While the vitriol and mocking of public-facing venture capitalists like Jason Calacanis, Bill Ackman, and David Sacks is always welcome, what needs to be rendered clear is that there’s a deeper hypocrisy poisoning the well of venture capital: VCs refusing to acknowledge that they’re a community of like-minded individuals, who helped Silicon Valley Bank (SVB) — their bank of choice — fail.
Let’s go back to the beginning.
SVB started in 1983, almost 40 years before it collapsed. At the time, it worked with legitimate innovators and industry disruptors. Not only did SVB welcome these individuals and businesses to be depositors (a relatively easy task for just about any bank), but also provided what are now being called pretty risky loans for companies lacking revenue streams.
This business model, somewhat surprisingly, worked well. Even post-Dot-Com Bubble and global financial crisis, SVB appeared to be on solid footing. A quick glance at its financials shows a bank growing assets, deposits, and revenue exponentially between 2007 and 2020.
Then it all came crashing down.
SVB execs made grave mistakes
It’s absolutely fair and reasonable to criticize management at SVB for their choices leading up to the demise of the bank. For years, financial analysts and economic forecasters warned of Federal Reserve interest rate hikes; that the era of free money was coming to an end.
Yet, in the year preceding its failure, SVB was continuing to place funds into mortgage-backed securities and 10-year treasury bonds that it couldn’t cash out. The bank essentially found itself in a self-caused liquidity crunch, refusing to acknowledge the dire straits they’d sailed directly into.
It also didn’t help that many banking regulations and restrictions had been nullified in the run-up to the collapse. Executives at SVB pushed particularly hard for mid-sized regional banks to be given a more hands-off approach from government officials.
Their lobbying efforts were successful. But in early 2023, management made perhaps their sole intelligent, logical decision: they reached out to the very community they’d been supporting for 40 years and asked them for help.
Venture capitalists took all lifeboats, let SVB sink
On March 8, SVB announced an emergency stock sale that would, hypothetically, inject $2.25 billion into the bank’s coffers, give it the ability to handle many more withdrawals, and face down the growing liquidity mismatch. Despite a large swath of SVB’s customers being literal billionaires and centimillionaires, almost no one came forward to offer cash to purchase shares. Instead, most decided it was time to withdraw their deposits.
So, instead of offering a relatively miniscule amount of cash — at least to many of these founders and fund managers — they did exactly the opposite of what you want to do if the goal is to save your favorite bank. Once the bank collapsed, they demanded that the government change all the rules for them.
It’s very difficult to feel sorry for these extremely wealthy individuals when they were offered the ability to put their ideals into motion – private money, no need for government bailouts or interference, and the efficiency of deregulated capital markets – and instead chose to run at the first sign of trouble in order to suckle on the teet of Big Brother.
If VCs and hedge fund managers think the public dislikes them for being hypocrites and loud-mouthed morons, perhaps they should. They had the opportunity to be the financial warriors they always pretended to be, but when the only bank that enjoyed serving them asked for help, they ran away.