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naraburns  nihil supernum  1yr ago (text post)   34487 thread views

Culture War Roundup for the week of March 6, 2023

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Silicon Valley Bank crashed just a day ago, and many folks in the VC/startup world are freaking out. I’ve seen predictions that 50-100 different startups will go bankrupt over the next month. This could cause a contagion effect and lead to worse effects, although I’m skeptical of a major economic collapse as some doomsday prophets have discussed.

Apparently the bank was mostly into mortgage backed securities, which lost a ton of value due to the Fed’s precedented* rate hikes. I don’t know enough about finance to confidently hop on my soapbox here - @BurdensomeCount may have a better idea of what’s going on.

As this collapse mainly affects very left coded super technical folks, I don’t expect many on the right to shed tears. That being said I do think this speaks to a larger issue of growth in the economy as a whole. Tyler Cowen has famously backed the stagnation hypothesis, or the idea that overall production has been slowing down.

Tech startups have recently been the major sector looked to for economic growth, especially with all the AI/LLM hype. This collapse not only will slow the industry but shows a marked incompetence from this growth sector which may cool investment there in the future.

How can we sustain economic growth without the recent massive gains from Silicon Valley technology?

If the FDIC or other banking entity does not cover deposits, any business that depends on SVB and has a > $125K bimonthly payroll will have to do furloughs or layoffs. That's basically any business above ~15-20 people.

Directors of a company are criminally liable if they ask people to work knowing they have no means to pay them. Wednesday is March 15 (payday, for work done March 1 - 15). That means companies unable to make payroll #2 in March need to furlough or have layoffs before start of work Thursday.

There's something on the order of 1,000 series A or higher deals per year (even in 2022, decreased from 2021). The average time between raises is about 2 years. Thus, conservatively there's something like 2,000 venture-companies that have > $125K bimonthly payroll, and many small businesses that use SVB but are not venture-backed are not counted in this.

SVB purportedly services 50% of all startups per their advertising. From a survey of my VC and startup friends, it seems reasonable to assume that 25% of that are extremely dependent on SVB (e.g. payroll, no cash sitting elsewhere, and incoming customer payments aren't going to cover anything).

If these assumptions hold, we're looking at around 10% of the entire startup ecosystem laying off effectively everyone in March (e.g. either by going under, or reducing headcount so drastically that they're cashflow positive... which for most startups would be extremely painful). Another large batch will effectively go under in April (e.g. they have one months' payroll at another bank but that's it).

So in the short term we're talking about somewhere on the order of tens of thousands of jobs. A lot of future value creation is lost. Sure, some of these startups are the Juiceros or latest crypto scam, but others are meaningful companies that provide meaningful services. The latter group typically doesn't get as much press because they're optimizing for value rather than hype.

In the medium term, if you're a business that requires having an account with a >$250K balance, why would you now use any bank other than JPM? Sure you can do "diligence" on your bank, but SVB had an A rating from Moody's and a "buy" rating from JPM. Now obviously those are bullshit but for anyone claiming that this collapse was obvious -- please share a screenshot of your brokerage account where you made tons of $ shorting SVB.

So the default will be to go with JPM, rendering most small and medium-sized banks uncompetitive.

At the end of the day, SVB's shareholders will (and deserve to) get wiped out. Their bond creditors and such will mostly (and deserve to) get wiped out. I am not for bailouts of either of those parties. And maybe how we think about the banking system where depositors are creditors should be re-interrogated, because who the fuck is wanting to risk all their money for like a 0.5% interest rate? But I do NOT think startups and small businesses deserve to be randomly decimated.

any business that depends on SVB and has a > $125K bimonthly payroll will have to do furloughs or layoffs.

I don't think your math is right. That's $650,000 to $870,000 per person per year. EDIT: Never mind.

Also, you're assuming that SVB doesn't have enough to pay any of the deposits. They probably can pay most if not all of them.

You're also assuming these companies won't be able to borrow more money. There's also the possibility that the depositors will be bailed out. Failing that, why wouldn't their investors reinvest the same amount? If these companies were good investments last week, they mostly still will be next week.

I'm going to register a prediction now with 80% confidence that there will not be a large number of layoffs because of this. Let's say under 1,000.

I don't think your math is right. That's $650,000 to $870,000 per person per year.

250000 USD / 15 = 16,667 USD per person per bi-week. 52 weeks in a year, 26 bi-weeks, 26 * 16667 = 43,334 USD/year. Which is... pretty low, these days, even by startup standards. Corrected: 433k USD/person/year, nevermind.

((In practice, any business worth mentioning has non-payroll expenses, on top of this.))

Also, you're assuming that SVB doesn't have enough to pay any of the deposits. They probably can pay most if not all of them.

The issue is less how much SVB can pay out eventually, but also how long it takes for that to be resolved. If you don't have a functional bank account Monday, it's probably illegal to let anyone work for you even if you have a very-likely-to-be-valid IOU. And it might be the better part of a month before you get all of the assets you're going to get.

((This may even be a problem the other direction: if you do payroll monthly and have until the 31st, that's great, but you might still be trying to spin up a whole new bank account and connect your payment processing system to it because some processors won't hold money for you (or in Paypal's case, shouldn't be trusted to).))

Now, this ultimately boils down to a Weird Cashflow Problem, and Weird Cashflow Problems are absolutely the sort of thing that your typical startup (and even a lot of small businesses) have a lot of experiences dealing with, and the ones new enough to not have that experience can also have a ton of vendors quite happy to be paid for the privilege of giving that experience. Some will have open lines of credit; some very few will actually have available cash on it. Most businesses will get loans, or additional venture funding, or pull cash out of a funder's 401k, or sell a kidney, whatever, if nothing else comes up; some few others will be able to pause for a week or two, or have an executive willing to bet his or her bacon that his employee #2 means it when promising not to sue for a late paycheck.

On the flip side, that Weird Cashflow Problems are a thing in startups also makes employees incredibly risk-averse about them. A car mechanic may -- though I wouldn't be the business on it -- look askance at an employee who fucks up direct deposit once, but he's got Options. Startup employee, less so.

Failing that, why wouldn't their investors reinvest the same amount? If these companies were good investments last week, they mostly still will be next week.

Investors will usually evaluate every opportunity individually; there's a specific name for anyone not doing so, but the general one is 'fool'.

But more specifically, this event itself is a reason to reevaluate a lot of investing. Even outside of the question of more widespread bank runs, since other banks have a lot of exposure to interest rate risks, this particular institution was very well-regarded mere months or even weeks ago. It's normally great business to be selling shovels, but this is the sorta time that approach dies.

52 weeks in a year, 26 bi-weeks, 26 * 16667 = 43,334 USD/year. Which is... pretty low, these days, even by startup standards.

You're out by an order of magnitude. It should be 433k, which seems unrealistic even in Silicon Valley.

Corrected, and thanks. That does significantly reduce my concerns. Still a huge problem, but every 40- or 50-person employer is a smaller field.

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