Blog - Fuse

As We Walk Through The Valley Of The Shadow of Debt

Written by Hubert Rapinat | Mar 28, 2023 3:44:57 PM

It's not that bad actually, but we thought the title was too good not to use...

 

 

As promised, here’s our weekly market update, where we investigated what exactly happened at SVB, and what it means for your financing opportunities.

 

It seems increasingly evident now, two weeks after the fact, that the SVB breakdown was due to two major factors:

 

In part, it’s become apparent that SVB, as helpful as it had been to the tech world, suffered from poor corporate management: according to the Wall Street Journal, the parent company of SVB had disclosed that the market value of its held-to-maturity bonds was $15.9 billion less than their balance-sheet value at the end of September 2022, according to the Journal, representing only slightly more than SVB’s $15.8 billion of total equity at the time.

 

This suggests that SVB's precarious financial state was already known several months before its eventual failure. In response to the announcement of a capital raise and the sale of securities at a loss, a significant number of uninsured depositors made a run for it.

That brings us to the next factor…

 

The second losing condition, some feel, was that it was pushed off the cliff by a couple of fair-weather VCs. VCs are 'absolutely to blame' for SVB chaos, said Seedcamp’s Reshma Sohoni.

 

The speed with which panic spread in the ecosystem created an unstoppable momentum, which the Guardian coined: “The first Twitter-fuelled bank run’.

 

After the smoke settles, we can try to trace back to where the fire started to spread: “Venture Capital firm, Founders Fund, is reported to have told companies in its portfolio to move their money out of SVB. In the gossip-fuelled world of Silicon Valley, this news spread like wildfire. Customers withdrew $40bn – one-fifth of SVB’s deposits – in just a few hours.

 

Mark Tluszcz, CEO of Mangrove Capital, tweeted: “If you are not advising your companies to get the cash out, then you are not doing your job as a board member or as a shareholder.”

 

If it wasn’t for the alarmist cry of Founders Fund’s managers and Tluszs, SVB would maybe, certainly, still exist today. At least, that’s the view of some people in the tech financing world…

 

But one should not necessarily point the finger solely at VCs. The bank run was unfortunate, yet ultimately VC firms had to look out for their assets and the well-being of their clients. They did not start the fire themselves, they simply saw smoke and told their partners to evacuate the building.

 

The corporate failure of SVB, as well as their poor balance sheet management, caused the VC bank run, not the other way around.

 

This sparked a terrifying 48h for many startup founders, in the U.S. but also here across the pond.

 

Part of this panic could have been avoided. Companies like ROKU and many others had left astonishing amounts deposited at SVB (A light quarter-bil, in ROKU’s case), 10x more than what the regulators would have insured in such an event. Deposit diversification, or the lack thereof, meant SVB almost dragged some of its customers down in their fall. Hopefully, that should not be the case for ROKU and the many others in the same situation, as it’s being monitored closely by U.S. regulators.

 

This whole shebang should foster resiliency and awareness among CFOs in the next era of tech financing.

 

Well, though there’s certainly going to be trouble in the VC ecosystem that had exposure to SVB, it might not translate everywhere else. Some businesses which greatly profited from the SVB ecosystem don’t have the leeway they used to. Symmetrically, that means more opportunities for others.

 

Many debt funds, here in the U.K., had little to no exposure to SVB, and are not only running BAU but are encouraging clients left in limbo by the demise of SVB to get in touch and explore alternative solutions. Knowing which are the right funding partners for your vertical, business model and territory though, may not be blindingly obvious.

 

 

That’s where we come in.

 

 

At Fuse Capital, we have 10 years of experience in pinpointing which funds are best suited to solve the requirements of different businesses in the tech world.

 

If you would like to get a perspective on which funds would be interested in solving your requirements, get in touch with us for a consultation.