decided to double down on it and bet the bank on interest rates going back to zero. I'm sure they had a bunch of risk experts sign off on it, but we both know that doesn't mean anything. Complacency sets in after 15 years of low interest rates, and I think it's exactly because SVB did so well in the ZIRP environment that they got careless.
      - otterley 4y ago
        > SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers. Isn't it true of any bank that experiences a sudden and unexpected flood of withdrawals that they need an infusion of cash to cover them? Whether they get the cash from new depositors or by liquidating investments, the cash has to come from somewhere. I think you're mistaking a bad investment decision for a criminal act and intent, and nobody is claiming SVB of a crime at this point in time; the evidence isn't there so far. Every bank invests cash deposits in a mix of liquid and illiquid investments, and the illiquid investments often can't be liquidated quickly, if at all. (Think mortgages.) As I said, that is the business model of a bank.

by gizmo 4y ago

otterley 4y ago

If that's a textbook Ponzi structure, then every bank is a textbook Ponzi structure by this logic. It's irresponsible to paint ordinary accepted business models that have been in place for hundreds of years and that work fine the vast majority of the time with a criminal brush.

gizmo 4y ago
SVB is not like other banks. Ordinary banks don't have catastrophic interest rate exposure. Regular banks don't have money burning startups as their main customer base. Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work. If you think SVB is a regular bank practicing accepted business models I'm not sure you appreciate how unusual SVB is in terms of their customer base and interest rate exposure.
- otterley 4y ago
  My point is about banking as a business model being mischaracterized as a Ponzi scheme, not about SVB’s particular level of risk exposure. > Regular banks don't have the problem of having billions of dollars in deposits but no way to put that money to work SVB chose a way to put that money to work, but they miscalculated what would happen to the bond market. I don't know how or why they overexposed themselves to this risk, but I'm fairly certain it wasn't some decision made without the review of numerous investing and risk experts. SVB was not a fly-by-night operation. It was founded over 40 years ago. My first paychecks from the startup I worked for during the dot-com 1.0 era were drawn from them.
  - otterley 4y ago
    I wanted to add that I learned today that SVB was operating without a Chief Risk Officer between April 2022 and January 2023. And apparently the former CRO sold $4M worth of stock immediately before she left. (Source: https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-officer/ https://fortune.com/2023/03/10/silicon-valley-bank-chief-ris...) That doesn't look good.
  - gizmo 4y ago
    SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers. Maybe you don't like the word ponzi, but it's an accurate description of the dynamic at play. Other banks don't have this problem because they don't have money-losing startups as their core customer base. VC investment is highly sensitive to interest rates. Always has been, and everybody knows this. Instead of hedging against this risk SVB decided to double down on it and bet the bank on interest rates going back to zero. I'm sure they had a bunch of risk experts sign off on it, but we both know that doesn't mean anything. Complacency sets in after 15 years of low interest rates, and I think it's exactly because SVB did so well in the ZIRP environment that they got careless.
    - otterley 4y ago
      > SVB literally needed a constant stream of new startup customers to cover the withdrawals of their current customers. Isn't it true of any bank that experiences a sudden and unexpected flood of withdrawals that they need an infusion of cash to cover them? Whether they get the cash from new depositors or by liquidating investments, the cash has to come from somewhere. I think you're mistaking a bad investment decision for a criminal act and intent, and nobody is claiming SVB of a crime at this point in time; the evidence isn't there so far. Every bank invests cash deposits in a mix of liquid and illiquid investments, and the illiquid investments often can't be liquidated quickly, if at all. (Think mortgages.) As I said, that is the business model of a bank.