WHAT JUST HAPPENED...

Imagine waking up and everything you own was gone.

Your bed. Your sofa. All of your clothes, including that ugly brown sweater you keep wearing for no reason.

Over night…*poof*. Gone

That’s what happened to 10,000+ companies yesterday, when Silicon Valley Bank shut down.

I can’t stop thinking about how that must feel.

Imagine you are a founder who has been working for years, building a company, hiring 50 employees, raising $10M from investors… and all of a sudden the $10M is gone and you can’t make Friday payroll.

What do you even say? “Sorry everyone, the bank uh, shut down and we lost our $10M”

“Dear Everyone, I didn’t think that the most widely trusted bank in silicon valley might buy billions of dollars of long dated bonds, and then a bank run drives them to go out of business’.

That wasn’t on my bingo card.

You know that Charlie Munger quote? “All I want to know the place where I will die, so I’ll never go there”

That’s how I run my business.

I keep a list of the reasons that we might fail. I look at it and then that becomes my “to-don’t” list. Don’t die because of this. Don’t die because of that.

But my list is usually things about our product or customers. I never really gave much thought to “my bank might collapse and our company checking account will be buried in the rubble”.

But it almost happened to me.

I was lucky. We had ~$1.5M in Silicon Valley Bank as of yesterday.

But in the morning, I saw the stock start to drop and heard rumblings of a bank run, I sent this message in slack.

Thankfully, Romeen (my partner in our fund) picked up the phone and started calling to get our money moved.

Fortunately, we got our money out before the bank shut down.

We were lucky, but most were not. SVB had ~$174 BILLION in deposits. I think I heard ~$25B had been withdrawn at one point yesterday. That’s still a lot of cheese left in the pantry.

According to their website, 50% of VC backed tech & life science companies bank with them.

Ouch. The FDIC only insures $250K per customer.

$250k?! What is this, a school for ANTS?

Even a small auto repair shop could have $500k+ in the bank account to meet payroll or pay vendors for parts. Most tech businesses have millions in their bank accounts.

If the CEO/CFO was smart AND paranoid, they split money across 3-4 different bank accounts just in case. Even still, the average series A company has $10M+ in their bank account.

One company in our portfolio split their money across ~4 accounts, but that still meant they had $2M in SVB, which is (best case) stuck, and (worst case) gone.

Most companies haven’t said anything yet.

It’s a financial earthquake. We’re still digging thru the rubble to count bodies.

If you’re a founder, your entire stash of $10M to build your business is GONE overnight, and instead you just own a shiny “receivership certificate”.

It’s the cruel finance version of “I went to Silicon Valley and All I Got Was This Lousy T-Shirt”

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So - what lesson can we learn?

You either win or learn. So what did we learn?

1. Best practice - Don’t keep all your money in one place.

Sounds obvious, but let’s be real. Most startups and early stage companies aren’t the most savvy when it comes to counter-party risk.

Keeping USD in a bank seem uber boring and safe compared to everything else we’re doing.

Startup CEOs are like bikers with neck tattoos going on the It’s a Small World ride in disneyland. It just didn’t seem that scary (until now).

Still. Lesson learned. Don’t put all your eggs in any banks basket.

To be totally honest, the only reason I urgently took steps to move money yesterday was because I got burned by 2 OTHER bank runs in the past year.

1. I famously lost a million dollars when the Luna / UST bank run. I was on vacation with my family in hawaii and couldn’t access my crypto wallet, so I just sat by a pool, sipping a depression mai tai, watching the house burn down. (here’s a video i did about it)
   

2. Then just recently, I had $25k sitting around in an FTX wallet. I heard FTX might go down, and lolly-gagged an extra day before hitting the withdraw button. I was 8 hours too late, and the funds were frozen before I could get them out.

Fool me once, shame on you.

Fool me twice, shame on me.

Fool me three times? Nope. Not today Satan.

Crypto gave me a speedrun of a bunch of finance 101 topics. It taught me that there is ZERO upside in taking a “wait and see” approach to these things.

The game theory says: Heads you win nothing. Tails, you lose everything.

Loyalty is NOT rewarded in a bankrun, it is punished like kissing & telling in catholic school.

To be honest - I think the real lesson is not about FDIC insurance, it’s about risk and black swans.

This is a black swan event.

But I’ll be damned if I haven’t been seeing a lot of these black swans lately.

• Once in a hundred year virus causes a global pandemic

• The global reserve currency hits the highest inflation in 40 years

• Invincible monopoly tech stocks (FB, Amazon, etc.) drop more than 40%+

• FTX turns out to be a big fat scam

The past year has felt like the Flight of the Black Swans.

They migrated to my neighborhood, and it turns out, black swans sure do like shitting directly onto my shoulder.

So beware.

It’s black swan season.

-shaan

written by my fingers, picture generated by AI

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