By Wendy Jarchow, Chief Investment Officer, River SaaS Capital
Last Friday Silicon Valley Bank (SVB) collapsed, causing the second largest bank failure in U.S. history. On Sunday, New York Signature Bank’s customers began withdrawing their cash, causing the regulators to take control and shut down the bank. Fortunately, due to the rapid response from regulators, the deposit outflows from small and midsized lenders have slowed, and it looks like any other major collapse has been avoided.
How did this happen?
According to Pitchbook, venture capital deal activity sank over 30% last year and a slowdown in initial public offerings and continuing drawdown in valuations signaled trouble for 2023. However, startup spending hadn’t slowed, even with the expected decline in funding.
Silicon Valley Bank had been seeing an influx in deposit accounts and a declining need for loans with total client funds having fallen for the last five quarters. With the declining need for loans, SVB needed to offset its assets with a new revenue stream and turned to government securities while the interest rates were at zero. This left the bank open to vulnerabilities, given that the government started to raise interest rates since SVB invested.
Last Thursday, the CEO of SVB announced his intention to sell those government securities at a loss to offset its current assets. This spurred venture capitalists to turn to social media and other online platforms and recommend that their portfolio companies and borrowers immediately withdraw their money.
These social media conversations induced panic and fear while providing a sense of uncertainty for all organizations that trusted the institution with their assets. The alarm of organizations withdrawing funds publicly sparked a run on the bank that SVB could not handle. Late Friday, SVB was closed by regulators due to being insolvent.
Luckily, the U.S. government took action on Sunday night and announced that depositors will be made whole.
Over the weekend, companies who banked with SVB had to scramble to open new bank accounts and communicate with their customers and employees about the changes and potential impact. Had the regulators not acted quickly, many startups could have had to shut their doors overnight, not being able to make payroll or other recurring expenses.
In hindsight, had venture capitalists and startup founders stayed calm, this immediate collapse could have been avoided.
However, that doesn’t mean that the venture and startup community is out of the woods yet.
Where do we go from here?
Venture capital exists in order to help startup companies that a traditional bank won’t invest in grow and scale. They prioritize tech innovation and growth along with growing the bottom line. There are higher risks, but much bigger rewards.
Silicon Valley Bank was arguably the epicenter of the financial system for the startup ecosystem because it was not only the bank for these startups, but also provided loans to venture capital and private equity firms. With that said, the future is uncertain, but here are a few things to keep in mind.
Cyber startups will continue to flourish
In 2022, cybersecurity companies raised a total of $18.5 billion in venture capital funding and cyber security valuations didn’t fall as radically as other industry valuations fell indicating that the area is ripe for innovation and growth.
Cyber startups should be whole even with the fall of SVB. The government did the right thing when SVB and Signature Bank failed and that was to use the FDIC insurance fund, called the Deposit Insurance Fund, that banks pay into to pay customers at each bank back in full. Although the cap on insured deposits is $250K, to stop panic from spreading, regulators successfully made the exception to make customers whole.
However, access to capital will continue to shrink
With a projected recession on the horizon, venture capitalists were already pulling back on new investments and concentrating on solidifying their existing portfolio. With the fall of SVB, their appetite for risk will continue to dwindle. Plus, one of their main sources of loans for venture capital is now gone.
The venture market is not going away because of what happened in the banking industry recently; however, it will be more difficult to get access to capital, at least initially as investments are less available, and likely more expensive.
We will see a bounce back in venture investing and likely new resources to fill the gap that SVB leaves, but the timing is uncertain. Startups need to preserve cash and closely manage their burn in an effort to extend their runway. Bridging to a larger equity raise by borrowing money from an independent debt provider could be a good resource for some strong growth companies.
The future of SVB and what it means for venture capital is still up in the air
If SVB gets absorbed by a larger bank like, it’s hard to say if they will be funding startups at the same rate. Some large banks will make loans to startups if those startups meet the loan criteria, usually with strong collateral.
As we have seen in the past, most software and tech companies don’t possess the collateral needed to secure traditional bank financing. Venture banks, like SVB, tend to be more nimble than the big banks. That being said, some of the largest banks such as JPMorgan Chase, Bank of America, Citi have groups/bankers focused on small business so perhaps we could see a shift in mindset where the large banks expand their appetite for risk to support emerging companies.
What should startup founders do now?
As startups try to navigate when VC investing will return to pre-2022 levels, there are things they can do to ensure their companies keep moving forward. Entrepreneurs and existing investors will need to focus on a few things to maximize their “dry powder.”
Here are the 3 areas startups should concentrate on in the foreseeable future.
- Focus your time and resources outside of VC
Understand that venture firms will be focused on the most promising companies within their existing portfolios so now is not the time to focus on raising capital from these investors.
- Make the most of resources within your control.
Here are three main areas that you can control over this next period:
- Focus on customer acquisition costs. Marketing spend can be mitigated by focusing on existing customers v acquiring new.
- Be diligent with cash. Focus on bootstrapping, which can extend the runway.
- Streamline operations, including remote working to avoid office expenses where appropriate.
- Leverage existing investors / relationships or focus on independent resources
Not many banks have the startup resources or mindset to support early stage companies. With that in mind, look for financing from your current investors, your cap table or bootstrapping from friends and family.
You can also identify independent resources, such as stand-alone venture debt providers who understand the inherent risks associated with early stage companies and who can partner with you to help you achieve your goals.
- Hang on
We know it’s easy to let panic set in, but strong leaders shine in a time of turmoil. Lean on your network, overcommunicate to your teams and know that this situation inevitably will shift.
Elon Musk Discloses That Twitter Is Worth Less Than Half Of What He Bought It For…. While Twitter’s Source Code Leaks
Posted in Commentary with tags Twitter on March 27, 2023 by itnerdElon Musk paid $44 billion USD for Twitter. And many said at the time he overpaid. But according to Musk, Twitter at present is worth less than HALF of what he paid for it:
Twitter is now worth just $20billion — less than half of what Elon Musk paid for it six months ago, the world’s richest man told his employees.
In a company-wide email on Friday, Musk said the social media giant has lost so much money in recent months that it is now worth jut $20billion, a whopping $24billion less than what he purchased it for in October.
He then went on to defend his decision to lay off thousands of employees in the months since he took the helm of the company, and sell off a variety of merchandise in recent auctions — claiming that Twitter was once just four months from being bankrupt.
That’s mind blowing. Sure Twitter wasn’t worth $44 billion. But prior to his purchase it was worth more that $20 billion via some quick Googling that I did. That illustrates how much he’s really screwed up here to tank the value of the company by that much money.
Oh yeah, there’s also this:
In his company-wide email on Friday, obtained by the New York Times, Musk defended his decisions to lay off massive swaths of employees, saying the ‘radical changes’ to the company were necessary to save money.
He claimed that Twitter should be looked at as an ‘inverse start-up’ as he tries to rebrand the company, saying: ‘Twitter is being reshaped rapidly.’
And if his efforts are successful, Musk suggested that Twitter can one day be worth $250billion.
His remarks came as he explained the new stock compensation package he is offering to the less than 2,000 employees still left at the company.
Under his plan, Twitter employees will receive stock grants for the company he established to buy the social media platform — the X Corporation — which will operate under the $20billion estimate.
Workers will then be able to sell and cash in on their privately-held stocks every six months.
Doing so, he said, would allow employees to have ‘liquid stock, but without the stock price chaos and lawsuit burdens of a public company.’
Musk has previously implemented a similar program at his Space X firm.
I don’t know what drugs Elon is smoking. But nothing that he’s done with Twitter indicates that this company will be worth $250 billion in the future. In fact I would say that Elon has sent Twitter’s valuation in the other direction. Clearly Elon is either stoned or delusional. Perhaps both.
Strangely, the fact that he’s tanked Twitter’s value by over 50% isn’t his worst problem at the moment. This is:
Parts of Twitter’s source code, the underlying computer code on which the social network runs, were leaked online, according to a legal filing, a rare and major exposure of intellectual property as the company struggles to reduce technical issues and reverse its business fortunes under Elon Musk.
Twitter moved on Friday to have the leaked code taken down by sending a copyright infringement notice to GitHub, an online collaboration platform for software developers where the code was posted, according to the filing. GitHub complied and took down the code that day. It was unclear how long the leaked code had been online, but it appeared to have been public for at least several months.
Twitter also asked the U.S. District Court for the Northern District of California to order GitHub to identify the person who shared the code and any other individuals who downloaded it, according to the filing.
Twitter launched an investigation into the leak and executives handling the matter have surmised that whoever was responsible left the San Francisco-based company last year, two people briefed on the internal investigation said. Since Mr. Musk bought Twitter in October for $44 billion, about 75 percent of the company’s 7,500 employees have been laid off or resigned.
The executives were only recently made aware of the source code leak, the people briefed on the internal investigation said. One concern is that the code includes security vulnerabilities that could give hackers or other motivated parties the means to extract user data or take down the site, they said.
Well, this is a huge problem for Elon as anyone who can grab this code from GitHub and evade detection by GitHub as to downloading this code, which frankly someone singular or plural is going to evade detection by GitHub, is going to have the means to make life a living hell for Twitter and Elon. Threat actors would be able to launch attacks on Twitter at will, then rinse and repeat as Twitter will only be able to close the attack vector that was used in any one attack. To have any hope of stopping this, Twitter would have to do a full code review to even begin to close any of the possible attack vectors that they can find. And even then they won’t get all of them as threat actors would be one step ahead of them. Not to mention that threat actors would likely come up with attacks that Twitter would never envision based on what they find in the source code. It’s the ultimate game of “whack a mole” where Twitter is always going to be on the losing end of it.
If you’re one of the few people who are still on Twitter, you might want to buckle up. Because I suspect that things are about to get very bumpy. And Elon is going to be having a number of sleepless nights in the weeks ahead.
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