Garry has an incentive to say the sky is falling because the sooner this is resolved the less pain it’ll cause, but to say this is an industry extinction event is a stretch.
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
Do keep in mind that at least in California unpaid wages are one of the only things that pierces the corporate veil, so management and investors are on the hook for them personally.
editing to add citation: California Labor Code Section 558.1
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate.
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
Smells like blame shifting to me.
He shouted the sky is falling.
Maybe it was, maybe it wasn't.
SVB was a pretty big bank and was clear in its representations.
Maybe he shouldn't have played Chicken Little, initiating the precise scenario the bank warned against.
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
In 2008, when startups started to fail, many colleagues left to work for large old established firms. Some others left banking on ne started new ventures. Turnover accelerated.
If we go through an event of the same magnitude, the economy and people will adapt, because history taught us so.
SVB’s failure is only a symptom of the wider environment in as much as it failed because of a focus on handshakes over proper management. The comments on the FT are illuminating: bankers can’t understand how they didn’t hedge for interest rate risk.
> Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
>> Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
I think the idea that tech is going to be set back a decade if a load of YC companies fail is an interesting assesment from the head of YC, and might be interpreted by some as hyperbolic and self-aggrandizing.
This is complete hyperbolic bullshit with the sole purpose of pushing a narrative, getting the right people concerned about their political image, and getting parachute out of this mess fast.
Can't blame the guy for doing his job, but you can call bullshit on him.
The real cost to startups is in management attention. If you're running a YC-funded startup, and got hit by this, it's going to occupy your attention for the next week at least, and probably the next month. The skills needed to deal with this are way outside the skill set of most tech founders, and even outside the skill set of most bankruptcy lawyers. You're going to need corporate lawyers and people who can evaluate deals in SVB receiver certificates. There aren't many people who do that sort of thing, and by now, they're probably all booked up.
And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.
For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.
So, priority is to get through the next two weeks while somebody works out a longer term solution.
Keep track of which founder teams deal with this well. They have potential in running a larger business.
All respect to Gary, I feel like "extinction level event" is quite hyperbolic. Obviously he cares about seeing YC companies survive but this is not going to wipe out the US startup scene.
As of right now, yes. Give it a week, and it will get sorted out. In all likelihood, the bank will have a new owner by coming Monday/Tuesday and everyone will be able to make the transactions.
Agreed. Given that this seems like primarily a timing issue (i.e. SIVB being forced to liquidate bonds at a loss because their tech-heavy depositor base needed their cash), I'd think that a better capitalized and more broadly diversified bank (i.e. not just tech or crypto depositors) would be salivating at the chance to buy these assets up on the cheap.
A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. ... As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits."
Those receivership certificates can be sold or borrowed against. The discount shouldn't be large, since there are solid assets, they're just long term. But figuring out how to arrange such deals is obscure, and early offers to buy will probably be at an excessive discount.
This doesn't happen often and it's not a routine type of transaction. Which means you may need expensive corporate lawyers.
Isn't this a similar version of what happened in the Savings and Loans crisis [0]?
Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.
I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.
I know this is (was) downvoted a lot, but I understand this sentiment. If you read the comments above, it's a "sky is falling" situation for many startups in the Silicon Valley sphere of influence. How is it that the silicon valley tech ecosystem could be in a position where one singular bank failure could wipe out so many startups? Pretty remarkable how fragile the ecosystem is if that's all it takes.
Tan, Sacks, etc are basically practicing "never let a crisis go to waste"
They only want to rig the game in their favor. These people weren't advocating things like tougher bank regulations that would have prevented this. They just happen to be on the losing side now and want a bailout.
It can be tempting to mock all the VC's freaking out about this, but I genuinely can't imagine how stressful this must be for a lot of people, so I"m willing to extend some grace and give people the benefit of the doubt when they let their emotions get the better of them.
With that said, the government's role in a situation like this is to prevent contagion, not make you whole. If a bunch of startups go under over this then that sucks, but that alone doesn't come close to justifying any sort of government bailout.
Forgive the naive question, but why did so many companies put all their cash in one account instead of spreading it between two or more independent banks?
Founders can take a loan on the IOUs from the FDIC from VCs and make payroll. Worth watching who goes this way and who holds out, doesn't pay their employees, and begs the federal government to pay them.
It's going to be a great reset for the tech startup landscape. If you can't pay your employees, your startup is going to zero.
Besides founders, who is going to work for free? In this economy, I wouldn't even risk the "promise" that startups will pay up. If all or most of their assets were held in SIVB and were not able to withdraw or transfer out, then they are effectively hosed.
[+] [-] phphphphp|3 years ago|reply
Even if the extremely unlikely scenario plays out and companies are unable to make payroll, employees are very unlikely to walk out, it would make an inconvenient situation (no pay) much worse (terminated) in an already challenging economic climate. Anybody with the financial means to walk away because payroll has been missed is someone with the financial means to ride out a few weeks waiting to be paid.
We will see many startups fall in the next few weeks + months, and many will attribute it to the failure of SVB, but SVB’s failure is a symptom of the broader economic environment, not a cause, and the same factors that caused SVB to fail are already hurting startups — like the difficult fundraising environment at the moment. SVB will be an easy scapegoat, “we didn’t fail, it was SVB’s fault!”
Most any startup that attributes its failure to SVB’s collapse would have been dead in a few months anyway.
[+] [-] robbiet480|3 years ago|reply
editing to add citation: California Labor Code Section 558.1
[+] [-] stingrae|3 years ago|reply
I don't understand how you can say this is an unlikely scenario. It is very likely, because a large number of startups are using one bank and that 250k won't cover much of their burn rate.
It also puts you in a terrible position to raise bridge rounds and other financing. Every investor and lender isn't incentivized to give good terms.
[+] [-] jonahbenton|3 years ago|reply
[+] [-] JumpCrisscross|3 years ago|reply
A lot of start-ups avoiding down rounds just got a great excuse to raise operating capital under the veil of liquidity.
[+] [-] woodruffw|3 years ago|reply
On top of that: there is no meaningful risk that these startups will not be made whole in the coming weeks. Given the absence of risk, there will be plenty of lenders competing to provide these companies with liquidity for a relatively small slice of the pie, should it even come to that.
[+] [-] batmansmk|3 years ago|reply
[+] [-] te_chris|3 years ago|reply
[+] [-] kweingar|3 years ago|reply
Even if employees don’t walk out, they can file a wage claim and collect penalties. Any retaliation for filing a wage claim is illegal and would result in more penalties.
[+] [-] ryanSrich|3 years ago|reply
Or several months, if not years. If SVB isn't bought by Monday those funds are going to be inaccessible for much longer than people realize.
[+] [-] the_gipsy|3 years ago|reply
I agree with the rest of your comment, but not the implication of this sentence. Riding out not getting payed is extremely risky with very low to no reward. Those that could ride it out are much better off quitting and making use of their time for interviewing - or anything but working for free.
[+] [-] phkahler|3 years ago|reply
Everyone should maintain the ability to miss a few paychecks. And everyone should know to start a job search the moment a company misses payroll or even looks like it might.
[+] [-] muzz|3 years ago|reply
[+] [-] gordon_freeman|3 years ago|reply
[deleted]
[+] [-] justinzollars|3 years ago|reply
Likely event. 30% of YC companies will not make payroll in the next 30 days. Their bank accounts literally went to zero today.
[+] [-] mellosouls|3 years ago|reply
[+] [-] kahrl|3 years ago|reply
Can't blame the guy for doing his job, but you can call bullshit on him.
[+] [-] Animats|3 years ago|reply
And what are those founders going to do? They're going to call up YC, which funded them and has board seats, and ask for instructions. YC probably told them to use Silicon Valley Bank.[1] So now YC has some responsibility to untangle this. It's probably in YC's interest to find a bulk buyer for SVB receivership certificates. If they don't, all their startups will be losing a month or two of management distraction while dealing with this problem.
For YC to take the lead on getting a market going in that stuff makes a lot of sense. They're the largest interested party. There are probably people at YC right now working the phones, trying to find a buyer for that paper.
So, priority is to get through the next two weeks while somebody works out a longer term solution. Keep track of which founder teams deal with this well. They have potential in running a larger business.
[1] https://www.svb.com/account/y-combinator
[+] [-] philkuz|3 years ago|reply
[+] [-] sp332|3 years ago|reply
[+] [-] justinzollars|3 years ago|reply
[+] [-] jjulius|3 years ago|reply
This is what we call "hubris". Gary needs to settle down.
[+] [-] halfmatthalfcat|3 years ago|reply
[+] [-] gauravphoenix|3 years ago|reply
[+] [-] hn_throwaway_99|3 years ago|reply
[+] [-] toss1|3 years ago|reply
A contact who has a college friend who works(/ed?) at SVB as a client service rep says that they were "specifically instructed to make or accept zero communications, emails, or phone calls with SVB clients."
[+] [-] paganel|3 years ago|reply
What due diligence can seriously be carried out by Monday/Tuesday? Especially for a messy "acquisition" like this one.
[+] [-] apnew|3 years ago|reply
[+] [-] Animats|3 years ago|reply
"All insured depositors will have full access to their insured deposits no later than Monday morning, March 13, 2023. The FDIC will pay uninsured depositors an advance dividend within the next week. Uninsured depositors will receive a receivership certificate for the remaining amount of their uninsured funds. As the FDIC sells the assets of Silicon Valley Bank, future dividend payments may be made to uninsured depositors. ... As of December 31, 2022, Silicon Valley Bank had approximately $209.0 billion in total assets and about $175.4 billion in total deposits."
Those receivership certificates can be sold or borrowed against. The discount shouldn't be large, since there are solid assets, they're just long term. But figuring out how to arrange such deals is obscure, and early offers to buy will probably be at an excessive discount.
This doesn't happen often and it's not a routine type of transaction. Which means you may need expensive corporate lawyers.
[+] [-] dmix|3 years ago|reply
[+] [-] not_enoch_wise|3 years ago|reply
Investor profits threatened by unstable silicon valley financial system: “Think of the workers! The sacred obligation of payroll!”
[+] [-] doesnt_know|3 years ago|reply
I didn't know there was a YC backed startup with an app that lets you directly inhale your own gas. I'm sure that one isn't at any risk of extinction.
[+] [-] rexreed|3 years ago|reply
[+] [-] wellthisisgreat|3 years ago|reply
[+] [-] alexpotato|3 years ago|reply
Effectively, banks lent money at X%. Then the government raised interest rates. Therefore, you owed your depositors a higher interest rate than you were collecting from your loans.
I know, not exactly the same but both related to the govt raising rates and banks not necessarily anticipating the move.
0 - https://en.wikipedia.org/wiki/Savings_and_loan_crisis
[+] [-] tekla|3 years ago|reply
[+] [-] rexreed|3 years ago|reply
[+] [-] murderfs|3 years ago|reply
[+] [-] Ancalagon|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] boc|3 years ago|reply
[+] [-] muzz|3 years ago|reply
They only want to rig the game in their favor. These people weren't advocating things like tougher bank regulations that would have prevented this. They just happen to be on the losing side now and want a bailout.
[+] [-] noelsusman|3 years ago|reply
With that said, the government's role in a situation like this is to prevent contagion, not make you whole. If a bunch of startups go under over this then that sucks, but that alone doesn't come close to justifying any sort of government bailout.
[+] [-] skylabmelody|3 years ago|reply
[+] [-] ezekg|3 years ago|reply
Things don't look good right now.
[+] [-] raldi|3 years ago|reply
[+] [-] mehlmao|3 years ago|reply
[+] [-] jppope|3 years ago|reply
[+] [-] TheAlchemist|3 years ago|reply
When times are good - they are the first to criticize government reach and taxes which are spend on other people. 100% capitalism etc.
When times get bad - we need government to step in and save us !
Ridiculous.
Besides, it seems the situation is nowhere near as bad as he paints it.
[+] [-] xyst|3 years ago|reply
Besides founders, who is going to work for free? In this economy, I wouldn't even risk the "promise" that startups will pay up. If all or most of their assets were held in SIVB and were not able to withdraw or transfer out, then they are effectively hosed.
Good luck folks.