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The bank had a good track record since the 1980s, good personal relationships with many VCs, and offered attractive loan terms to startups. In a free market pe

The bank had a good track record since the 1980s, good personal relationships with many VCs, and offered attractive loan terms to startups. In a free market personal relationships matter just as much as they do in any other kind of market. It's not like everyone in business flips a coin when they decide who to use as a bank or as a vendor.

hypothesis 4y ago
I read that SVB in fact had lots customers who didn’t want/need loans, as they were depositing loads of venture money. That was part of bank’s problem.
- swatcoder 4y ago
  Perhaps in some cases, but the venture money deposits could be used collateral for loans, giving the startups access to even more capital. So the bank was drawing in startup clients with these nontraditional loans while requiring that they deposit the venture money with then for surety. It wasn’t just coincidence that they were so disproportionately in one sector and had such a share of uninsured deposits. It was their strategy. It just backfired when that venture money tightened up, and finally blew up when the money spooked. People are focusing the TBill thing thing because that side of the story broke first (and was amplified by VC PR) and glosses over the part that implicates how the startup sector was using them.
- twblalock 4y ago
  SVB was offering attractive loans to account holders, and many took them up on it. If you just got a funding round you are already running your business on borrowed money. Imagine that a bank told you, deposit the cash from that funding round with us and we will give you even more funding! That's pretty attractive when interest rates are super low. When the free money spigot got turned off, mainly by the Fed raising rates, some of the account holders started spending their cash rather than running on more loans. The same increase in interest rates that caused that change in depositor behavior also caused SVB's long-term bond investments to lose value. SVB effectively doubled down on the low-interest rate era by both depending on depositors living on loans (rather than withdrawing deposits) and investing in low-interest long-term investments at the same time.
dboreham 4y ago
But why weren't there three commonly used banks, each favored by the three big cheese VC's networks? Why only one?
- alephnerd 4y ago
  The two major regional banks in Northern California are San Francisco based First Republic and San Jose based SVB. First Republic specializes in HNW Personal Banking, while SVB historically specialized in small business banking. The same issues that hit the VC industry rn with SVB are hitting the Wine Industry in Northern California as well because they primarily worked with SVB because SVB specialized in SMB B2B in NorCal. Different banks target different personas. There were a couple other regional B2B Banks as well but they all mostly died out in 2008 and SVB was the last one left. Also, historically, San Francisco and Santa Clara Valley (what is now known as Silicon Valley) weren't that closely integrated until the 90s and early 2000s (less of a NJ-NY type relationship and more of a DC-Baltimore type relationship historically)
  - alephnerd 4y ago
    Also, I just realized I forgot to add until recently SF based Charles Schwab to that list, but they always specialized in HNW Personal Banking and ETF/Index Funds. Wells Fargo also used to be a SMB B2B oriented bank in the area but basically dropped that practice by the 2000s to concentrate on a mix of IB and Housing that caused it to get acquired by a MN based bank when WF collapsed in 2008. BoA on the other hand was always much more large business oriented in NorCal. Also, one last caveat, until the 2000s, Northern California (Bay Area+Sacramento) was always overshadowed by Los Angeles+OC+San Diego. Even today, 2/3 of CA's population lives in SoCal and historically the entire Californian banking industry was largely based there, at least until the Aerospace and Defense Bust after the collapse of the Berlin Wall. VC was always a parochial industry based in R&D heavy but economically backwater regions like Boston and the Bay, while High Finance was concentrated in Los Angeles and NYC.

hypothesis 4y ago

I read that SVB in fact had lots customers who didn’t want/need loans, as they were depositing loads of venture money. That was part of bank’s problem.

swatcoder 4y ago
Perhaps in some cases, but the venture money deposits could be used collateral for loans, giving the startups access to even more capital. So the bank was drawing in startup clients with these nontraditional loans while requiring that they deposit the venture money with then for surety. It wasn’t just coincidence that they were so disproportionately in one sector and had such a share of uninsured deposits. It was their strategy. It just backfired when that venture money tightened up, and finally blew up when the money spooked. People are focusing the TBill thing thing because that side of the story broke first (and was amplified by VC PR) and glosses over the part that implicates how the startup sector was using them.
twblalock 4y ago
SVB was offering attractive loans to account holders, and many took them up on it. If you just got a funding round you are already running your business on borrowed money. Imagine that a bank told you, deposit the cash from that funding round with us and we will give you even more funding! That's pretty attractive when interest rates are super low. When the free money spigot got turned off, mainly by the Fed raising rates, some of the account holders started spending their cash rather than running on more loans. The same increase in interest rates that caused that change in depositor behavior also caused SVB's long-term bond investments to lose value. SVB effectively doubled down on the low-interest rate era by both depending on depositors living on loans (rather than withdrawing deposits) and investing in low-interest long-term investments at the same time.

dboreham 4y ago

But why weren't there three commonly used banks, each favored by the three big cheese VC's networks? Why only one?

alephnerd 4y ago
The two major regional banks in Northern California are San Francisco based First Republic and San Jose based SVB. First Republic specializes in HNW Personal Banking, while SVB historically specialized in small business banking. The same issues that hit the VC industry rn with SVB are hitting the Wine Industry in Northern California as well because they primarily worked with SVB because SVB specialized in SMB B2B in NorCal. Different banks target different personas. There were a couple other regional B2B Banks as well but they all mostly died out in 2008 and SVB was the last one left. Also, historically, San Francisco and Santa Clara Valley (what is now known as Silicon Valley) weren't that closely integrated until the 90s and early 2000s (less of a NJ-NY type relationship and more of a DC-Baltimore type relationship historically)
- alephnerd 4y ago
  Also, I just realized I forgot to add until recently SF based Charles Schwab to that list, but they always specialized in HNW Personal Banking and ETF/Index Funds. Wells Fargo also used to be a SMB B2B oriented bank in the area but basically dropped that practice by the 2000s to concentrate on a mix of IB and Housing that caused it to get acquired by a MN based bank when WF collapsed in 2008. BoA on the other hand was always much more large business oriented in NorCal. Also, one last caveat, until the 2000s, Northern California (Bay Area+Sacramento) was always overshadowed by Los Angeles+OC+San Diego. Even today, 2/3 of CA's population lives in SoCal and historically the entire Californian banking industry was largely based there, at least until the Aerospace and Defense Bust after the collapse of the Berlin Wall. VC was always a parochial industry based in R&D heavy but economically backwater regions like Boston and the Bay, while High Finance was concentrated in Los Angeles and NYC.