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SVB collapse could mean a $500B venture capital ‘haircut’
- EMM_386 4y agohttps://archive.is/uCB49 https://archive.is/uCB49
- cs702 4y agoStartup valuations had gotten too rich. Now they're coming down to more reasonable levels, in fits and starts. VCs and their LPs don't want the write-offs. They're painful. But ultimately, I think the write-offs will prove healthy.
- spaceman_2020 4y agoI also think that tech is moving very fast, and startups with 10+ years of unprofitable existence without any potential exit are going to get disrupted by newer players. The current crop of startups have largely been pioneers, but usually, the settlers take away the bulk of the spoils. In India, Uber got everyone used to the idea of app based cabs. Now newer players are eating away Uber’s lunch with newer models and without having to spend any money on educating customers or drivers.
- dehrmann 4y ago> startups with 10+ years of unprofitable existence without any potential exit are going to get disrupted by newer players. It depends how unprofitable. Well-established products like Twitter and Reddit are big, have an established user base, and while not particularly profitable, I also don't see them getting disrupted by a rising competitor.
- snordgren 4y agoThey are social media sites, the textbook example of the network effect. Them not being very profitable is almost like a moat in itself - not only is it hard to displace them, it's probably not profitable to do so either.
- KerrAvon 4y agoMastodon — which is a non-profit — is nibbling away at Twitter.
- dehrmann 4y agoThe takeaway from SVB is that there are a lot of losses in asset values either because of the pandemic (SF office space) or rising interest rates (home prices, startup valuations) that have yet to be realized.
- ryanSrich 4y ago> VCs and their LPs don't want the write-offs. They're painful. > But ultimately, I think the write-offs will prove healthy. Yeah this was happening with or without the SVB collapse. In fact, I really don't see much of a correlation to any of this (between lower valuations and the SVB collapse). But I couldn't read the article as it's behind a paywall and the archive.is version got cut off. Valuations from late 2020 to early 2022 were so radically insane for later stage startups that we will likely see a mass extinction event in another 12-18 months when they all either run out of money, or shrink by 90%+. Series A and B companies getting 100-200x on revenue is simply unimaginable for me even in the best of times. VCs that invested at these valuations are likely also going to die off as they'll be unlikely to raise future funds. Only time will tell.
- gumby 4y ago> Startup valuations had gotten too rich. What possible value is there for entrepreneurs of a secular reduction in valuations? Currently those of us in tech are suffering due to the absurdities of the SaaS obsession. Edit: I mean developing technology, what has to be called “deep tech” these days.
- wcarss 4y ago> What possible value is there for entrepreneurs of a secular reduction in valuations? If the valuations were just speculative, then it could represent a return to a world where cause and effect and value are more rational, which is theoretically far better for a smart investor/entrepreneur to participate in than something between a game of craps and a ponzi scheme. I don't mean to assert that any of that is reality, but that's a possible avenue for value to be found in a reduction of valuations.
- guestbest 4y agoAs an independent developer (misv) working on my projects part time out of necessity, I look forward to a tech market where well funded businesses give away their software for free until they establish a monopoly mostly disappear. I don’t think this will do it, but it helps make me think they won’t have spigots of easy money flowing in to their accounts.
- gumballindie 4y agoThis comment is underrated. Basically what these businesses do is they sell their products at a dumping cost. If that practice is illegal for physical products then so should it be for software.
- mmmmmbop 4y agoI agree with the sentiment, but it's not correct that price dumping is illegal for physical products. Trade treaties and WTO rules cover dumping in international trade for obvious reasons, but to my knowledge, there's no law in the major western jurisdictions covering domestic dumping.
- toast0 4y agoDomestic dumping may be prohibited as predatory pricing under anti-trust, depending on the circumstances, including the pricer needing to have market power.
- mmmmmbop 4y agoRight, but there is zero differentiation there between physical and virtual products. GP implied that there is some sort of protection against price dumping of physical products that doesn't exist for virtual products.
- deleted 4y ago[deleted]
- DeepYogurt 4y agoI wonder how this will play out for today's mid stage startups. Do they acknowledge their prior rounds as being inflated? Do they try to say the course and double again? Their burn rates will likely not be easy to cut down in the short run.
- gigatexal 4y agoGood. All those 0% interest leveraged VC funds can go burn in a fire. They pumped stupid money into companies and inflated valuations. Now that things are getting saner with real interest rates above 0 and getting higher sanity will reign again in the markets.
- leptoniscool 4y agoReal interest rates (nominal interest rate minus inflation rate) is still negative.
- bagacrap 4y agoNo? Overnight rate is 5% and last month/3 month inflation is running under 5% saar no matter which measure you use.
- deleted 4y ago[deleted]
- adam_arthur 4y agoCore CPI is above 5% by many measures (annualized using recent months numbers). Median CPI, which removes outliers, was 0.6% MoM last month. https://www.clevelandfed.org/indicators-and-data/median-cpi https://www.clevelandfed.org/indicators-and-data/median-cpi That being said, I don't think the effect of the funds rate will be felt linearly like most academic models assume, and don't think funds rate has to be above CPI to be restrictive.
- deltree7 4y agoIt's delusional to think that this won't have effects on most HNers employment/salary. So be careful what you wish for
- bbbbzzz1 4y agoMore tame inflation for people who maintain their good paying jobs will be in an even better position
- EMM_386 4y ago“Extend and pretend” shows how ridiculous this all really is.
- kurthr 4y agoPlay bank run games, win bank run prizes. Really, I don't love the regulatory arbitrage played by SVB and unhedged duration risk, nor the moral hazard created by the bailout, nor the somewhat bizarre attitude of companies holding huge $100Ms of uninsured deposits earning minimal interest (why have more than 1 months cash flow?), but really this was a bank run pure and simple. When you have to plan to lose >20% of your deposits in a single day you're not a bank anymore. That is a money market account or some other product, which doesn't lend long. It's a bit apropos that those who started the run will pay part of the price, although there's a LOT of collateral damage, and I don't doubt those who started it will ultimately turn that to their advantage since they have the deepest pockets. https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.html https://www.cnn.com/2023/03/14/tech/viral-bank-run/index.htm... BTW you can blame the Fed for low interest rates, but it's the yield curve inversion and long rates which caused the liquidity/solvency problem not the short term rate hikes (not raising short rates would increase inflation expectations and push 10y rates even higher!). And there is no hard line between solvency and liquidity, because it all has to do with time scale. If I say you have to give me $1000 in the next 3 seconds or I take your car, you can't do it because you can't reach your wallet fast enough.
- rcme 4y agoThe Fed’s owns projections have rates coming down in 2 years. Of course the 10Y yield curve is inverted.
- jgilias 4y agoYou sound like you have a good grasp of this! What’s your take on the observation that historically after the yield curve inversion ends, it’s 3-6 months until a recession?
- qwytw 4y agoIt's a correlation. Also a big part of the inversion is the fact the market expects the Fed to start cutting rates in 3-6 months. Of course historically this tends to happen at the beginning of recessions...
- northstart001 4y agoIt simply wasnt booked, some might say "they" needed an excuse to justify markdowns. So many assets are not marked to market which gives outsiders the false impression.
- blindriver 4y agoI'm waiting for hedge funds to start blowing up from all of these multi-sigma moves in what should be relatively stable investments. I'm also waiting for Softbank to implode but somehow they're still around.
- lvl102 4y agoCan’t be the only one who thinks this is possibly a ploy by VC bros to make Fed blink on interest rate hikes. Only they could have triggered such a bank run and only SVB.
- bagacrap 4y agoSo far it's worked out brilliantly for tech megacaps
- Dr_Birdbrain 4y agoInteresting idea. If so, it was a risky gambit, and also they only get to do it once, because the next bank is bigger than SVB. Do they really care enough about lowering interest rates to play such a risky gambit, which can only be played once? Also we are coming on the debt ceiling limit at some point in the next few months, which might trigger a crisis of its own. If I were a VC I wouldn’t play my one-time hyper-risky card before seeing how the debt ceiling shenanigans play out.
- lvl102 4y agoDebt ceiling is a political game and VCs definitely have politicians under control.
- __derek__ 4y agoNo, you're not the only one:[1] > It’s important to take the time to celebrate that the VC’s attempt to gin up a banking crisis to pause rate increases failed and now they’re well and truly boned [1]: https://twitter.com/SMTuffy/status/1638609733702524936?s=20 https://twitter.com/SMTuffy/status/1638609733702524936?s=20
- fuzzfactor 4y agoRemember the way Mr. Drysdale fainted when Granny threatened to withdraw all of her money from his bank?
- varispeed 4y agoThe whole idea of venture capital comes from the broken taxation model. The people who actually produce things, you know doing the work and have knowledge how to do something are burdened with heavy taxation, because years ago, when companies had high headcount, it was a way to make companies pay taxes. Now that everything gets offshored, including work, that model doesn't work anymore, but politicians for known reasons (corruption) don't want to change that, so to plug the tax gap, they increase taxes on labour and continue the squeeze, while not touching the big companies and the rich. This has created a situation, where educated and hardworking people can't amass enough capital to start their own business and their only way to get their idea running is to beg venture capitalists for money in exchange for a slice of their business or banks for a loan. This has created a divide and widens the inequality gap on a scale not seen before in our lifetimes. The rich get extremely rich, because they don't pay the same taxes as labour and they have so much money they own politicians and can make sure the status quo never changes. This has caused things like "quiet quitting", because people no longer see work is worth anything anymore if you can't progress your life in any meaningful way. All ladders to wealth and fulfilment that our parents and grandparents had have been destroyed.
- jimnotgym 4y agoThis is a good comment. In the UK capital gains are taxed at around half the rate of employees. There are other incentives to 'investors' too. VCs and Hedge Funds are parasites on those that know how to produce wealth. They should pay more. Or what is the alternative, if they didn't get their tax breaks they would do what? Stop wanting money? I don't think so
- youngtaff 4y agoYeh, Carried Interest is one of the biggest tax cons going
- erenyeager 4y agoI don’t know, I like your reasoning but isn’t it more complicated than that? Bootstrapping imo is the best way to go if you don’t wanna give up stake but the reality is that going to VCs makes much of the process much easier (funding). Without the VC system, would we have to go back to a traditional loan process? I find that backwards and I would assume founders will like getting money from VCs better than banks at the start (after all, most loans may not even be approved if you’re starting out).
- dehrmann 4y agoIs the only common thread between SVB and the haircut that it's inspiring LPs to look more closely at their investments?
- fairity 4y agoI’m confused too. Seems like link bait. The article fails to connect the dots between SVB and venture valuations, which were already well into a downswing before SVB’s collapse.
- seizethecheese 4y agoYeah this is upvoted purely from HN shaudenfreude
- lr4444lr 4y agoPardon my ignorance, but why would VC backed companies not have CFOs and general VC advice against putting all or even a majority of their funds in a single bank? Why would they not split it among several mid to large sized banks? [Edited for typo]
- jimnotgym 4y agoIndeed. I suspect vcs were telling the companies to bank with svb as some sort of mutual backscratching.
- gumby 4y agoIt’s a pain to do. They should have a small amount (basically the next month or so, plus payroll a couple of days before payroll), then just keep the rest in the MM/commercial paper.
- eunos 4y agoFrom a reddit AMA (dont have the link sorry), IIRC small startups dont have enough manpower to hedge their finance and more or less discouraged to hire finance teams (just focus on your product!).
- lxgr 4y agoThere are treasury products available that do it for you, both by distributing deposits across multiple FDIC-insured banks or by buying short-term treasuries.
- bagacrap 4y agoSVB was a large bank fwiw A lot of their contracts with SVB involved exclusivity clauses apparently. I'm not sure what SVB gave them in return.
- fblp 4y agoI'm sure some VC firms also encouraged their portfolio to bank with SVB. They were regarded as the most "startup friendly" bank.
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- Animats 4y ago“There are enough zombie companies with frothy valuations that need restructuring, price discovery and of course re-tooling of their business models to a world of tighter credit, subdued revenue and higher rates,” SVB has nothing to do with that problem. It's about higher interest rates. The end of free money for stupid stuff. Now companies have to make money. So who's going down? TSLA, UBER, and RBLX already made it to the public markets; they're out of the VC sector. Those are the biggest ones. What are the remaining big money-losers still owned by VCs?
- bobolino123 4y agoScale AI and Cruise?
- vlovich123 4y agoCruise is owned by GM
- bagacrap 4y agoTSLA is a stupid money loser?
- temp2022account 4y agoMany think it's overvalued by around 50-500x what the company is worth. From what I've seen they're very good at cash management and continually invest in company facilities, very similar to what Bezos was doing pre-AWS with Amazon's tight margins.
- bagacrap 3y agoEven the loudest, most annoying haters don't think it's overvalued by 50x. More like 10x at most, if you think it's just like any other car company and growth is going to zero. My point was about the business though, not the stock price. The business is solidly profitable.
- happytiger 4y agoI mean considering that many expected venture backed startups to bring us through this upcoming recession and be the silver lining, SV’s problems seem more than a little problematic. https://medium.com/prime-movers-lab/venture-backed-startups-will-lead-us-out-of-a-recession-7fa61f1f397 https://medium.com/prime-movers-lab/venture-backed-startups-...
- deleted 4y ago[deleted]
- redeeman 4y agowhy are we all acting as if its impossible to have a bank that DOESNT spend all the depositors money on god knows what positions? imagine if you will, some kind of place you could deposit your money, and they WOULDNT get to gamble with it, outside of with consent. imagine the depositor being able to say "i wish to allow the depositors to be used for whatever the bank pleases", or "i wish to not participate in this"
- reportgunner 4y agoWhat would they do with the money then, just keep it under a matress ? Why would anyone do that for anyone ? Don't get me wrong I agree with you, I just think they would get steamrolled by those who use depositors' money to gamble.
- gorm 4y agoBut why were these companies holding so much money in an uninsured account? I heard something mentioned about SVB incentivizing them somehow? I can't understand why these companies didn't put the money in short term treasuries instead of keeping the money uninsured. If they needed short term liquidity it would not be a problem. Did SVB have an obligation to give them floating interest rate without properly adjusting for the risk? It's not possible that all these companies didn't expect a yield curve inversion as it was obvious it would happen.
- n8ta 4y agoTo try to answer the first question: It's about who your customers are. If you're a business with 30 employees all making 150k/yr you have 375k in payroll costs every month. Holding even 1 months payroll in cash puts you above the FDIC limit of 250k. Normal people rarely need more than 250k in cash so the ratio of business to normal people in customer base matters. To make things worse let's say you're VC funded and you don't have monthly revenue to put towards your payroll. Instead you have X months of payroll/runway in cash in an account being slowly drawn down. Now you might have 1 year of payroll in cash. Nearly all of that is uninsured. Quick googling shows me that SVB was only 15% insured. Likely because of their focus in startups with large balances vs regular ppl with low balances. For context BOFA is 40% insured and JP morgan is 35%. https://time.com/6262009/silicon-valley-bank-deposit-insurance/ https://time.com/6262009/silicon-valley-bank-deposit-insuran... https://www.forbes.com/advisor/banking/bank-of-america-review/ https://www.forbes.com/advisor/banking/bank-of-america-revie... But I do see your point, short term treasuries probably would make sense for startups right now. With a 4.2% rate on the 1 month treasuries it would make sense to setup a ladder with bonds coming due as you needed them. But in the very recent low interest rate past this probably wasn't worth the hassle for many startups.
- gorm 4y agoThanks! They wouldn't even need to keep them in 1m treasuries as overnight rate has been above 2% since last summer and is now above 4%. Also they could just have opened accounts in more banks and have their deposits secured. SVB was in all practice insolvent already last summer. I don't think all these customers could be idiots so there must have been some incentive which rewarded them for keeping the money unsucred I think.
- mogadsheu 4y ago$500B is more than a haircut, it's a whole head shave with the eyebrows included
- osigurdson 4y agoWe just need a single, centralized bank controlled by the government … not.
- drumhead 4y agoInvesting in startups that make no profit is a risky business. The volume of money that's poured into tech startups over the last 10 years has been insane, anything that breathed was having money showered on it. It's as if risk control was just thrown out of the window.