Silicon Valley Bank: What Do Investors Expect?

March 13, 2023 By E.J. Smith - Your Survival Guy

Greg Becker, President and Chief Executive Officer of Silicon Valley Bank and SVB Financial Group, gives remarks at the welcome reception for the Global Entrepreneurship Summit, held on June 22-24, 2016 at Stanford University in Palo Alto, California. [GES Photo/Public Domain]

Silicon Valley Bank’s deposits increased by 238% in two years. Many of its deposits were from IPOs and SPAC deals. Andy Kessler writes that “Most startups had relationships with the bank.” Why is that? Kessler explains:

Why did so many startups bank with SVB in the first place? Here’s a hint. Apparently, more than half of SVB’s loans went to venture and private-equity firms backed by the borrower’s limited-partner commitments, a legal but slippery way to goose venture funds’ all-important internal rate of return metric, IRR, by investing three to six months before calling investors for cash. VCs are very persuasive with startups.

Here’s an important lesson for companies in trouble: On Thursday, Mr. Becker told everyone to “stay calm.” That never works, ever since Kevin Bacon’s character in “Animal House” told everyone, “Remain calm. All is well,” as chaos ensued.

Was there regulatory failure? Perhaps. SVB was regulated like a bank but looked more like a money-market fund. Then there’s this: In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have “1 Black,” “1 LGBTQ+” and “2 Veterans.” I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands.

Management screwed up interest rates, underestimated customer withdrawals, hired the wrong people, and failed to sell equity. You’re really only allowed one mistake; more proved fatal. Was management hubristic, delusional or incompetent? Sometimes there’s no difference.

Action Line: What do investors expect? When management loses sight of its fiduciary duties and ignores the Prudent Man theory, things can often go wrong. When you want to learn more about the Prudent Man and what it means to be a fiduciary, let’s talk. Until then, click here to sign up for my free monthly Survive & Thrive letter.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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