Introduction:

Welcome to this article where we will be discussing the recent events surrounding Silicon Valley Bank (SVB) and its sudden downfall. In a recent podcast episode of Cofi, Rob Tompkins, CFO of RiskScout, joined the conversation to share his thoughts and opinions on the matter. In this article, we will dive deeper into the events leading up to the downfall of SVB, analyze the impact it had on the industry, and discuss the possible future implications of this event.

Background:

Rob Tompkins began his career in finance as an analyst at a price before moving on to work for Silicon Valley Bank (SVB) for 11 years. During his tenure at SVB, he witnessed the boom of the tech industry in the early 2000s, which was the time when a lot of big tech companies got their start. He then moved on to become the CFO of RiskScout, where he is now responsible for managing the company's finances.

The Downfall of SVB:

In the podcast episode of Cofi, Rob Tompkins discussed the recent downfall of SVB. He explained that during the 2020 venture boom, VCs and startups piled their deposits into SVB, which resulted in a massive influx of deposits for the bank. SVB had about 100 billion in deposits in 2020, which was up from 50 billion in 2018. In 2021, those deposits had increased to about 190 billion, which was a significant amount of money for a bank to handle.

However, SVB couldn't reasonably lend those deposits out fast enough or responsibly. So, in addition to their normal lending practices, they decided to park a large amount of these deposits in long-term government bonds that were at a fixed interest rate of 1.5 percent. At the time, it seemed like a better idea to earn some return than none.

The problem was that these were long-term bonds, and when the Fed started increasing interest rates to try to stave off inflation, the value of their bond portfolio dropped. As a result, SVB had an unrealized loss on their balance sheet. Normally, this wouldn't be a problem because the bank normally wouldn't have to realize the loss. They could just let the bonds mature, and they would eventually get paid back more than they invested. It wouldn't have been a home run investment, but it would have been fine.

However, in parallel to all this, startups were burning more than twice the amount of cash that they had burned historically. They weren't able to go out and raise new funds, and they just had grown to the point where they were burning cash like crazy. This created a perfect storm where, as the deposits started to drop, and the cash balance had started to drop at the bank, SVB eventually found itself in an unfortunate position of having to liquidate their bond position, realizing the loss, and trying to shore up the delta with capital from the private markets.

Impact on the Industry:

The downfall of SVB had a significant impact on the industry. Many startups and VCs had their deposits with the bank, and they were left scrambling to move their money to other institutions. The sudden loss of confidence in SVB caused a massive run on the bank, which led to its downfall. This event caused a lot of panic and uncertainty in the industry, as people were left wondering if other banks were also at risk of collapsing.

Future Implications:

The downfall of SVB raises many questions about the future of the industry. It highlights the importance of risk management and the need for banks to be transparent about their investment strategies. It also shows how quickly things can change in the industry, and how vulnerable even the biggest banks can be. In the future, we may see more.

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