The Silicon Valley Bank Saga

What’s Going On?

So, Silicon Valley Bank just went under 72 hours ago.

Meaning the second-largest bank collapse in American history just occurred. Simply crazy.

Slight digression- there’s gotta be something up with the letters S, and B_ - think FTX collapsing under SBF (Sam Bankman Fried) last year, and now SVB….

(Conspiracy theories welcome)

Anyways, back to business.

Half of the venture-backed startups have money going through SVB. And, if they can’t make payroll in the next couple of weeks, they will have to lay off many workers- around 120,000.

Seems eerily similar to the situation companies were in right at the beginning of the pandemic. In this situation, however, it’s mainly tech startups that are feeling the brunt force.

Garry Tan, CEO of Y-Combinator, called this an “extinction-level event” for startups. And, is he wrong? Many of the companies building innovative tech companies in current times have raised enormous sums of money to keep operations afloat.

And, if they can’t make payroll, then the employees will quit. And, if the employees quit….well, need I go further?

Anyway, one of the main drivers behind this event is the fact that SVB executives utilized deposits to lend and buy long-term, 10-year bonds- a pretty large red flag if you ask me.

In fact, it was a combination of the misallocation of funds and the fact that the federal reserve was off on their interest rate calculation by 47x. Simply bananas.

Which means, SVB had $91 billion parked in these long-term securities, and with the large fed interest rate hikes, were worth $15 billion less.

And so, 48 hours ago, people began pulling their money out of SVB, causing a bank run... SVB didn’t have the money- they were insolvent. So, FDIC, or the Federal Deposit Insurance Commission, took control of SVB and essentially shut them down.

Though the FDIC guarantees people can withdraw up to $250k from the bank, it’s a drop in the bucket for startups that have an entire workforce to pay.

The big question: how does this play out?

This is eerily similar to what happened in the ‘08 financial crisis.

Obviously, the execs at Silicon Valley Bank should be held accountable, but good faith depositors shouldn’t be punished for the miscalculation of these execs.

We’re talking 1-5 person scrappy startups.

Moreso, a lot of people in the tech world propose that one of the larger banks, such as JP Morgan, backstop SVB- but the FDIC blocked a private sale.

Many in Silicon Valley speak of the “contagion” effect. Basically, this means that, once people across the country see what’s happening with SVB, they will pull money out of their banks.

The next domino, Signature Bank, has been shut down

Listen: Humans are social creatures, and often imitate what others do (as we saw during the pandemic). And so, many will pull money out of their local banks, leading to even more concentration of capital in the top banks.

In other words: the “too big to fail” banks will only get bigger, and less able to fail…

As we near the end of the saga, the federal reserve has confirmed that depositors will be made whole and that a new funding program, including a $25 billion backstop, will be formed for eligible depositors.

Hello Crypto?

The crypto believers across the world can be heard shrieking “I told ya so- the big banks are comin’ for ya!”

In fact: Satoshi invented Bitcoin in response to the 2008 financial crisis….what I’m saying is, where can I invest in Bitcoin 2.0?

Going to log in to my Metamask account to check my crypto losses…

Anyway, many do propose using crypto to backstop this- but, even the crypto world’s been shaken by this.

Why?

Well, let’s take USDC, a stablecoin. Basically, a stablecoin is a crypto coin that is pegged 1:1 to the US dollar. And of the $40 billion it has in reserves, get this- $8 billion - of it is in SVB. All of which may be vaporized- like fairy dust.

And now, USDC is being unpegged from the dollar, falling below $0.87.

Basically, there should be a measured backstop to prevent a fast downward spiral. See, this is

Anyways lads, as we always say- where there’s chaos, there’s opportunity. Mad opportunity.

So, in light of what’s going on, here are some business ideas for you:

1. A real-time dashboard that monitors bank liquidity at non-big-4 banks-> The big 4 get protected by the government no matter what- the people want to know…are the others safe?

2. A Crypto wallet (that’s not Metamask)- a truly decentralized crypto wallet that’s not going to get regulated

3. Build more DeFi banks (since trust in the current banking system is sure to plummet even lower)

4. A way to book insanely cheap flights to Bali (I mean, who doesn’t need this right now?)

The sponsor of today’s edition of the ZenPreneur is SV…, just kidding.

Alrighty then lads, go out and keep crushing it.

Peace.