Ding Ding TV hosts Silicon Valley Entrepreneurs Forum – How will the collapse of SVB change Silicon Valley?

On March 29th, Ding Ding TV hosted Silicon Valley Entrepreneurs Forum at Ding Ding TV studios. The forum’s topic was “How will the collapse of SVB change Silicon Valley?”
Co-organizers and partners on the event included Sandhills Investment Club, Incepvision Law, TSVC, Founders Space, and Silicon Valley Central Chamber of Commerce.

Who is responsible for the SVB collapse? How will it affect startups, venture capital, and the ecosystem of Silicon Valley? If Silicon Valley is no longer the best place, where can investors put their money? What are the consequences or loopholes in the US financial system and policy? Will SVB collapse cause a new financial crisis, or could this cause the butterfly effect? What lessons can be learned from SVB to avoid this from happening in the future?

The panelists included: Steve Hoffman (the Chairman and CEO of Founders Space, a venture investor, founder of three venture-backed and two bootstrapped startups, and author of several award-winning books), George Zhang (former Silicon Valley Bank Manager of the Credit Risk Management department and Founder of Shunyi Cellars), Xiaoxiao Liu (a seasoned corporate and securities attorney admitted to practice in New York, California, and China), and Spencer Greene (General Partner at TSVC with over 25 years in Silicon Valley as an entrepreneur, tech executive, and angel investor). Amrita Singh moderated the forum.

George Zhang used to work as a Manager of the Credit Risk Management department at Silicon Valley Bank. When asked who he thinks bears the responsibility for the collapse, Zhang said the top management made mistakes on some decisions.

Deposits of $250.000 are insured, but some companies managed to withdraw more money. Amrita Singh asked Xiaoxiao Liu how that was possible. The Federal Deposit Insurance Corporation (FDIC) closed SVB and took control of the deposits. The implemented emergency measures did not prevent a bank run and some managed to get more money out.

Spencer Greene spoke about the SVB collapse from the venture capitalist’s perspective. He talked about 73 banks that have failed over the last couple of decades and how the deposits were always protected. The FDIC insurance covers up to $250,000 per depositor. But it is at a discretion at the federal level, and that discretion has been exercised many times.

How has the collapse of SVB affected the ecosystem?

Silicon Valley was always the hub of entrepreneurship. The moderator wanted to know how has SVB collapse affected the ecosystem.

Spencer Greene posited it is less than people believe even though it has dominated the news cycle. He spoke about TSVC, which does early-stage investing in companies that are pre-product and pre-revenue. He thinks the collapse will have more of an impact on companies that are in later stages. Furthermore, he also believes a lot has been going on in the venture ecosystem over the past two years. His belief is that SVB collapse is a symptom rather than the cause. As Spencer Greene mentioned this is at least the third cycle he has seen. Prior to dot.com crash “people were spending too way too much money, investors were pouring too much money into companies that were not worth it. Then there was the crash in 2001. 2008 financial crisis was the second cycle.” He doesn’t think we are heading for dot.com crash, but time will tell.

Amrita Singh asked Steve Hoffman if he saw signs all of us missed. He said: “We knew we were in 0 interest world, and a lot of money was flooding the system. When interest rates rise dramatically, we knew there would be repercussions.” He also thinks the government did a good job by reacting quickly and stemming the tide. But he also believes there are people out there mismanaging banks and other institutions who make bad decisions, and those will come back. As far as how the startup system will look in the future, Steve Hoffman predicts there will be less money, and that will impact how startups are run.

When asked which industries bore the impact, Spencer Greene said we already saw that the fintech industry was most impacted. He also mentioned the buy-now-pay-later products that depend on low-interest rates. He said: “Fintech will be the hardest hit, but they are not alone.”

Steve Hoffman spoke about the domino effect, whether the investors’ confidence in Silicon Valley is shaken, and where they will invest their money now. Hoffman said: “If it is a systemic issue with the banking system, it is going to affect a much broader segment of the economy, you are going to see downturns all across the economy… these things are hard to predict, and the government is going to step in to mitigate that situation… Assuming there is a domino effect, we’ve seen this in the past, it could happen again. Fortunately, it didn’t happen because of SVB.” Hoffman also stressed the story is not over yet. Across the board, people are shifting their money to bigger banks and diversifying across treasury notes. Hoffman concluded people’s appetite for risk has gone down: “Venture capital runs Silicon Valley, and it is a high-risk, high-reward business.” He thinks things are going to slow down in Silicon Valley.

What have we learned from the SVB collapse?

The moderator wanted to know whether the community learned anything from the SVB collapse.

Xiaoxiao Liu said she advises her clients to have more than one banking client. She also concluded no agreement or contract could prevent these types of situations from happening.

From an investor standpoint, George Zhang said he would invest in more mature startups with more mature ideas. From a startup founder’s perspective, he suggested founders need to diversify more in things like hiring, how they manage their funds, and where they put their money.

Steve Hoffman concluded the main takeaway is to: “Diversify, diversify, diversify and not to put all your eggs in one basket.”

The panelists also discussed the different choices for cash management – a checking account vs. a money market account vs. a money market fund. A money market fund is held under the client’s name, and even if the custodial bank fails, you can recover your money. Steve Hoffman also mentioned ETFs as an alternative to holding your money in a place that is relatively safe, especially if you are trading stock.

A lively Q&A followed the panel discussion. An attendee wanted to know if panelists had a time machine to go back to 2019 what would they do differently. Steve Hoffman said: “Most of us didn’t see it coming, we didn’t see SVB going under so quickly… Whenever you are doing business, whenever you are investing, it is good to talk to people in the industry to get their perspective.” He also mentioned insiders on SVB sold a lot of stock. The insiders knew about the problem with the treasury notes as early as November and December.

George Zhang posited SVB collapse was the perfect storm brewing for a while. Factors like dramatically increasing interest rates, the downturn in the tech industry, smaller VC funds, and bad management decisions led to the collapse.

Another attendee wanted to know how the panelists foresee the system correcting itself. Steve Hoffman spoke about the pipeline and IPOs that are just not happening. He concluded we would see a greater number of startups fold while others would scale back until the money starts flowing again.

Spencer Greene said there is a difference in how the system recovers and how different companies recover. He quoted Warren Buffet, who said in 1983: “You need to be fearful when people are greedy, and greedy when people are fearful.” He concluded people who are greedy in these times would come in to fill in the void, and that is how capitalism corrects itself.

Another attendee wanted to know why the market and the regulators did not do more. Spencer Greene said it is essential to avoid simplistic, one-dimensional reasons because “when people are putting forward one reason only, what they are trying to do is distract from other reasons.” He also tied it in with the previous question on what should have been done differently: “You would have to go back to 2018 when the oversight of banks below $250 billion was loosened and that was clearly a mistake… What Congress should have done was retain oversight of banks in the $50 billion and $250 billion range.” An attendee posited the regulation should just be reversed, but Greene again warned against simplistic solutions: “I think there are many factors and I do think this needs be reversed… that particular legislation was bipartisan so there are mistakes on both sides… In addition to that, supervision under the legislation wasn’t exercised the way it should have been. So you have regulation that was relaxed, regulatory framework that exists where the execution of it wasn’t proper, a rapid interest rate rise, a concentrated customer base, and irresponsible venture capitalists. It all contributed.”

If you missed Silicon Valley Entrepreneurs Forum, watch the video.