The Jennifer Kamara Podcast

Jennifer: All right, sunny Classic. As we're literally recording, we have breaking news from the Department of Treasury stating that all deposits will be returned with no losses to folks on Monday, March 13th. What does that mean in the context of what we just discussed?

Sunny: This is truly fantastic news, Jen. I think we'll have to, you know, really look into the details of this, but as we were just discussing, I think what we're seeing here from the Treasury, the Federal Reserve and the F D I C are steps to reassure the public, you know, provide confidence in the banking system and really take the pressure off that contagion risk.

I think what they're really trying to do here is provide that confidence that this will not. To other banks and really provide that guarantee that, look, if we can pro assure that we'll provide full access to deposits at SV S V I B or SVB, that will not see the spread to other banks as well. So we'll wanna double check.

We'll wanna make sure that this is truly what they're able to provide on Monday. But if that's the case, then I think this will take a lot of pressure off some of those pure banks in the system. And again, we'll be that good outcome that we were all

Jennifer: Incredible. Huge size of relief. I'm feeling less pressure on my chest myself.

Sunny: absolutely.

Jennifer: potentially mean, and we will need to go back on Monday and read the details, but would this also mean the companies involved that are exposed would be able to make payroll?

Sunny: It should. I mean, I if, if we can retake this at face value and they have full access to their deposits, then it should mean that they can actually pull those deposits and make payroll from that as well, which again would be very reassuring to many of those

Jennifer: Incredible. Anything else you wanna leave with listeners?

Sunny: You know, I think, uh, we were hoping that we would see something like this. And again, assuming the details check out here, this would provide a lot of reassurance of how the system should work. You know, we, it would be ideal if we weren't in the situation, but I think this provides a lot of, uh, reassurance that despite all of the challenges, we can still mostly get through this without too much pain for everybody.

Jennifer: All right. We'll tag this to the beginning of our episode and let folks listen in on more of the details of how we got here and why this was lovely. Sunny, thank you again.

Sunny: Thanks, Jen.

Jennifer: On Friday, Silicon Valley Bank, a lender to over 50% of VC backed startups in life science companies, including some of the biggest names in tech. And 2,500 VCs, according to their website, became the largest bank to collapse since the 2008 financial crisis. It collapsed within a day, which is crazy. Before we dive in, I wanna make it clear that our guest son Kumar, is a partner at GSR Ventures, which is a Silicon Valley VC where he invests in early stage companies applying artificial intelligence and machine learning to healthcare. He has no affiliation to Silicon Valley Bank or the Federal Deposit Insurance Corporation.

Opinions are his, as we all wrap our heads around what is going on. So with that, welcome, sunny. Thank you so much again for being with us today.

Sunny: Yeah, absolutely. Jen. It's a pleasure to be.

Jennifer: My goodness, what a few days. How are you doing? First of.

Sunny: Well, thank you so much for asking. I'm doing all right. You know, I think the last few days have been hectic, to say the least. And all of us in the community are doing everything that we can to support our companies, support our peers, support our colleagues. Um, as you mentioned, this has come on unexpectedly quickly, and I think all of us are still trying to unpack what's happening, trying to figure out what the next steps are.

and really see, you know, how can we pick up whatever pieces we can and plan for the future. But it's all happening in real time.

Jennifer: Yeah. And we're all wrapping our heads around it together. So let's start with, what is your understanding of what happened to cause the.

Sunny: Yeah. You know, this is something that I think we're gonna be analyzing for days, weeks, months, potentially even years, to see what lessons we can learn. But, you know, there are some facts that we know on the ground today. So if we take, again, what's known today, what we can understand is that actually, if you look at the assets and the liabilities of Silicon Valley Bank, they were actually pretty well matched, uh, going up until.

Early this week that said what we know as of Wednesday night when the announcement first came out, what Silicon Valley Bank decided to do was to shore up their balance sheet, which means that they decided that they wanted to have a little bit more assets to offset their liabilities. The root cause of this, again, from what we know so far is that a couple years ago, In 2021, they decided to buy long dated bonds, 10 year bonds at a relatively low interest rate, given the zero interest rate environment that we were in at that time.

So the interest rate at that time was, uh, on those bonds about 1.7%. The issue is that, you know, over the next two years, the interest rates have gone up significantly now at 5% plus. Uh, those bonds, given the fact that they're only at 1.7% are no longer worth as much as they. , but because they have that 10 year date, the bank was stuck holding them.

So what they did was they sold off some portion of those bonds at a loss and also decided to announce in an equity raise in and of itself, that's not problematic. This was just a step that they took again to shore up their balance sheet. However, the issue came after. Which was, uh, a question that became raised.

Why are they doing this? What was the need for them to do this? Uh, and as you might be aware, this led to a, a psychological factor, which became a concern that if they're doing this, are there other problems beneath the surface? Um, the initial reaction from some members of the community were to say, Hey, you know, there might not be too much going on here.

Let's stay calm. Let's all you know, stay, keep our cash within the. But as you may have also seen, there were plenty of folks out there who were more concerned about what was happening, encouraging portfolio companies, encouraging, you know, VCs themselves to pull their capital out of the bank. And this led to what's, you know, commonly known as a bank run.

Where folks started pulling their capital out. And once that started accelerating the, as the amount of capital within the bank started decreasing very quickly. And then, as you may have seen in the headlines, about 42 billion left the bank within 24 hours. That caused a big problem. And as, uh, as was reported, the bank went into a.

Cash balance within that period. So as a result, given that rapid acceleration, um, more money was pulled outta the bank than they they could handle. Now, if you actually look at some of the factors, I think if, as we start to unpack this, I think it ultimately comes down to the fact that this was a very, very highly concentrated bank.

Uh, there, the fact that the spank, you know, was such a pillar of the industry, but you know, more or less exclusively, um, catered. , the VC backed companies, startups, the technology sector also meant that they were vulnerable to this type of run, where once the industry became concerned about these factors, it allowed them to very quickly run into this loop of folks pulling their capital out and then this bank run dynamic.

Jennifer: Totally makes sense. Thank you for that. Sunny, and understanding a couple of things at play here. The interest rates having gone up, them needing to sell their bonds at a significant loss, folks getting wary and then withdrawing so much money out so quickly, it all accumulated. I'm hearing also talk over that this is potentially an unforced error.

Have you heard talks about that? What are your thoughts here?

Sunny: There are a couple, uh, elements of that for sure. And I, you know, I can't blame anybody who involved in this process. I actually think, you know, certain parts of this, like shoring up the balance sheet were actually somewhat reasonable. But, you know, there are comments that could be made about, you know, the timing of it.

You know, you may have seen that, um, there was a, a separate bank that failed in the crypto industry, silver light. And I think, uh, some are commenting that the. of Silicon Valley Bank's announcement of what they did in context of that, uh, may have been mistimed. Again, I'm not an expert, but I think, you know, just having those two occur in such quick succession may have been a big signaling risk.

These are two very, very different banks during very different industries. Very different sizes, very different histories, but I think some, some are. Comparing the two and saying the timing there, uh, may have contributed to that unforced error, uh, component of it. Certainly, uh, some are commenting that putting, you know, 70, I believe it was 70 billion worth of capital into these 10 year long dated bonds may have also been an error, but I think that's a very much a hindsight bias.

It's easy to say no. Yes. Buying those bonds at that time was a mistake, and I think most of us would agree that yes, in h. That's a mistake, but at the time it was very difficult to say what would happen to interest rates, you know, going forward a couple of years. So I think it's harder to judge them for that, you know, was the the right call to shore up the balance sheet at the time, given the information that they knew.

That I think is gonna be something that we're gonna be analyzing for a longer time. I actually think in, uh, in isolation, that was probably not the wrong decision. Maybe how it was done, how it was announced. That's probably where there's gonna be some challenges, um, in when we, when we unpack that.

Jennifer: All right. Let's talk about what this means for the stakeholders

Sunny: Mm-hmm.

Jennifer: We know so much money has gone or is frozen. We are not sure what will happen with it. So we have stakeholders like the startups whose funding is caught Silicon Valley Bank VCs who are exposed Silicon Valley Bank employees and LPs, meaning the folks that put in the funds into all of these investments.

Maybe we start with the startups. What does this mean for startups?

Sunny: Yeah, let's be clear that right now there's tremendous uncertainty, uh, and I think that's the biggest challenge for a lot of folks. We still don't know, and we're trying to figure out as much as we can, you know, over the last few days, over the weekend. Hopefully we'll get more information on Monday and early next week, because I think that's one of the biggest challenges for everybody.

Uh, trying to face this situation and we're learning as much as we can in real time. One of the biggest challenges for startups today is if you have capital in the bank in a deposit account, not necessarily in a money market account or in a treasury sweep account in a deposit account. There's a lot of uncertainty in what's gonna happen to that capital.

What we know for sure. Based on what's been announced is that you should get the secured portion of the F D I C insured portion of that, the 250,000 on Monday that should be available. Um, the challenge for many companies is that's only a small portion of what you had, um, with the bank, and that may not be enough to make payroll to make some of your other obligations.

So what happens to the breast? I think that's the big question. What we believe, and this is now outside of what we know, but what we believe is that there will be a dividend. on the remainder of your balance, that will come out at some point. Now the real question is how much will that dividend be? When will that be available?

And those are things that we don't know yet. We can, uh, based off of history, based off some things that have been announced where there's some expectation that that dividend may be somewhere between 10%. Up to 50% and may come out sometime in the next week or so. But again, none of this has been officially announced yet.

So again, it's contributing to that uncertainty. If we zoom out a little bit, there are a couple different paths that we can go from here. Uh, and we're getting, again, a little bit of information kind of day by day on this. One path is that we may see an acquirer. Come in to buy the bank, the assets, the relationships, the accounts.

I think, uh, many folks in the industry, myself included, think that this would probably be the best path forward for the bank. Um, given that there's still a tremendously valuable asset here, it seems like from all the announcements that are being made slowly public, that this would probably be the path forward.

but at least as right now, there has not been a publicly announced acquirer. There hasn't really been a plan set forward. Ideally, this happens today, tomorrow, really early in the week, and then we can start figuring out what the path forward. But there are complications. We don't know, for example, how they're gonna value the assets that are held at the bank.

You know what that timeline looks like. You know, if there is an acquirer, when they'll actually be able. Make accounts available to, uh, the deposit holders. There is, uh, a separate path, which is the F D I C or, or the treasury actually comes in and, uh, decides to backstop the bank and make the depositor's whole.

It looks like, again, from what we've heard from from Secretary Yellen, that they do not plan to go down this path. So again, that seems to be off the table at this point. . There are ver a variety of different reasons why they may not wanna do that, but I think that seems to be not the path, potentially, because maybe they think that the acquisition path is more likely, maybe for other reasons, but that seems to not be the path, the last

Jennifer: be, to be clear, the acquisition would be by another financial institution.

Sunny: Yes. That would be very luckily the path that would happen. The last path is a kind of controlled, um, asset sale where you go in, see what assets are available, you sell those off piece by piece, and then, uh, try and make the depositors whole over time as those assets get sold off. In an ideal scenario, there's enough assets to make all the deposit.

Hole. Uh, in a less ideal scenario, you don't get quite there. Maybe get 80% of the way, 90%, 95%. We don't know what that number's gonna be. The downside, of course, is that you may not get all the way to a hundred percent, and it actually may take some time. It may take three months, may take six months, may take longer.

So those are the three different scenarios that we see. . Hopefully we get to scenario one again, that acquisition scenario, scenario two would be okay, two, but it seems to be off the table, which is that having the, the government come in making everybody whole. And if we don't get there, it'll probably be scenario three where we have that slow, uh, sell off of assets to make everybody whole.

Jennifer: I'm really curious, do you, if you have any understanding of how the acquisition would make sense for the acquirer financially? Do you.

Sunny: Yes. So as of right now, there are a couple different reasons why that would make sense. One is that, uh, depending on how things get valued, for better or worse, Silicon Valley Bank no, is no longer worth on paper as much as it was, you know, even just a week ago or a couple weeks ago. Um, the actual company itself, the relationships that they have is tremendously valuable.

So if you're a larger bank or even a regional bank, you're trying to buy, not just. The assets and the liabilities, but the relationships and the future value of those relationships. You've seen all of the big banks want to come in and, and build that, uh, that relationship base for a variety of different reasons, whether that's a future wealth management business, whether that's, you know, a future of lending business that you can build on top so you're not just buying the existing business as it is today, but you're trying to buy what you can build on top of that business going forward.

And you've seen all of these. Larger banks try and enter this industry, but it takes a long time to build up those relationships, find those clients, you know, establish that if you can do that in a. One step move. You know, that does cost money of course, but if you do that in a one step move, you might be able to cut the cost of developing that program significantly, um, and potentially acquire a significantly valuable asset.

Of course, you do have to capitalize that. So what's happening today is they say, what's that shortfall? You know, how much am I spending to make those depositor as whole? If that amount is small, then this could be really valuable outside of maybe what you have to pay to those, uh, equity holders, if. Gap is significant.

Then they're trying to figure out, you know what that difference.

Jennifer: That makes sense. So what is the latest advice to startups that are much larger, potentially have 30 million plus in held up in Silicon Valley Bank that do need to make payroll?

Sunny: Yeah, so I think the first thing is to game plan, figure out what do we actually need to make payroll, you know, payroll maybe this Wednesday, maybe one week out, two weeks out. But I think the first thing to do is figure out what do we actually need, uh, and over what timeline picks again. As I mentioned earlier, we don't actually know when that capital is gonna be made available.

How much. The first thing to do, figure out what are your actual needs are and what, and over what timeline. Cause I think without that, you know, it's very difficult to actually plan. Once you have that plan in place, then you can start scenario planning with your board, with your investors, um, with the other folks that you may be working with.

Once you have that in place. The next question is, where can you get capital from? Um, fortunately there are some sources available. Of course, you have your investor base, so I think many companies. calling together board meetings and saying what sources of capital are available from your investor base?

There are also other short-term loans available from banks that are stepping up. Um, and I think it's worth looking into that to make payroll. Um, I think the context of your question is you don't want to be in a situation where you're not. Making payroll that can be very challenging for a company. Um, you certainly from my perspective, don't want to be in a situation where you are forced to furlough, um, your employees.

There is some question of would there be penalties if you're not able to make payroll because of this? We don't know. , honestly, we know, uh, legally speaking, yes, there are penalties involved if you are not able to make payroll. We don't know if that will be enforced, given the extenuating circumstances here, but from our perspective, you wanna avoid that situation.

Yeah, to the extent possible. So work to figure out first what the. needs of the company are to work with your investors and or any other short-term source of capital to figure out if you can plug that gap. And then three, you know, work, pay as close attention as you can to, you know, the F D I C announcements, the S SV V announcements to see what sources of capital will come in.

I do think it's very likely beyond the $250,000, we'll get some additional capital over the next week or so, but that timing and that amount is still up.

Jennifer: goodness, what a time. Really empathizing with the startup founders and the folks that need to be making these decisions. How about from the VC perspective? Folks that are exposed.

Sunny: Yeah, absolutely. I mean the, you know, as you mentioned, not only does, um, Silicon Valley Bank cater to startups, they also cater to VCs. So number of VCs have direct exposure in addition to all of the exposure through their companies. So, uh, many of them, uh, are working through that simultaneously. Think, you know, they have to do the same thing where they're trying to figure out, you know, how do they actually.

Capital from their limited partners to the companies, if that's the channel. You know, there tends to be a little bit more flexibility with VCs just because we can move things around a little bit more easily. But there are VCs for sure that have capital tied up and stuck with the bank as well. Um, just giving me long standing relationships that many VCs have had with the banks.

So there, there are those challenges as well. And as I mentioned, you know, many, uh, VCs may be called upon to try and support companies as they get through this. Depending on the timelines of these companies, you may have to react relatively quickly. So can we set up the rails through alternative banks to call capital to fund companies?

I think many VCs are moving quickly to set that up as well. So all of this is happening in real time. We're all trying to figure this out, but you know, there's not, there may not be a tremendous amount of time to help support companies as we get through some of these questions over the coming days.

Jennifer: Really over the coming days, I imagine similar situation for the LPs as well. I, I

Sunny: Yeah, the elf.

Jennifer: see. Mm-hmm.

Sunny: Totally. I, I would say the LPs are maybe one step removed. Um, just. , generally speaking, some of them, of course, are directly involved naturally investing in these companies, but generally they're going through the VCs, so they're one step removed, but they actually absolutely have exposure to all of this through their VCs, through their setups.

So certainly they're following this situation very closely to see what's happening, to see how things will play out. Um, if we get to a, you know, a good solution, because of that acquisition, they'll likely be able to see things play out, you know, hopefully in a positive. , but certainly they have exposure through all the other players.

Jennifer: Yeah. Wow. And I imagine folks outside of tech are so curious to know and get a holistic sense of, are we gonna see companies start to just go bankrupt and disappear? That is. Most likely what will happen to some companies. Any insights from you there?

Sunny: That's a great question. And I think there's a, a lot of. Conversation happening outside of, you know, the tech ecosystem on, you know, what does this mean for everyone else? Uh, and I think the biggest question right now that we need to answer and really get our, our grip on is how much risk of is there outside of Silicon Valley Bank.

You know, as, as you mentioned, as, as I touched on, uh, Silicon Valley Bank has been a pillar of. Venture ecosystem of listen startup ecosystem. But you know, there is some potential risk of this spreading outside of Silicon Valley Bank. You're starting to hear some murmurs of that over the, over the weekend.

And I think one thing that we need to be very mindful of is how much contagion risk is there of this spreading beyond S V B? And I think that's probably the biggest question on everyone's mind, at least this weekend. Uh, and going, going into next week beyond, uh, you know, this specific issue, That's something that we absolutely have to pay attention to.

This very possibly is not a, something that's. to svb, and I think that's something that I'm curious about. You know, how's the F D I C thinking about this? How's the Department of Treasury thinking about this? Um, if as an example, SVB gets acquired by another bank, this could be a relatively contained solution.

Uh, a challenge. But, you know, if this ends up spreading to other regional banks, you know, other mid-size banks, then we end up having a much, much. Problem on our hands, and that could potentially spiral well beyond the startup and tech industry. I think the biggest thing that we have to do is make sure that we can keep this as, um, well

Jennifer: as

Sunny: as possible.

Jennifer: What does that look like? Keeping that contained as possible,

Sunny: Yeah. So if you think about what actually happened with Silicon Valley Bank, you know, yes, absolutely there was this potential balance sheet issue, but I would argue. Biggest challenge they had was the, the psychology of the bank run. So how can we control that to the extent possible? That's probably gonna be the biggest factor here. If I could speculate, I would say, you know, I'm a little bit surprised and there are so many different factors that go into this. There's a lot of politics, there's a lot of, uh, political willpower as well, uh, around the backs. Element of it. Um, I am a little bit surprised that we aren't seeing more effort being done to provide that guarantee in the event there's not an acquisition or whatever.

Uh, because I think if we saw that, that would probably take a lot of the pressure off some of these other banks. Now again, there's a politics, there's all these other factors that contribute to that, but I think if without that, then. Folks out there might be concerned if you're at a A bank that may be in a similar situation, a Silicon Valley bank, do you start worrying and pulling your capital out?

Now preemptively, we might start seeing some of that on Monday and Tuesday. I think that starts putting some other banks in a bit of a shaky position with the backstop, with the guarantee. You know, there are reasons why you might want not wanna do that, but with that guarantee, it just takes some of that, you know, pressure off.

so we'll see. Maybe we, we see some of that on Monday and Tuesday, or maybe we get an acquisition and all of this goes away, but I think that's something that we should pay attention to.

Jennifer: We will be keeping glued to the news and updates hour by hour, I imagine. All right, let's talk about lessons learned here, sunny. So for many of us listening, This, we weren't old enough to have been present in the workforce potentially in 2008 when this happened. And lots of folks that were, were among the quickest to take their money out on Thursday.

And th that's just one lesson that comes to mind is just pay attention to the markets and how things are going. What other lessons come to mind for you, as I'm sure you're just going through all of these motions with your company and the companies that you're.

Sunny: Yeah, it's a, it's actually a great comment that you mentioned because we actually saw a bit of a bifurcation in some of those comments, at least early on in this specific cycle. When I say early on, meaning, you know, a difference of minutes or even hours, but actually at the very beginning you, what you saw were some of the folks who had been through some of this before, actually initially urging comp, urging folks.

To overreact. And I actually think if we had all followed that advice, we probably could have avoided this. Uh, and it was, uh, not to overgeneralize, but it was some of the folks who maybe hadn't seen some of this before, who had probably gone to the extreme end of trying to, you know, pull things out right away.

Jennifer: mm.

Sunny: course that shifted very quickly as, you know, the, uh, the mood changed and people started to all decide that this was happening and that we should probably pull out, but I think that that was. A bit of a reaction that led to that herd psychology of, you know, the bank run. And again, part of this was if the actual fundamentals were strong enough, we might have been able to avoid this.

But from a practical perspective, what can we do going forward? One thing that we realized is that the vast majority of startups, particularly early stage startups, were very, very concentrated from a capital perspective. They all had, you know, one bank account with, with Silicon Valley Bank. You know, for, for years, for decades, that was fine.

Jennifer: It's not something you think about that you wanna diversify your bank funds.

Sunny: Uh, but I think now as we go forward, um, what we're certainly encouraging every company to do, even the earliest stage companies, is to have, you know, that multiple sources, uh, that banks, you know, you don't wanna be solving yesterday's problem. But, you know, I think, you know, going forward, this is just a, a way to protect yourself to have that extra set set of security by having those two accounts. just in a world in which, you know, there's some sort of risk of this happening again. So I think that's certainly one step that you can take. I do wanna urge a little bit of caution because I don't want to be in a world in which, you know, as soon as you hear some bad news, you're pulling your capital out and going to another bank because that just, again, feeds into this cycle.

Uh, but certainly paying attention to what's happening and being able to adapt to that is going to be really important in this.

Jennifer: Aye. Aye. Aye. All right. Can I ask, how have you spent your weekend and how will you be spending Monday and Tuesday? Are those outside Valley to get a sense?

Sunny: I think, you know, a big part of it is, you know, supporting those companies that are in this kind of intermediate zone of, they're, they're stuck, uh, right now with their capital. They're dealing with the uncertainty and they have to make payroll. If you're kind of dealing with all three of those problems at once, it's a, it is a bit of a challenging.

Period for you. Cause you just don't know, you know what to do. From our perspective, let's try and solve those problems. You know, as they come up. There's only so much we can do with the uncertainty we have to pay attention to it. But, uh, we've been spending a lot of our time trying to figure out, okay, how do we make sure that we can get the companies that need capital, the capital they need to make payroll to operate?

and then just keeping our ear as close to the ground as possible to figure out, okay, you know, is Silicon Valley Bank gonna get acquired? Is there gonna be that dividend? When is that going to happen? You know, I may have mentioned earlier, some of these companies actually don't have deposit accounts. They have other types of accounts like money market funds or treasury accounts.

Those are, this is a little bit of a nuance, but those actually, those funds are safe. Because those are backed by those treasury securities, by those money market securities. But they're locked up because they're through Silicon Valley Bank. So we actually don't know when are we gonna get access to that.

So there's been a lot of process to figure out, you know, how can we get access to that if we didn't have to worry about making payroll and, you know, The next two, three days probably would be okay. But I think that timeline is also being, you know, a little bit of a pressure factor for a lot of these companies as well.

So all of this is, uh, you know, adding a little bit of excitement to the mix. That said, I'm actually personally cautiously optimistic that there should be a okay to positive outcome for all of this, but it may take a little bit more time than some of these companies have to really be able to figure.

Jennifer: and again, to your point, hopefully we can see some funds being unlocked for the folks affected in the coming week as, as we look forward to hopefully good outcomes in the midterm. Sunny, this was great to have you on to explain this further. I, it makes a lot more sense to me. Thank you so much for coming on, and I'm sending you all the best energy as well to the startups involved as, as we work through this.

Sunny: Jen, thank you so much for having me. Always a.

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