30% of YC companies exposed through SVB can’t make payroll in the next 30 days

https://twitter.com/garrytan/status/1634286688922132481

by saeedjabbar • 3 years ago

353 371 3 years ago

twitter.com

ezekg• 3 years ago

Per the CEO of your favorite orange site, if somebody here doesn't know who this is (I didn't).

Things don't look good right now.

rvz• 3 years ago

I guess SVB was too busy building the VC pyramid scheme to care about asset and money management.

I wonder what the sentiment of YC startups that have access to bookface [0] is right now. I don't think it is happy days there.

[0] https://bookface.ycombinator.com/

jppope2• 3 years ago

Doesn't Y/C have money for these sorts of things? ... seems like a bad situation for them as well since it will wipe out a lot of their holdings

adamnemecek2• 3 years ago

This sounds like a huge amount of money and I can't imagine YC has that much cash lying around.

djbusby2• 3 years ago

Capital call to their investor base?

throwaway81523• 3 years ago

This sounds like a huge amount of money and I can't imagine YC has that much cash lying around.

And even if it had had the cash, the cash might have been at SVB.

mbil• 3 years ago

If so hopefully it’s not in SVB

ilyt2• 3 years ago

How many companies have spare funds for event of bank going tits up ?

anononaut3• 3 years ago

What is your congressman going to do?! Nothing meaningful unless society starts calling for the end of fractional reserve lending.

vkou4• 3 years ago

What is your congressman going to do?! Nothing meaningful unless society starts calling for the end of fractional reserve lending.

... What?

If you think this is an economic catastrophe, just wait until you see what happens if we get rid of fractional reserve banking. It'd be a nuclear bomb in a china shop.

The 'cure' is way worse than the disease.

anononaut3• 3 years ago

Only because we allowed it to get this bad. End the Fed.

maxilevi5• 3 years ago

Can you provide any arguments as to why?

I don’t see how it can make things worse in the long run

shmatt• 3 years ago

This is just a subtle way of a millionaire telling founders "don't worry, only poor people are allowed to lose money"

irjustin6• 3 years ago

I get the idea but what good is putting my money under the couch? Inflation will just eat it away.

anononaut3• 3 years ago

Assets, my brother, assets. Real actual things.

tgv• 3 years ago

Do you think SVB would have been better off if they hadn't had any liquid reserves?

halfmatthalfcat2• 3 years ago

All respect to Gary, I feel like "extinction level event" is quite hyperbolic. Obviously he cares about seeing YC companies survive but this is not going to wipe out the US startup scene.

j_crick• 3 years ago

After reading that and playing some Kojima games lately, all I could think of was a Funds Stranding game.

version_five3• 3 years ago

As bad as it sounds, even if it was an ELE*, I think killing off what has become a monoculture will not necessarily be all that bad for innovation or the ecosystem (it will be bad for the people at the companies that die obviously).

Tan makes it sound like it will favor the balance of power to big tech. I think big tech is irrelevant here, and it may actually shift the balance of power away from SV stereotype startups and give some oxygen to other businesses.

* honestly I think most solvent startups will find workarounds, it's more going to be a big stress than actual destruction

justinzollars7• 3 years ago

It is an "extinction level event" for those whose bank accounts went to zero. We are talking about a large number of jobs and people effected. Its pretty sad really.

ahzhou3• 3 years ago

It'll be a haircut (my uninformed bet is ~10% loss), but definitely not zero.

kneebonian• 3 years ago

If you or your company are affected, I recommend that you reach out to your local congressman to get this on their radar TODAY.

No this is complete and utter bull hockey, this is 2008 all over again in every concievable way except this time instead of mortagages and housing it is tech that is begging for a bailout. This is nonsense, for years all the SV tech bros were bragging about "changing the world through arbitaging pizza delivery misinformation ML." getting paid ridiculous salaries, and playing foosball. I don't have sympathy for them, at all.

Most of the "startup" companies had the end goal of simply being bought out they never wanted to actually do anything they were just a get quick rich scheme.

Quite frankly this correction was long overdue and obvious to everyone who thought about it for even a moment. Now that the limitless capital has stopped (because of the fed rate hikes and because of the boomer retirement) it turns out it isn't profitable to have a buinsess model where you are loosing money on every transaction.

The curtain is pulled down, the emperor has no clothes, the chickens are coming home to roost. Deal with it.

EDIT:

As a followup I don't give a damn about the jobs lost, bailouts are the worst possible thing a government can do, all it does is screw the little people over while the owners keep the wealth and use it as an excuse to cut pay and lay people off.

vecter2• 3 years ago

My understanding may be incorrect (if so, someone please correct me), but I thought this was caused by SVB buying long-term bonds which fell in value after interest rates went up. I don't think this has anything having to do with unprofitable zombie startups being kept alive by "free" money (which roughly ended at the end of 2021). It seems you're angry at tech folks, but they didn't do anything wrong. They're just the victims of SVB's bad bet.

I'm not saying a bailout is justified either (I have no opinion on that), just pointing out who's responsible here.

jmclnx• 3 years ago

I thought this was caused by SVB buying long-term bonds which fell in value after interest rates went up

I heard the same thing, but they took a gamble and lost. That is free enterprise. People who when to SVB will loose too, again free enterprise.

It was no secret interest rates were going to go up, so 2 years ago they should have sold those bonds and took a small loss.

zpeti• 3 years ago

Also if the FDIC just buys these assets at non firesale prices, and eventually sells them to other banks, SVB depositors could easily come out of this whole, with no damage to anyone.

I think everyone is being way too hysterical. This isn’t a massive bank run.

janee2• 3 years ago

I don't think this is really comparable to 2008. Grossly simplified 2008 for me is more about bad debt, while this is around bad risk management...svb bought too many long term bonds which was a bad bet given current rates and an industry "correction" as you put it.

They just didn't manage the risk of a market "correction" and high interest rates. The tech sector was/is due a correction, but this isn't 2008

sangnoir2• 3 years ago

Hear me out: shouldn't venture capital be providing backstop capital for it's ventures? The money is there, and will eventually be unfrozen; the individual startups only need access to make the next one or 2 payroll runs.

henrikschroder• 3 years ago

There are times when government intervention and bailouts are appropriate, in order to prevent some greater bad for society, or in order to ease the effects of some kind of large-scale economic change.

Bailing out startups is dead last on that list. That is absolutely not something the government should spend tax money on.

dragonwriter9• 3 years ago

Bailing out uninsured accounts in a failed bank may not be, even if they happen to be startups, depending on the form of the bailout. Favorable term government bridge loans against the receivership certificates (perhaps limited to some reasonable expectation of what will eventually be realized on those) would not be unreasonable, and would mitigate the worst short-term impacts.

OTOH, the problem is that for it to work, you’d [EDIT: probably; maybe there is a means to do this under executive authority] need immediate legislative action, involving both the Republican-majority House and the Democratic-majority Senate, and that seems improbable.

readthenotes1• 3 years ago

"this is 2008 all over again in every concievable way except this time instead of mortagages and housing it is tech that is begging for a bailout. "

not ironically, it is overpriced mortgages an interest rate increase that are at the heart of this catastrophe again.

tekla6• 3 years ago

This is nowhere NEAR 2008. The financial crisis affected pretty much every bank on Wall St. This is localized to a small network of regional banks. Absolutely nothing indicates contagion.

twelve40• 3 years ago

not sure why all the schadenfreude, a bank going crazy and collapsing has nothing to do with quality of startups

at any rate, at least in that thread he's not even talking about a bailout, but asking to speed up the usual FDIC process so that people can get at least a small part of their money back to make the ends meet:

make the receivership as short as possible

doesn't seem like a great reason to gloat?

apnew• 3 years ago

Bold of him to assume 30% of YC startups not surviving means "mass extinction" of american startups!

manquer2• 3 years ago

It is not just 30% of YC alone. YC startups tend to be on average more successful than others, so number probably much higher for other startups.

Not making payroll is just the first problem. Vendors are the next ,

many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too

a lot of products such as saas apps , cloud services are sold to startups extensively.

If collectively startups stop making payments, those businesses become unsound even big tech like AWS will feel pain and mean layoffs everywhere.

Not making payroll for tech and tech adjacent people also means lot of local business will be distressed in those communities think your grocers and barbers etc.

kazen443• 3 years ago

many startups provide critical services from healthcare to security to dozen other sectors if they cannot pay for their servers those services will go down too

I don't know how this works in the US, but there not some kind of clause or law which basically prevents critical companies from becoming bankrupt like this?

In my country, vital infrastructure is supposed to have money on hand to keep the infra chugging along while the company gets put under administration. (or nationalized, depending on the political climate and what it provides).

breck3• 3 years ago

It is not just 30% of YC alone. YC startups tend to be on average more successful than others, so number probably much higher for other startups.

It's the opposite. 99% of startups do not bank with SVB and/or have less than $250K in SVB.

If this were a public ledger we could talk about exactly what the situation is. Instead we'll get lies and half truths from those jockeying to tilt things in their favor.

version_five3• 3 years ago

  YC startups tend to be on average more successful than others,

Is this true? It it true for the median? YC appears to have a portfolio of startups that has better returns than average seed VCs. This means that somewhere in the huge number of companies they fund, there are some massive wins. But way more often, they just lose a few 100k on a startup that goes nowhere.

So even if it's true that the average return is better, the median return is probably similar or even worse (seems YC can probably afford to take bigger bets than smaller less known funds, resulting in bigger wins as well as more failures- the latter all having a capped downside).

Anyway, maybe I'm wrong, but it's not obvious to me that if you picked 10 yc startups and 10 other vc backed startups, the yc ones would be likely to be in better financial shape, even if the portfolio returns are better

youngtaff2• 3 years ago

YC startups tend to be on average more successful than others, so number probably much higher for other startups.

Is there actually any evidence that YC startups tend to be more successful than others, and on what metrics?

time_to_smile2• 3 years ago

Though it is widely publicized that he was pretty aggressive at getting YC startups to move their money out yesterday.

It's not altogether unlikely that other groups of startups, without an aggressive push to pull out of SVB, are in more trouble.

That is also a lot of startups in a very short window of time. Startups don't exist in isolation, and, for better or worse, often actively try to purchase each others products when possible. It is an ecosystem.

I work at an IPO'd SaaS company, but a lot of our customers are startups. If 30% of our startup customers suddenly can't pay their bills that impacts us in a big way. On top of this, like most companies, we were already concerned about how we were going to meet profitability goals.

And again, the short time frame means not a lot of time to respond and adapt.

youngtaff2• 3 years ago

That aggressive approach to get money out is what appeared to have caused a run on the bank and it’s actual failure!

scotcha1• 3 years ago

Given the # of startups the YC program creates with every new batch, and proportionally the success of YC to all other types of startups, this seems more fair to say, though it does seem a bit hyperbolic.

JohnFen11• 3 years ago

I find that statement fascinating. I assume that he made it because of the human tendency to generalize the personal.

Most startups aren't even SV companies, let alone YC ones, but if your whole world is focused on YC/SV, it can be easy to forget that.

dysonpunk2• 3 years ago

These people love “creative destruction” except when it’s happening to them.

johnsimer• 3 years ago

This isn’t “creative” destruction though. Purely destructive destruction

bpiche• 3 years ago

I think BruceS warned us all about this at south by about ten years ago [0]. Forget exactly where it happens in this talk but he basically tells the audience that if they want to live by disruption, they will die by disruption, and that they have built their castles on shifting sand. Great talk imho

edit: this is actually a long now talk, will edit later if I find exactly the talk am looking for, but should be close

[0] https://soundcloud.com/longnow/the-singularity-your-future-a...

blibble6• 3 years ago

this entire event was triggered by startups (YC and others) starting a bankrun

aintgonnatakeit• 3 years ago

Given YC’s obsession with web3, maybe it’s a good thing.

kragen6• 3 years ago

sanitized link: https://nitter.fdn.fr/garrytan/status/1634286688922132481

i wonder where garry is getting this 30% number or if he just made it up

mattkrisiloff• 3 years ago

YC sent out a survey this morning to all companies asking if effected

DWqRdped• 3 years ago

Founders lie on those surveys. I bet its closer to 50% who can't make payroll for a month if they only have access to 250k

kragen6• 3 years ago

thanks, did it ask specifically if they couldn't make payroll, or just whether they were affected?

TheAlchemist• 3 years ago

Are you guys serious ? I saw this and David Sacks tweet with similar message.

When times are good - they are the first to criticize government reach and taxes which are spend on other people. 100% capitalism etc.

When times get bad - we need government to step in and save us !

Ridiculous.

Besides, it seems the situation is nowhere near as bad as he paints it.

corbulo4• 3 years ago

Well, the situation was created by the government (fed raising rates). I don't see it as hypocritically as you do.

SVB is kindling a bank run right now.

https://nypost.com/2023/03/10/nypd-called-to-silicon-valley-...

afavour• 3 years ago

If it was caused by the government why wouldn't other banks be experiencing the same issues SVB are?

boc5• 3 years ago

The FED isn’t quite the government. If the government controlled monetary policy directly things would be way, way worse.

jkaplowitz• 3 years ago

The situation was triggered by the government's rate change, but not really caused by it. The government did a normal fiscal policy action and effectively set off a land mine that SVB had set up for itself and its depositors.

The situation was created by SVB irresponsibly locking most of their money into 10-year mortgage-backed securities a couple of years ago when interest rates were historically low, plus the affected startups irresponsibly locking most of their cash into a single bank that took such irresponsible actions, without that one bank being systemically too-big-to-fail from a nationwide policy perspective.

Expecting the government to keep interest rates historically low for another decade or else to bail the bank out is an unreasonable expectation on the part of SVB and the ecosystem that over-relied on it, not the fault of the government.

dougmwne• 3 years ago

Oh no kidding. Here they were during the good times:

https://www.wired.com/2008/05/peter-thiel-makes-down-payment...

wankerrific• 3 years ago

Socialism for the rich, capitalism for everyone else.

newaccount2023• 3 years ago

Call your member of Congress...to see about "socializing" this on to single working moms

dysonpunk2• 3 years ago

The one redeeming quality of corporate Democrats is that they have zero sense of personal loyalty. It’s why no one of the left or right respects them. It sucks when they turn on a good man who made mistakes like Al Franken. But it’s fun to watch them fail to circle the wagons when it’s Theranos or FTX or Y Combinator.

danhak• 3 years ago

  But it’s fun to watch them fail to circle the wagons when it’s Theranos or FTX or Y Combinator.

Ummm...one of these things is not like the others

version_five3• 3 years ago

Right. Everyone's a libertarian when the upside favors them and then suddenly a socialist when they actually experience downside.

quickthrowman• 3 years ago

Privatized profits, socialized risk. The VCs have plenty of money to backstop a month of payroll for their portfolio companies, taxpayers should not be paying for this one.

It sucks for customers that SVB chose greed over risk management, had they invested in short duration treasuries they would be fine. It’s time to let risk actually have consequences instead of big daddy Fed/Gov coming to the VCs rescue.

ipaddr• 3 years ago

Wouldn't a libertarian take the upside socialist give away but set their own rules so they limit their downside?

xupybd• 3 years ago

Exactly if we don't let the market fail it can't self adjust.

hristov• 3 years ago

Regarding "socializing" I should point out that silicon valley bank had about 34 billion more assets than deposits at the time they were taken over by the FDIC. In percentage terms their assets were 119% of their deposits. So not only are they not in the red, there is a 19% cushion.

So I am not sure there even are losses to socialize. There is the uncertainty with marking to market instead of marking cost of purchase but even then I am not sure the assets will shrink to the point where anyone is losing money.

Furthermore, from everything I have read about it the assets of the safest type. They are either US treasuries or Fannie and Freddy issued mortgage backed securities. Even if marking to market would make these be worth less than they were initially purchased for, there is little doubt that they will be paid back in full if held to full term, and thus eventually make more money than they were purchased for. The problem is that it will take a while for that money to be paid back, while all the depositors want to withdraw their money now.

So I understand that people are still feeling anger from the 2008 bailout. But this is not the case here (as far as I know). There has been no excessive risk taking, there are no hidden losses. It is just the well known case that even the best and best run bank will fail if all their depositors decide to demand their money at the same time.

The FDIC should take over the assets and pay the depositors as soon as possible. If necessary, the FDIC should take a loan from the FED against the assets. And no, it does not seem that there will be any cost to the taxpayer.

It may help to call your congressman, to urge the FDIC to move fast and make people's money available quickly. It may also help to try to nudge your congressman to urge the FED to stop this interest raising cycle which is obviously affecting the health of the banking system.

tekla6• 3 years ago

Good stuff, let it burn. The system is working as intended. People who made very very risky dumb bets are getting punished heavily for it.

Ancalagon• 3 years ago

How is this good? This means companies will fail and employees won’t get paid through essentially no fault of their own?

ilyt2• 3 years ago

Teaching companies lesson about diversifying their finances is probably worth few startups going down (...which they might anyway). VS robbing taxpayers for another private corporation mistake

wellthisisgreat2• 3 years ago

Businesses with more than 250k in the account should have diversified. Employees are at no fault of course but so are tax payers.

YC companies that have been exposed so badly through this are probably non-essential.

My company is also exposed and we will suffer, because we were stupid but luckily not complete morons

kazen443• 3 years ago

welcome to a capitalistic economy in which the free market reigns supreme.

This is part of a healthy economic market according to market economic theory.

boc5• 3 years ago

SVB didn’t make a risky bet- they did the opposite and locked deposits in a very conservative bond strategy.

tekla6• 3 years ago

No it wasn't conservative. It was very risky completely based on assuming almost 0% interest rates over 10 years and fully locked in. That's clearly a crazy position to take. Every small increase in interest rates has a outsized effect on these bonds.

murderfs• 3 years ago

Sorry, are you saying that depositing money in a bank account is a risky dumb bet?

tekla6• 3 years ago

When the majority is uninsured, yep.

rexreed5• 3 years ago

I know this is (was) downvoted a lot, but I understand this sentiment. If you read the comments above, it's a "sky is falling" situation for many startups in the Silicon Valley sphere of influence. How is it that the silicon valley tech ecosystem could be in a position where one singular bank failure could wipe out so many startups? Pretty remarkable how fragile the ecosystem is if that's all it takes.

blibble6• 3 years ago

seems as if banks don't want VC startups as customers

dragonwriter9• 3 years ago

I know this is (was) downvoted a lot, but I understand this sentiment. If you read the comments above, it’s a “sky is falling” situation for many startups in the Silicon Valley sphere of influence. How is it that the silicon valley tech ecosystem could be in a position where one singular bank failure could wipe out so many startups?

From most accounts it seems to be a very tight ecosystem with a lot of close relationships between VCs, service providers, and serial founders. Very easy to see how it could develop high-impact dependencies that are very close to single points of failure.

gauravphoenix• 3 years ago

As of right now, yes. Give it a week, and it will get sorted out. In all likelihood, the bank will have a new owner by coming Monday/Tuesday and everyone will be able to make the transactions.

hn_throwaway_99• 3 years ago

Agreed. Given that this seems like primarily a timing issue (i.e. SIVB being forced to liquidate bonds at a loss because their tech-heavy depositor base needed their cash), I'd think that a better capitalized and more broadly diversified bank (i.e. not just tech or crypto depositors) would be salivating at the chance to buy these assets up on the cheap.

bequanna• 3 years ago

Buy what assets? From what I understand, SIVB had paper losses which totaled maybe ~30% of deposits before the bank run.

If 70% of depositors withdrew before the bank went into receivership there is nothing left.

And the assets they held were primarily treasury securities and MBS. Why would anyone sell those “on the cheap” when the market is super liquid?

toss1• 3 years ago

For now, there is nothing.

A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."

paganel• 3 years ago

the bank will have a new owner by coming Monday/Tuesday

What due diligence can seriously be carried out by Monday/Tuesday? Especially for a messy "acquisition" like this one.

dmix2• 3 years ago

It actually happens all the time with FDIC takeover banks. They run a bidding process so the buyers are pressured to act, you can be sure they are already preparing everything to do this ASAP.

They understand timing is really important to rescue these banks, they need to get stability ASAP or tons of value gets destroyed. Potential buyers know this too.

tiffanyh• 3 years ago

Why exactly can't they make payroll?

Because their funds are frozen? Or they assume their funds are completely gone?

zamnos4• 3 years ago

SVB's failure means that anything over $250k that a startup had there is not currently accessible. They'll probably be made whole in a couple of months by FDIC, but payroll, along with rent and the cloud bill won't wait and can't be paid via IOUs.

nsnick• 3 years ago

Why would the FDIC make them whole? Doesn’t FDIC insurance only cover $250,000?

honkler2• 3 years ago

techbros.. did we get too cocky?

muzz16• 3 years ago

He's asking for a government bailout, so looks like the cockiness has only _increased_

popcalc• 3 years ago

February 25, 2022
>>/g/

honkler2• 3 years ago

goodmorning /g/entleman

3wolf• 3 years ago

30% of all YC companies, or 30% of YC companies banking with SVB? The phrasing implies the latter.

nedwin• 3 years ago

It's the latter.

rubyron• 3 years ago

Probably the same number. Almost every startup in SF uses SVB by default.

edit: misread. My estimate of at least 30% of VC-funded startups in SV using SVB stands. It’s recommended as the default by most investors.

spamizbad• 3 years ago

Thinking back to the financial crisis when the idea of protecting home owners was floated and we had to endure finance guys ranting about greedy home owners and their 2nd bathrooms.

kingstoned• 3 years ago

Going to the nanny state to bail them out of the consequences of their bad choices

nodesocket• 3 years ago

Gary is currently on CNBC giving a pretty good interview. He's actively pitching for government intervention and bailout. I'm torn on this stance, why should taxpayers bail out banks who continue to make poor decisions, but as a small business owner and former SVB customer I completely sympathize with the plight of the founders. They did nothing wrong, they followed the rules, they thought they were being responsible using SVB, and here we are the small companies, founders, and potential employees pay the price.

Ultimately I am sick and tired of my hard earned money going to the government for them to redistribute it, whether it be bailouts, stimulus payments, student loan forgiveness.

mikeyouse5• 3 years ago

They wouldn't be bailing out the bank here.. at least not in any normal sense of the word. People who owned the bank (equity holders) are going to be zeroed out, people who lent money to the bank (creditors) are going to be nuked too. The people being bailed out are individuals and companies who had deposits with them.

If the government can make all of the depositors whole, take the associated amount of capital off their balance sheet and hold onto it until it matures, thus costing the taxpayers $0, that seems mostly okay to me? There's the opportunity cost of money blah blah but total increase to the deficit would be $0 and all of these companies would be able to continue operating.

What's the point of a Federal gov / lender of last resort if they can't keep depositors in solvent banks whole?

tekla6• 3 years ago

There is a reason why the FDIC limit is $250k and not a infinity symbol. The Fed's job is not to bail out every single entity that knowingly held assets in a risky manner.

halfmatthalfcat2• 3 years ago

Why bail out what are essentially high risk ventures? Seems like the money would be much better spent with the aforementioned loan forgiveness to people who are actually hurting rather than 20-something YC founders who will easily land on their feet.

itronitron• 3 years ago

> They did nothing wrong, they followed the rules, ...

Most people are willing to follow the rules for what is essentially 'free money'.

If the reason things don't work out for them is beyond their control that still does not mean they should be bailed out by the 99% of people who would never have used their product in the first place.

kazen443• 3 years ago

Also,

what about people losing their housing, financial security and destroyed their lives during the great recession? they also played by the rules. Why did they not receive a bailout, but SVB somehow does?

theGnuMe5• 3 years ago

The thing is, it wasn't beyond their control.

It was a known unknown you could hedge. You know your account is not insured above $250k so you make sure you prevent the loss in the unlikely event that...

muzz16• 3 years ago

They made poor decisions on where to store their money.

Why should they get bailed out, when every 401k retirement account that lost money in the stock market today isn't getting bailed out?

dragonwriter9• 3 years ago

He’s actively pitching for government intervention and bailout.

FDIC takeover is a government intervention and bailout. One systematically programmed and under rules laid out in advance, but an intervention and bailout nonetheless.

theGnuMe5• 3 years ago

They did nothing wrong, they followed the rules, they thought they were being responsible using SVB, and here we are the small companies, founders, and potential employees pay the price.

The rules are FDIC insurance up to $250k. That's the world where the game is played. This is real life and life isn't fair.

mellosouls• 3 years ago

I think the idea that tech is going to be set back a decade if a load of YC companies fail is an interesting assesment from the head of YC, and might be interpreted by some as hyperbolic and self-aggrandizing.

philkuz• 3 years ago

YC isn’t the only set of companies that used Svb, they’re probably representative of the distribution of startups that need banking

ryanSrich3• 3 years ago

Roughly 50% of all venture backed startups in the US have an SVB account. So yes, it's much larger than just YC.

kahrl• 3 years ago

This is complete hyperbolic bullshit with the sole purpose of pushing a narrative, getting the right people concerned about their political image, and getting parachute out of this mess fast.

Can't blame the guy for doing his job, but you can call bullshit on him.

muzz16• 3 years ago

Agreed, and he really lost a _lot_ of respect from these tweets today

sp3323• 3 years ago

It was the 14th largest bank in America. This is the second biggest bank failure in history.

cloverich• 3 years ago

Yes but if companies collectively recover 80-90% of the capital, the additional context is extremely relevant.

justinzollars7• 3 years ago

Its not just YC. Its the second largest bank failure in history, and concentrated in this Industry. It could get ugly.

Animats2• 3 years ago

The real cost to startups is in management attention. If you're running a YC-funded startup, and got hit by this, it's going to occupy your attention for the next week at least, and probably the next month. The skills needed to deal with this are way outside the skill set of most tech founders, and even outside the skill set of most bankruptcy lawyers. You're going to need corporate lawyers and people who can evaluate deals in SVB receiver certificates. There aren't many people who do that sort of thing, and by now, they're probably all booked up.

And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.

For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.

So, priority is to get through the next two weeks while somebody works out a longer term solution. Keep track of which founder teams deal with this well. They have potential in running a larger business.

[1] https://www.svb.com/account/y-combinator

phphphphp4• 3 years 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.

woodruffw4• 3 years ago

Excellently 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.

sp3323• 3 years ago

To be clear, you think the FDIC will be able to sell enough bank assets to cover 100% of deposits?

time_to_smile2• 3 years 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?

kweingar• 3 years 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.

bombcar3• 3 years ago

FDIC 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.

robbiet4802• 3 years ago

Do 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

eddsh19943• 3 years ago

Does that work even if the companies incorporated in Delaware?

plonk• 3 years ago

Is it illegal to not be able to pay wages because the company's bank melted down?

julienb_sea• 3 years ago

Realistically this encourages immediate furloughs, layoffs, firing or bankruptcy proceedings. There isn't a world where the companies actually get to the stage of "unpaid wages", there are many steps they can take to avoid getting into that legal boondogle.

Me10004• 3 years ago

If this happens the companies will immediately close up shop. So you get your last 2 weeks of pay then no more, no severance, nothing.

stingrae3• 3 years 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.

phphphphp4• 3 years ago

You’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.

kypro• 3 years ago

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.

Why wouldn't a lender lend in this scenario? It's almost zero risk.

It wouldn't be a good negotiating position if there was no other lenders, but there would presumably be plenty of lenders interested in providing a "small" bridging loan in a situation like this. And those lenders will have to compete.

te_chris• 3 years ago

SVB’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.

disgruntledphd22• 3 years ago

As 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• 3 years 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• 3 years ago

Wonder if any of the SVB owned private equity or debt will be sold off or marked down because of all this.

the_gipsy• 3 years 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.

anon2915• 3 years ago

Yeah, 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• 3 years ago

Yep. 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.

jonahbenton• 3 years ago

Smells 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.

muzz16• 3 years ago

I 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• 3 years ago

In 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.

muzz16• 3 years ago

I don't doubt your claim, but in retrospect that was the best time to join a startup

justinzollars7• 3 years 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• 3 years 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.

ryanSrich3• 3 years 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.

muzz16• 3 years ago

He really lost a lot of respect from these tweets

alexpotato• 3 years ago

Isn't this a similar version of what happened in the Savings and Loans crisis [0]?

Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.

I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.

0 - https://en.wikipedia.org/wiki/Savings_and_loan_crisis

esotericimpl• 3 years ago

Can't believe VC has gone full communist. Socialize the losses it seems.

dsfhakjhsf• 3 years ago

Fittingly, VC can either stand for "Venture Capitalist" or "Viet Cong". They want socialism for themselves and capitalism for the rest of us.

dragonwriter9• 3 years ago

“Government should serve the interests of the investor class” is…not communism.

The system that does that is named after another name for the “investor class”.

formvoltron• 3 years ago

Are there dedicated companies that want to continue if they could move key employees to a low cost, high productivity location? I suggest Maine.

skylabmelody• 3 years ago

VCs have plenty of billions let's have them do the bail-out this time around.

pkaye• 3 years ago

The FDIC will be working over the weekend to audit things and by Monday have enough funds released so customers aren't totally stuck.

dragonwriter9• 3 years ago

The FDIC will be working over the weekend to sort out account ownership by ownership category to establish which balances are insured and which are not, and taking the administrative steps to stand up a new Depository Insurance National Bank to take over administering SVBs business. Access to all insured funds should be available Monday, and depositors with uninsured funds should get a mix of some funds and “receivership certificates” for the uninsured balances.

So, yeah, not “totally stuck”, but anyone with balances over $250K may be…largely stuck.

cinquemb• 3 years ago

Prob should reach out to SBF, he has a lot of political connections and familiar with these kind of situations

jjulius2• 3 years ago

All little startups, tomorrow's Google's and Facebooks, will be extinguished if we don't find a fix.

This is what we call "hubris". Gary needs to settle down.

cma• 3 years ago

It also kind of sounds like "look on the bright side" when you consider how often those example tech companies we'll be lacking a future replacement version of buy up small startups just to squash them or keep them out of hands of competitors.

muzz16• 3 years ago

He's saying entrepreneurs are special-- they are the job creators, they are the Atlases of Ayn Rand, etc-- and thus deserve to be bailed out by grandma paying more in taxes

JohnFen11• 3 years ago

It's worse than that. He's not even talking about all startups, he's talking about SV-style VC-backed startups. That's a small subset of all startups even if you only count tech.

doesnt_know• 3 years ago

This is an extinction level event for startups and will set startups and innovation back by 10 years or more.

I didn't know there was a YC backed startup with an app that lets you directly inhale your own gas. I'm sure that one isn't at any risk of extinction.

wellthisisgreat2• 3 years ago

Gas in the blockchain sense I hope

rexreed5• 3 years ago

Go figure, one singular bank failure could wipe out so many startups. Pretty remarkable how fragile the ecosystem is if that's all it takes.

twblalock2• 3 years ago

Startups are fragile by definition. Most fail.

muzz16• 3 years ago

Also, how poor the decision-making must be at all those startups in regards to where they keep their cash.

eksx• 3 years ago

FDIC mentioned that by Monday there will be access to accounts with 250k that is fdic protected. Does this statement take this into account?

anon2915• 3 years ago

At my last place, my biweekly wage was over 10k, which means that at most you can have about 25 mes, and I am neither a particularly well compensated nor particularly senior engineer. There were many making more than that. Many companies have more than 25 employees.

minkzilla• 3 years ago

biweekly over 10k
[not] a particularly well compensated

You are living in fantasy land.

akavi• 3 years ago

To save people the math, that's 260 k$ in cash compensation (or ~mid FAANG L6 tier).

I am confident in saying there were not many making more than that.

jzawodn• 3 years ago

Can't they just issue some crypto? :-)

balls187• 3 years ago

It was bound to happen.

The rest of the world weathered the pandemic; it’s time for tech bubble to burst.

more_corn• 3 years ago

It will be open Monday morning. Deposits are safe.

Asparagirl5• 3 years ago

No. INSURED deposits are safe, up to $250k per signer on an account, depending on how that account is titled and how many other accounts that company or signer might have at the same bank, and some other details that are very nitpicky but also very important.

That is a very different statement.

damiankennedy• 3 years ago

In this situation, the reserve bank absolutely should take over SVB's assets and liabilities, that is what its for and what it can do easily and painlessly. The govt is not involved and no tax dollars are involved. No customer of SVB should be out of pocket and certainly no employee of a customer of SVB should be. The losers are the shareholders of SVB as their equity is wiped out and some of SVB's employees will lose their jobs.

not_enoch_wise• 3 years ago

Investor profits threatened by interest rates: “We’re sorry we’re laying you off, we take full responsibility, now gtfo”

Investor profits threatened by unstable silicon valley financial system: “Think of the workers! The sacred obligation of payroll!”

pm90• 3 years ago

It’s completely rational behavior albeit immoral.

somsak22• 3 years ago

remember this is the same guy that titles his self produced videos things like "my $200m startup mistake" in reference to deciding to work at Microsoft

muzz16• 3 years ago

He wants "Depositors must be made whole" by the government.

Amazing how quickly capitalists turn to socialists

mehlmao• 3 years ago

Founders can take a loan on the IOUs from the FDIC from VCs and make payroll. Worth watching who goes this way and who holds out, doesn't pay their employees, and begs the federal government to pay them.

raldi3• 3 years ago

Forgive the naive question, but why did so many companies put all their cash in one account instead of spreading it between two or more independent banks?

breck3• 3 years ago

Some might say that this is another reason we need a public ledger where we could speak exactly about the facts rather than speculate on bits of information leaked by people with conflicts of interest.

etchalon• 3 years ago

Because spreading out your cash like that is unmanageable.

raldi3• 3 years ago

It also sounded unmanageable the first time I heard the idea of consistently replicating databases across clusters in multiple availability zones, but ultimately the vast majority of tech companies nonetheless decide it's worth going through all that trouble to avoid existential risk in the event of a SPOF.

I'm curious about the calculus that makes this tradeoff non-worthwhile when it comes to squirreling away an emergency payroll fund in a backup bank. What about that is unmanageable?

mike_d3• 3 years ago

Because corporate financial education isn't part of the YC curriculum and most small companies don't have CFOs.

Large companies and smart individuals keep cash reserves in pass-thru depository products like CDARS which do exactly what you describe. You have a virtual account at Bank A that shows your balance, but the actual money is stored across hundreds or thousands of other banks across the US - each holding less than the FDIC insurance maximum.

icedata• 3 years ago

Actually, the entire incident can be seen as an effective educational exercise.

spacebanana7• 3 years ago

Apparently SVB gave loans to startups with a condition that companies use SVB as an exclusive banking partner according to a billionaire on Twitter (unfortunately I’ve lost the tweet so can’t link)

raldi3• 3 years ago

Indeed: https://twitter.com/search?q=svb%20covenant

I guess if someone loans you money, they want to be able to keep an eye on any sudden moves you make with it.

breck3• 3 years ago

I disagree with his subpoints, but I love how Garry speaks from the heart and doesn't filter it through a PR firm or lawyers.

I do agree with his main point: make the receivership as short as possible. I'd hope everyone can agree on that. (Meanwhile, I'm still waiting months to log back into my https://ftx.us/ account).

I disagree with this: "This is an extinction level event for startups and will set startups and innovation back by 10 years or more. " I could easily see it being the exact opposite.

muzz16• 3 years ago

He's using scare tactics to try to get a taxpayer bailout

muzz16• 3 years ago

Tan, Sacks, etc are basically practicing "never let a crisis go to waste"

They only want to rig the game in their favor. These people weren't advocating things like tougher bank regulations that would have prevented this. They just happen to be on the losing side now and want a bailout.

Animats2• 3 years ago

It's not that bad. FDIC:

"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. ... As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits."

Those receivership certificates can be sold or borrowed against. The discount shouldn't be large, since there are solid assets, they're just long term. But figuring out how to arrange such deals is obscure, and early offers to buy will probably be at an excessive discount.

This doesn't happen often and it's not a routine type of transaction. Which means you may need expensive corporate lawyers.

dmix2• 3 years ago

Any idea what an "advanced dividend" means in practice here?

quesera• 3 years ago

It's a partial payment against your uninsured balance.

If you have $1MM of uninsured deposits, you might get $100K as an advance dividend.

The importance is that this money is available quickly, while you make arrangements to do without the remainder of your funds, for a possibly-extended period of time. Until the next follow-on dividend, if any, and until you are fully whole, if ever.

chernevik• 3 years ago

This situation is not that bad and the solution is a mix of short-term belt-tightening followed by companies raising more equity. It really seems this is obvious, and that Gary is trying to avoid it.

Companies will not "go extinct". Yes, they _may_ have delays making payroll, but nothing that employees cannot work through. And I doubt even that. Regulators will make some fraction of deposits available in short order and companies can function from that. It will be tight and a nuisance but it's manageable. Even if we stipulate that the next generation of tech innovation was banking at SVB, it will survive.

But yes there will be actual deposit losses. At a guess these will be no more than 30%, which will take some time to emerge. No promising startup will be unable to raise capital to fill the gap. What, investors won't kick in another 30% (if that) for an idea they like?

Gary's tweets about "small companies lacking treasury management" are disingenuous. The whole point of the VC ecosystem and institutions like YCombinator is to provide entrepreneurs with business support and advice they otherwise lack. Help with legal structure, accounting, hiring, benefits, etc is very much part of the VC value proposition. Well, cash management is exactly in that department. Wariness about cash management and banking risk is actually part of Gary's job. Apparently he didn't do it very well here. Well, we all make mistakes, seriously -- but I don't expect taxpayers to pay for mine.

This really seems like fear mongering and special pleading to avoid equity dilution at the taxpayer's expense. Really I thought better of YC.

justinzollars7• 3 years ago

This is actually an interesting time. A make or break moment for Jerome Powell. Will he reverse? Can he tolerate the pain? Monday approaches.

xyst• 3 years ago

It's going to be a great reset for the tech startup landscape. If you can't pay your employees, your startup is going to zero.

Besides founders, who is going to work for free? In this economy, I wouldn't even risk the "promise" that startups will pay up. If all or most of their assets were held in SIVB and were not able to withdraw or transfer out, then they are effectively hosed.

Good luck folks.

cgb223• 3 years ago

Which companies specifically?

thih9• 3 years ago

“SVB failure” stands for Silicon Valley Bank collapse.

Silicon Valley Bank collapsed on Friday after a run on deposits drove the Northern California institution into insolvency, marking the largest bank failure since the financial crisis.

Source: https://www.politico.com/news/2023/03/10/silicon-valley-bank...

Discussed at: https://news.ycombinator.com/item?id=35096877

noelsusman• 3 years ago

It can be tempting to mock all the VC's freaking out about this, but I genuinely can't imagine how stressful this must be for a lot of people, so I"m willing to extend some grace and give people the benefit of the doubt when they let their emotions get the better of them.

With that said, the government's role in a situation like this is to prevent contagion, not make you whole. If a bunch of startups go under over this then that sucks, but that alone doesn't come close to justifying any sort of government bailout.

hoofhearted• 3 years ago

And then there was web 4.0.

phso• 3 years ago

Do you have any informartions about brazilians company like Kiwify , how the bankrupt will affect ?

smugma2• 3 years ago

Looks like CA is pushing for federal backing/bailout:

https://twitter.com/CAgovernor/status/1634634828204367872?s=...

muzz16• 3 years ago

This tweet looks more and more like utter BS

30% of YC companies exposed through SVB can’t make payroll in the next 30 days

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