March 10, 2023 – Today’s news about Silicon Valley Bank (SVB) took everyone by surprise. In the span of just a few hours, the country’s 16th-largest bank went into FDIC receivership. Most of you will not have heard of SVB prior to today — they mostly serve as a corporate banker, predominantly in the venture community. By carving that niche for themselves over the past four decades, they somehow touch roughly half of all venture-backed companies in the U.S.
How they failed is a longer discussion of hubris and arrogance, but fail they did. The circumstances that led to their failure appear to be relatively isolated, namely their exposure to venture companies and the need of those companies to draw down deposits as venture funding dried up over the past year. In simple terms that most will understand, it is a Jimmy Stewart moment from “It’s a Wonderful Life.”
While this is a preliminary assessment of the exposure of our investments, it is our expectation that this will both be an isolated incident and relatively well contained. With the FDIC stepping in today, and Janet Yellin being very clear that unguided failure is not an option, it is likely that there will be a sale of SVB to a large, well-capitalized national bank. Should a sale not occur, and the dissolution proceed, it should be orderly with enough assets to cover deposits.
All deposits at SVB are insured for the first $250,000, which given the nature of their corporate customer base, will be critical for continuity. Per the FDIC today, those funds will be available on Monday. The deposits above that amount will be partially available on Monday as well, with the balance to be determined based on the sale of bank assets. Should SVB be purchased over the weekend, this calculus would change to the positive. Based on what we have seen, SVB’s asset base could make depositors whole or very close to whole.
We have a variety of exposures to SVB as outlined below. Keep in mind that this is based on just a few hours of phone calls, and more information will be available in the coming days. The most readily available information is from our private investments, as outlined below.
HCG Funds
The main fund, HCG Digital Finance, is not exposed to SVB in a material way.
The venture funds, Digital Ventures I and Digital Ventures II, have some exposure. All of DVI’s exposure will be covered by the FDIC. Some of DVII investment capital is exposed and could have an impact on returns if recovery is significantly impaired. The operations of DVI and DVII are not at risk.
Eastham Capital
Eastham Fund VI does have deposits with SVB. Those funds represent 1.2% of the fund, hence subjecting long-term returns to some deterioration should the recovery be significantly impaired. Their operations are intact and not at risk.
Vodia Ventures
We have one portfolio company in Fund I and II that is at risk, given the deposit freeze. They are currently working with the bank to assess their access to deposits come Monday. Should the FDIC plan go as described, the company will be operationally sound on Monday with minimal loss. We have been monitoring this situation very closely.
Vodia Ventures Funds I and II themselves do not use SVB.
None of the other portfolio companies are at risk or have exposure. Our other private investments appear to be unaffected by the situation, although we are still collecting information.
On the public investments side, namely stocks and bonds, the damage will likely be limited to market volatility. It is certainly a troubling time to see a major bank fail, and as such, the markets responded today by hammering stock prices. But yet again, the level of market decline is relatively muted and likely to be a footnote over the longer term.
There will be more to follow, and please take a few minutes to read the assessment below from the Robertson Stephens Investment Office. They give some more detail about the sequence of events.
As always, don’t hesitate to reach out with questions.
- DBM