The Reminiscence Of Banker Who Saw Fragility Of Banks

Last week the headlines were crowded with the demise of Silicon Valley Bank (SVB).   Without going into the history of why this happened, and how could it be avoided, I would like to make a case for the need for such an institution.

Paradoxically, only 10 days ago, when asked where I see opportunities in Asia, I suggested to someone that there is a need for Asian version of Silicon Valley Bank.   Obviously, since the SVB demise, the sarcastic emojis I received from him on WhatsApp was understandable.  It is ironic that the inspiration of my suggestion has become desperation for the customers for whom SVB was founded.

Having lived through the demise of my first employer, Lehman Brothers, I can empathize with employees, customers, depositors and vendors of SVB.  Getting emails on updates on funding situations of portfolio companies from Venture Funds shows the widespread influence of SVB.   It may feel like desperation and exasperation today, but it is also a testimony of the deep impact SVB has on the start-up ecosystem.

The early-stage companies and founders have a hard path ahead of them.  Aside from having great ideas, they must conjure resources (funding from angel, or VC) as well as inspire a team to support them in their vision.  SVB was an institution that specialized in catering to banking and financial needs of these companies.  SVB services spanned from simple steps of opening their bank accounts, to providing overdraft facility, letter of credit, cash management, etc. to more sophisticated products such as term loans, bridge loans, structure equity solutions and advisory.  – This provided the strategic support to start up in their journey to become valuable companies while they make their mark on sands of times.  Contrast this with walking into the doors of big established institutions in your countries as founder of a start-up – one can easily imagine the reception one would get and the inflexibility one would face from institutions that have their origins in supporting established businesses.  Lack of understanding sometimes may even breed contempt for the start-ups and off handed remarks of what would not work. The lens of their assessment is clouded, distorting the vision of the founder.

While angels and venture capital have provided the risk capital for the founders, SVB provided the balance needs and, in the process, created a niche for itself over four decades.  The funding came from venture capitalists and rich founders who had sold their businesses, or the venture capital funded start-ups who kept balance while they continue to burn cash and also raise cash in their next rounds.  The lending was to venture capital funded companies.   However, as they saw surge in their deposits during the early-stage funding boom in 2020-2021, they invested surplus cash in safe government and mortgage bonds.  As the bonds were of longer duration, and with interest rate hikes, the market value of the securities portfolio declined substantially.  In contrast, the funding winter in 2022 cause the early-stage companies to burn through their cash balances. As the balance sheet of SVB became riskier, it triggered a run on the bank, causing a swift demise in 48 hours.  

There were things that SVB could have done differently.  Yet, it does not take away the role it played in the start-up ecosystem.   From venture capitalists to founders, from overdrafts to loans, from balance sheet lending to advisory services – it was special – and we shall miss SVB for some time to come.  When a founder now walks into the doors of JP Morgan or Bank of America, I hope the banks have the humility to treat them with the respect and dignity that the founder deserves.  In the meantime, I hope someone is inspired by SVB and is starting another institution to help the start up fulfil their dreams.

The author is Founder - Nextinfinity. He also co-founded SSG Capital Management, one of the largest special situations and credit-focused investment houses in Asia-Pacific and has been active IBC-related cases.

Shyam Maheshwari

Guest Author The author is Founder - Nextinfinity. He also co-founded SSG Capital Management, one of the largest special situations and credit-focused investment houses in Asia-Pacific and has been active IBC-related cases.