The SVB Collapse
The sudden collapse of SVB provides a stark reminder of how quickly economic conditions can change. Several members of our team led companies through the 2008 financial crisis, and we have lived the stress of navigating short-term liquidity crunches. Few things will educate an entrepreneur as much as the fear of not making payroll. The lessons learned from those experiences are hard to forget, and they inform how we approach building businesses today.
Impact on Venture Ecosystem
SVB was the 16th largest US bank with over $200B in assets. That makes it the second largest commercial lender to ever fail in the US (after Washington Mutual in 2008). We’ve seen reports that as much as 93% of deposits at SVB were uninsured (unverified). One GP I know well told me that they had a portfolio company with $53M in deposits at SVB (only $250K of which would be insured by the FDIC). And while it is best known as a bank for startups, reportedly over 50% of its loans were actually to VC and private equity firms, secured by their LP commitments.
Given the nature of SVB’s concentration in venture-backed startups, the massive amount of uninsured deposits is actually not all that surprising. Venture-backed companies often raise millions of dollars in cash and then just set that cash in an operating bank account to be drawn down. Most of these companies are led by young founders who have never experienced a bank failure and accordingly didn’t appreciate the potential risk of maintaining large, uninsured deposits.
The extent of the impact on the overall venture ecosystem will become clearer over the coming days. Ultimately, the longer it takes for SVB’s assets to be sold, the longer it will take SVB customers to access their uninsured deposits. And of course, there are no guarantees that those SVB customers will receive 100% of those balances.
Many startups (and some venture funds) are being forced into taking desperate measures to access short-term liquidity through selling equity at significant discounts or taking out expensive bridge financing. If this drags out, we would not be surprised to see the following scenarios unfold over the next few months:
LPs pulling back from VC commitments due to the uncertainty of impact on underlying portfolio assets
This could cause VCs to be unable to make follow on investments to prop up cash strapped portfolio companies
Additionally, VCs may be hesitant to make new investments
Many startups may need short-term liquidity that they are unable to get from their existing VCs
Many startups who otherwise could have raised capital from traditional VCs may find it harder to raise now due to the liquidity crunch.
Opportunities for Mark II
While we are sensitive to the impact this is having on our friends in the industry, we are also preparing for a massive increase in demand for the studio’s support. We believe that times such as these really highlight the value that the Mark II Studio brings to young entrepreneurs leading young companies.
As capital becomes harder to access from VCs, we believe that many startups (perhaps even more established startups that have existing revenue streams) may seek to join the studio in order to access our guidance and support. For some founders, Mark II may seem like a safe harbor from the storms of the broader venture market.
When times are good, many founders might see the studio’s more disciplined approach and tight governance controls as oppressive and restrictive. For example, we control Board governance for each of our companies and maintain much of the financial control over the business including signing authority for expenditures over a certain amount. These sort of “guardrails” allow us to protect our portfolio companies (and our investors). We anticipate that many founders who may have previously shunned such controls might now find them reassuring.
There is a good chance that many VC funds may be less capable of investing in new companies or providing follow-on investments in the short-term. If this comes to pass, it presents an opportunity for us to be a source of capital for great businesses at potentially highly attractive prices. We will be prepared to take advantage of these opportunities as they arise through our venture syndicate.
When it comes to fundraising, our focus has been primarily on helping our companies raise capital from established VC firms in our network. Our syndicate exists primarily as a vehicle to allow our investors to take advantage of pro rata rights as a co-investor in those rounds led by other VCs.
Given our large network of HNWIs and Family Offices, we plan to expand our venture syndicate and allow individuals and FOs to invest alongside us through that vehicle if such opportunities present themselves. This could include leading some of our own rounds through the syndicate. Of course, none of this may come to pass if the larger venture ecosystem recovers quickly. However, we are always on the lookout for great opportunities, and we will share those with our syndicate when we find them.
If you have any additional questions, please do not hesitate to reach out.
If you know of startups that may be interested in the support and guidance the studio can offer, please direct them our way: www.mk2v.com
If you know of investors who might want to sign up as part of our venture syndicate, please feel free to introduce them to Patrick Cooney at email@example.com.