Friday, 10 March 2023

Silicon Valley Bank shoots self in foot

by Berkeley Lovelace

It may go down in the history books about Silicon Valley: the time that its most prominent bank, a bank founded nearly 40 years earlier, inflicted such grievous injury on itself that it had to be rescued by another bank or else risk going down in flames in a single day.

We don’t yet know who that “white knight” will be, but you can bet a lot of conversations are happening right now about who will step in and acquire Silicon Valley Bank, an institution whose shares are down roughly more than 80% in after-hours trading from where they were at the beginning of yesterday. And why? Not because the bank is falling apart at the seams. Instead, because it utterly flubbed some important messaging at the very worst time imaginable.

This, friends, is what is called an own goal.

If you’re just catching up, here’s what happened: Silicon Valley Bank lost $1.8 billion in the sale of U.S. treasuries and mortgage-backed securities that it had invested in, owing to rising interest rates. The bank is also contending with shrinking customer deposits, given that its customer base of largely startups has far less money right now to park at a financial institution.

Because it’s in this spot, it decided to raise a bunch of money to safeguard its business. The plan was to sell $1.25 billion of its common stock to investors, $500 million in convertible preferred shares, and $500 million of its common stock in a separate transaction to the private equity firm General Atlantic. The apparent goal was to project that the bank was being conservative and raising this money to stabilize itself.

Oh, though, how it backfired, and who can be surprised, given it issued its announcement about these plans just as the crypto bank Silvergate was announcing that it was winding down operations.

You might imagine that someone at Silicon Valley Bank would have paused to think: “Hmm, maybe today is not the right time to declare that we’re shoring up our balance sheet.” Evidently, they did not. Instead at the end of the market close yesterday, they put out a convoluted press release that was received so badly that it was almost comical. Except that Silicon Valley Bank is a trusted financial partner to many startups and venture firms that are now nervously scrambling to figure out what to do.

It’s certainly not funny to Silicon Valley Bank’s estimated 6,500 employees or to its CEO Greg Becker, who found himself having to jump on a Zoom call late this morning to assuage panicked customers that it was just a little news release!

It was not an assuring performance. Please just “stay calm, because that’s what’s important,” Becker said. Silicon Valley Bank has been a “longtime supporters of you, the venture capital community companies, and so the last thing we need you to do is panic,” he added, saying what no one ever wants to hear from the head of their bank.

One of those customers, who asked not to be named, said to us afterward: “It’s like the end of ‘Animal House.’ Don’t panic? Now, I am panicking, watching your broadcast.”

What happens from here is the question, and something needs to happen fast, given how quickly the bank’s shares are falling. We’ve reached out to General Atlantic to see if it still plans to invest $500 million in Silicon Valley Bank’s common shares (we have yet to hear back).

We reached out to Silicon Valley Bank itself, which reiterated Becker’s earlier talking points. Silicon Valley Bank was/is just trying to “strengthen its financial position.” It is “well-capitalized,” has a “high-quality, liquid balance sheet,” boasts “peer-leading capital ratios,” etc., etc.

Again, we’re betting that a bank like Goldman Sachs shows up to the table, scoring the deal of a lifetime (and keeping Silicon Valley Bank’s employees from running for the exits). We’ll know soon enough.

In the meantime, whoever works in investor relations might want to start looking for a new job.

Maybe the same is true of Becker, who should have done more to diversify the bank’s business — this has been an issue hiding in plain sight for years — but who further just gave traders and hedge funds a fresh new way to trade on the current decline of the startup economy.

His only hope now is convince the bank’s remaining customers that all is well and hope they’ll buy it. (Founders Fund is among other firms that have reportedly advised their portfolio companies to withdraw their money.)

“We have ample liquidity to support our clients, with one exception,” Becker said earlier on that Zoom call. “If everybody is telling each other that SVB is in trouble, that will be a challenge.”

Silicon Valley Bank shoots self in foot by Connie Loizos originally published on TechCrunch