Investor Mark Suster Says a 'Handful' of Bad VC Actors Destroyed Silicon Valley Bank

Yesterday around noon in Los Angeles, investor Mark Suster of venture capital firm Upfront Ventures appealed for "calm" on Twitter. Silicon Valley Bank had spoiled its messages on Wednesday around an effort to strengthen its balance sheet, and startup founders were beginning to fear their deposits with the 40-year-old tech-friendly institution were at risk. "More members of the VC community need to speak out publicly to ease the panic over @SVB_Financial," Suster wrote, saying he believed in the health of the bank and saying the biggest risk to startups , the VCs the bank has been addressing for a long time, and SVB itself would be a "mass panic".

As we now know, Suster was already too late. The industry was nervous and the bank's CEO, Greg Becker, speaking serenely to bank customers on a Zoom call late yesterday morning, managed to scare them further when he uttered the words: "The last thing we need you to do is panic."< /p>

This morning, after Silicon Valley Bank halted trading to halt the free fall in stocks (they had already plunged more than 80% between Wednesday and Thursday), the California Department of Financial Protection and innovation closed the bank. Then he put it under FDIC scrutiny, which is determining next steps as the bank's customers grapple with how to pay their bills in the meantime.

Today we asked Suster what his advice was yesterday and whether he regrets it or not. During our conversation, he also echoed a growing number of others in the startup world who have started pointing the finger at what they insist is a small number of VCs that set off alarm bells in the startup ecosystem – bringing down SVB but also, potentially, triggering contagion. Here is that interview, slightly edited for length and clarity.

TC: You were on CNBC this morning, where you said you think holding companies should have diversified where they've been holding their money all along. But I understand Silicon Valley Bank required many startups to have an exclusive relationship with them.

MS: SVB generally does not require exclusivity unless you are incurring debt. The problem is that a lot of people are going into debt, and we've been warning [portfolio companies] about it for a year.

What percentage of your startups do you think have diversified banking relationships?

About half have a relationship with SVB. Maybe half of them have alternative accounts.

You were very visibly supporting SVB yesterday as everyone rushed for the outings. Is SVB an investor in your venture capital firm?

No.

Did Upfront get its money from SVB?

No.

Are you worried because you didn't withdraw your money?

No. I heard about $12 billion went out of SVB yesterday, and SVB has just under $200 billion in assets, or 6.5-7% of [its assets] gone in one daytime. It's not catastrophic, but the Fed knew it was going to accelerate. They don't want a bank run, so I guess the Fed, in a perfect situation, would like someone to buy SBV, and I suspect they're talking to every bank and doing a review right now.

Are you surprised no one has come forward yet?

Imagine you have a whole bunch of people evaluating a bank's purchase. How do you rate it when you don't know how much is leaking? How do you catch a falling knife? By [closing SVB this morning], the Fed saved that knife from falling; now I think we will see an orderly sell off by Sunday. JPMorgan, Bank of America, Morgan Stanley, [someone is going to step in to buy it]. Then I think the panic will stop, because if you pull out of SVB because you are worried about SVB, it won't be a problem anymore.

How will SVB be rated by a buyer? Its market cap was around $6.3 billion when it closed this morning.

The valuation of a bank is correlated but above all not correlated with its assets. There are creditors and shareholders, and if a company goes bankrupt, creditors get money before shareholders. What people were betting with SVB was that ordinary shareholders would get nothing because SVB was going bankrupt; [its market cap and assets] became uncorrelated because they didn't believe SBV would survive.

What matters is: are there assets and is there value? SVB is a lender to a very cash-rich and well-run tech industry, and those customers are coveted. SVB not only serves startups, but also venture capital funds and private equity funds. Imagine that all of a sudden you have access to...