Silicon Valley Bank's collapse & its impact on the Asia startup ecosystem with Shai Oster
Fresh out of the studio and an emergency podcast, Shai Oster from The Information discuss the fallout coming from the collapse of Silicon Valley Bank over the past weekend, and what it means for the venture capitalists and startups in the Asia Pacific. We dived into what happened to Silicon Valley Bank, the aftermath of the intervention of the regulators on 12 March 2023 and what would have happened to the startup ecosystem across China, India and Southeast Asia if the US regulators did not intervene.
Bernard Leong: Welcome to Analyse Asia, the premiere podcast dedicated to dissecting the pulse of business, technology and media in Asia. I am Bernard Leong and the sudden collapse of Silicon Valley Bank has sent shock waves to the rest of the world, not just in the tech ecosystem. What is the impact of Silicon Valley Bank on Asia Pacific, specifically for China, India and even Southeast Asia companies? With me here, is Shai Oster, the Asia Bureau Chief for The Information. The Information has broken down a few critical stories on the topic. Shai, welcome to the show and let’s get into the account.
Shai Oster: Thank you. It's a pleasure.
Bernard Leong: So maybe I will set the context first about what Silicon Valley Bank is, and then we will talk about why, they got into trouble, and subsequently what has happened up to our current time, which is 13 or March 9:00 PM in Singapore time, and that means it's 9:00 AM now in. New York time where the market bell has just started ringing. So Silicon Valley Bank (aka SVB in short) was founded in 1983 in California and become the bank for the tech sector there, and the people who finance it help the startup ecosystem. Of course, it claimed to have banked for nearly half of the US venture-back startups as of 2021. It is also the banking partner for many venture capital firms because I was looking at their S-1 filing and could see all the branded venture capital firms from Andreessen Horowitz, Sequoia and Benchmark, etc. They funded the startups and called themselves the financial partner of the innovation economy. One thing is that it's very tightly woven into the financial infrastructure of the tech industry, specifically the startups. So it operated globally, (see Kevin Xu's tweets) so I don't want to call it a regional bank. It's opened in Israel in 2008, the UK in 2012, China in 2012 with Pudong Development Bank in Shanghai, Ireland in 2016, Germany in 2018, and India, Canada, and Denmark in 2019. That means, if I hear it correctly yesterday during Janet Yellen's interview, any foreign bank can take it over. Of course, it must pass the CFIUS test. Can you help us understand what this bank is, and what it means, and can you explain the background on why it ended up in trouble?
Shai Oster: So, I'm not a banking expert, but, so I'm sure to mangle this, and I'm sure you'll get angry comments. I would think of Silicon Valley Bank as a small-town bank, but in this case, the small town happens to have a global footprint. It's the bank for Silicon Valley, which has developed expertise in dealing with particularly the small and young emerging startups, which a big bank wouldn't necessarily touch because they represent a kind of risk that normal banks don't deal with. [For example] I'm a young woman, graduated from MIT. I have a brilliant idea, but I have no revenue and my business model is kind of sketchy. But my venture capital backers believe in me and they include Andreessen Horowitz and whatever VC firm. Now if you're a Citibank, HSBC or Bank of America, you're gonna look at this and say, "How am I gonna lend you money or even open a bank account if I don't know about what your assets are? You don't even have a garage. Whereas Silicon Valley Bank developed expertise in serving these clients and took a gamble in some way. But it was a pretty lucrative gamble. It worked out pretty well for them, but they developed that expertise, and it's really like boots-on-the-ground networking. They developed that network of bankers in the valley where they would know everyone. It's unique expertise to know how to lend and deal and do business banking for a very young, nascent startup. Now with that expertise, they try to export other startup scenes around the world.
So you have an active startup scene in Israel. You have a startup scene in the United Kingdom (UK) And then of course in India and in China. In China, they were already doing some work in the early 2000s and opened up an office in 2005. The joint venture with Pudong Development Bank was in 2012. That was interesting because they were doing some local currency business. I think that the scale is still somewhat modest, but they were developing a good relationship with the Shanghai government that they were even managing some of the government guidance funds, which are essentially government pools of cash for venture capital. So, they were pretty embedded in the scene and in particular, what Silicon Valley Bank could do for players in India. In particular for China, if you're a young startup guy or woman from Shanghai or Shenzhen or heaven forbid, from a third-tier city and you're trying to raise dollars and set up in an offshore BVI [British Virgin Islands] or Cayman, and you rock up to your big Wall Street bank and say, "Hi, I am an unknown Chinese person with a bank account in the Cayman Islands, and I'd like to open up a credit line for 2 million." The banks will need to do the KYC (know your customer), you [SVB] know your client and clear all the anti-money laundering [AML] regulations. It is so much work to figure out who this person is, where the money's coming from, what the actual business is and why is it in the Cayman Islands. How come? But wait for a second, but you don't own anything. The VIE structure is really hard to understand, and so if you understand how a big bank works and why I devote hours of manpower resources to sorting through this, it just wasn't worth their time. Silicon Valley Bank became the default. It was already the banker for the fund. So if I'm Sequoia China, I say, "Look, my fund is already with Sequoia Capital and then I can bring my hot startup to the bank, I vouch for Chiang. I think they're superstars. Trust me, I got them." This isn't like some weird narco-syndicate thing. Whoever it might be and because it's really difficult, there is capital control on the Chinese side and anti-money laundering regulation on the US side. So it was quite difficult for some unknown startup to open up a bank. Offshore and that, but opening up that bank account offshore is the only way to raise US dollars. Otherwise, what are you gonna do? So the loss of this conduit was potentially devastating for the Chinese startup, particularly in the early stages.
Once you reached Unicorn status, the guys at Citibank are gonna come knocking and say, "Hey, we'd like to be your commercial banker. We hear you have revenue of US$100 million a year, and we'd like to be part of that. So, why not issue a statement saying that they were no longer banking with SBV? That makes sense because I recall Silicon Valley Bank's total balance sheet is like 150 billion and the market cap is roughly the same. Of course, they're gonna be banking at someplace bigger. But, you know, we interviewed with one startup, which is also on the raise according to Pitchbook, roughly USD$200m, a company named Laiye which does robotic process automation among other things. In their earliest stages, they were with Silicon Valley Bank. As they matured, how do you say presciently, they had started reallocating their capital in the US to other banks and within China, they must have a Chinese bank account.
Now as to the cause of the [SVB bank] run. The bottom line is rising interest rates caused the bank's assets. They'd parked their cash into US treasuries, and as the interest rates rose, the value of the treasuries went down and that caught them short of cash. They arguably wisely said, "We need to recapitalize to make up for the shortfall." Once that word got out and they have to announce it as a publicly traded institution. These are banks and there are degrees of transparency. Once that got out, people like, wait, what do you mean you have to recapitalize the value of what? And, you know, bank runs are like mass psychosis? Somebody else that I forget who was quoting this, "Capitalism is a collective hallucination, so sometimes we hallucinate the world differently." This is the classic case where the bank has no assets because everyone decided the bank has no assets. If everyone had decided that it's fine and they'll raise the 5 billion, don't sweat it. But I think there's perhaps an underlying anxiety already in the markets. All it takes is that one trigger, but basically, it's the interest rates. So the culprit to some extent, seems that they may have adequately hedged for that interest rate risk. Now, I'm not a banking expert. I don't know the ins and outs. I haven't seen anyone do a deep dive yet on whether or not they weren't hedged and maybe there are some other underlying issues, but it seems that they just didn't hedge for interest rate risks.
Bernard Leong: They didn't hedge for interest rate risk. There's a very good article entitled "The Demise of Silicon Valley Bank" by Mark Rubenstein from Net Interest, which I read pretty religiously on financial institutions and structures. They bought some mortgage securities and because the deposits are getting lower and lower, what they were suffering from is the duration risk. Had they had enough time, they would not have defaulted. The best part was when they wanted to recapitalize, they started informing all the VCs. Some of the VCs say hold, and some big ones like Peter Thiel from Founders Fund asked them to pull out everything. So it triggered a bank run on their end and actually as it happens, even for me as an angel investor, I'm getting at least a few Southeast Asia founder emails from startups in that I invested. In Southeast Asia, there is little to no exposure because everyone is banked with a local bank. I don't have any exposure there as well. The real secondary effects came from the USDC (or circle stablecoin) de-pegging, and as a web3 investor, the founders are getting into panic mode and asking what is going to happen with their US dollars. The price of the USDC went from $1 down to 0.89 cents. Everyone started to panic and it was a bank run that spilled over into the ecosystem.
Shai Oster: So the US federal government came in with a guarantee. For the sale of Silicon Valley Bank's UK assets, the numbers seem quite small. It's just breaking news. So I think the numbers are like 4 billion. It's a relatively small balance sheet, right? It's not systemic. They don't think they really were huge in the UK. But you know, as of early trading, it seems that people aren't buying into it yet, that it hasn't stemmed the panic and the feeling that other regional banks are also inadequately hedged against these risks.
Bernard Leong: In fact, in the press release from the US Treasury, US Federal Reserve and FDIC was that they are going to have a program to backstop the deposits. They're only going to protect the depositors and not the shareholders or the management. Within the same press release, they also talk about a similar systemic risk exception: Signature Bank, which is actually the other crypto bank similar to Silvergate Bank a few days ago, which got into a bank run and has collapsed as well. So I don't know whether this is going to start percolating across the US banking system, you know, it feels a little bit like 2008. As an update, Silicon Valley Bank UK has been acquired by HSBC for 1 pound on 13 March 2023.
Shai Oster: Right. So the language there, I mean, so basically they're the government. What they're saying is that we are not bailing out the people who made the mistake. We're bailing out the people who hold accounts. They don't wanna use the word bailout because it's not taxpayer funded. The idea is that if you're a startup and you're using SVB to pay your payroll, your payroll is safe. If you are somebody who lent money to SVB, or some private equity firms or you are a shareholder but chances are that you are an accredited investor, a high net worth individual, you can take a little pain. Whereas the next start-up with 30 people, 100 people, or 1000 people, if they can't make payroll, that's actually really problematic. So I could see a wobble in share prices because all the shareholders are like, oh my goodness, but I think you know, it's hard to gauge a market because it's psychology, right? Not necessarily in reality or is it psychology that's gonna drive the reality? It's unclear to me. I think Biden's supposed to be giving a speech later today. If they decide that the real economy matters more than the investor economy, things might calm down relatively soon.
Bernard Leong: Do you think that this situation affects only the series A and B startups in the Asia Pacific? Everybody's allowed to withdraw their deposits. One interesting thing is that the Silicon Valley Bank actually offer certain loan services to founders or even VCs who first started out. This will actually make it almost very difficult because the actual financial plumbing for startups and the VC ecosystem in Silicon Valley collapsed and will probably affect the rest of the world. This ecosystem doesn't exist anymore now. So will the liquidity problem that happens in the US start to reflect back to the rest of the world? Are we gonna be seeing some form of a common recession, and then even turn into a type of depression for the startup ecosystem?
Shai Oster: It depends on how fast the vultures swoop in. I'm kidding. Yes, you're right. So there are all these financial issues, and it's unclear to me in the details of what will or still won't be functioning under federal control. Will the bank still do these lines of credit? I'm sure they're working on that. I think they're sophisticated enough to understand the ramification, that it's not just about, you know, startups doing payroll, but also about, you know, a VC having access to its credit line. The other thing is that you know, there's the bidding process right now to acquire the bank and that's complicated. In the meantime, people are looking for alternatives and it's a question of how quickly they can create these alternatives. So one of the hardest things, you know, friends of mine who have startups in the US have already opened up bank accounts. In fact, in The Information, I think we even wrote about it. We've figured out a way to protect ourselves.
Definitely, I know a handful of startups where, and even a Chinese startup where they had an American co-founder, just went to JP Morgan [bank] and within an hour, was able to open up a bank account. So the ones that have an alternative, they're probably already trying to seek it. The Wall Street banks, you know, I have a friend who is formerly from SVB a couple of years back, was saying basically like now every Wall Street CEO just realized that Silicon Valley has money and realized that this is a whole line of business here. I wasn't aware we could do that. It's the Chinese expression that crisis brings opportunity. That expression really is in this case. Yeah. Silicon Valley bank's crisis is gonna be an opportunity for everybody else. It is a question of how long and how quickly that transaction will take. My guess is we'll see a very ugly 3-6 months. But then again, it also depends on the details of what Federal control looks like. I mean, you know, there've been times where the government's controlled companies and they've functioned pretty well.
The Royal Bank of Scotland in the UK did okay. You know, there've been examples of effective government ownership of companies, I think in the US where the company still managed to function. So I don't know yet. Everybody who knows anything at SVB, are they going to take their expertise to another bank where it's gonna take six months for them to get the institutional plumbing in place or are they gonna stay? So I think there are a lot of questions that we don't know. I think the next six months are like a haze. After six months though, it's clear that Silicon Valley will no longer only have one bank, which is crazy, right? When you look back on it, you will think that this is an insane idea where like all of our risks were on one institution. Like who have looked at this and said, "Great idea, guys." So we'll probably be in a healthier position where all these other banks will have scrambled and gotten talent pushed all the best and brightest from SVB and built their own [equivalent] Silicon Valley bank branches. That's the optimistic case. The pessimistic case is that the internet breaks and we're sending smoke signals.
Bernard Leong: Do you think that it will end up becoming a regionalization-type situation? Like, say maybe India will have its own version of Silicon Valley Bank. China will end up having its own Silicon Valley Bank and Southeast Asia might have its own as well, because suddenly, you know, everything that used to be concentrated in one is now being fragmented across the world.
Shai Oster: I think because the capital is still largely US dollars. The institutions will still remain primarily American, just not one bank. It's crazy when you look back on it, It's crazy that Silicon Valley Bank which is effectually a small town bank, was doing this for everybody. My guess is that there might be joint ventures, and partnerships, but I think it'll just be another part of the portfolio in Goldman Sachs, ABN Amro, Credit Suisse or whatever they're all gonna have as part of their portfolio you know, startups and VC businesses. I could see a Japanese bank playing key roles right through SoftBank as well. Chinese banks are tough ones. It's really not small private businesses and not really in their DNA. They're good at global finance with big state-owned shipping and construction. I don't know enough about India. But I think it still comes down to big LPs. If you're a startup and you're raising money from a big Western LP or with Western GP like Andreessen Horowitz or a private equity firm, then your banker is gonna be Western.
Bernard Leong: One thing for sure, most of the Asian VCs raise a lot of their money from LPs in the US and over the weekend, it's also quite a nightmare because there were VCs that have so many assets tied into Silicon Valley Bank and then they may not even be able to afford payroll. They need to go to their LP and ask for some emergency drawdown to basically fund some of the startups within the portfolio. I could see this kind of impact. Even for the LPs, it might be even much more difficult for them to invest in the Asia Pacific region as a whole. I'm talking about China, India and Southeast Asia. Take your pick, whichever region is. Do you see the impact heading to these regions?
Shai Oster: There's so much else going on in the region that's problematic. I mean, the reverse CFIUS and all these constraints on investment and in particular the slowdown of investment in China. This has already been pretty sharp. India, I don't have figures off the top of my head. I think it's still gonna continue. I think what happened over the weekend was the legitimate response where people were scrambling to make sure they could make money and payroll. That problem is solved now. You don't need to go to your VC. You don't need to go to your LPs to get cash. The US government stepped in and we're fine. I mean, you know your share price. There may be some other weird like secondary derivative impacts from share price and sort of market jitters, but the money's safe. And I think everyone will be gun-shy for a while because they've just been traumatized. But you know, I think after three to six months people will start looking again at the fundamentals.
With China, the big question is: can you trust President Xi? President Xi Jinping, is he trustworthy? How much do you believe in the economic recovery post-Covid-19? People will figure out a way if they believe in the China story, they'll figure out a way to get money into it. But I do think that there's a lot of wound-licking, particularly for Chinese investors, as they've just been traumatized so much. You know, they've had a rough 12 months. They really didn't need this.
Bernard Leong: Just one final question: what would be your advice now to the startups in the Asia Pacific after this event?
Shai Oster: I would keep your money in Silicon Valley Bank. I think it's safe. I trust, you know, I mean, maybe foolishly, but I trust America. Well, you know, Janet Yellen. Her word is gold. Do look for an alternative because especially if you're Chinese, it's gonna take you a long time to open up another bank account. But it doesn't make sense to start hedging your bets because the SVB of today is not gonna be the SVB of the future. My concern is that whoever takes over SVB may not have when the next Bytedance in the making rocks up and says that I'm some random Chinese dude from some random village who needs the opening up of a BVI account. Do you know what I mean? That's building expertise. That's just not easy to do. I've heard from friends of mine who have told me that it took them a year to open up a bank account in one of the mainline investment banks or commercial banks, a year of due diligence, meetings and phone calls This was a VC who's raising $200 million. So it's not chunk change, right? It's not like my first fund. You don't know me, somebody with a relatively established track record, but it took them a year and a lot of pulling strings. Replacing SVB is just not easy. So, keep your money safe for now. Don't buy gold bars yet. I don't think we're at the stage of smuggling diamonds in our underwear to pay people.
Bernard Leong: Our grandmas put money in their boxes and that was in the 1920s to 1930s.
Shai Oster: Yeah. I think now is the time to look for an alternative, and it's gonna take a long time to find that alternative just because of the paperwork and the proof of who you are, it won't be simple.
I think the competing banks see an opportunity, so they're gonna make it, they're gonna make it quicker because they want that business. They suddenly realize that I said earlier that there is a business there. But I think the worst of it is over. Any famous last words?
Bernard Leong: I think we'll continue to monitor and then if there's anything else, we can always have another emergency podcast. So Shai, thanks for coming to the show. I just have one closing question for you. Can you just tell my audience where to find you? Of course, The Information is really putting up really great stuff this weekend and I've been reading a lot of interesting stuff as an investor.
Shai Oster: Fantastic. Glad to hear. So we're at The Information dot com. I'm at shai (at) theinformation (dot) com. I'm on Twitter at @BeijingScribe, my direct messages are open. I'm also on Signal, Telegram, fax machines, smoke signals and stone carvings. I'm out there. I'm also on LinkedIn. Another interesting thing is that I'm now based in Bangkok for the past couple of months, but I officially announced it lately. It's an interesting perspective to see China from another angle. I'm fine using more Chinese apps here than I was in Hong Kong such as Lazada and Uber. In any case, we are following the story. I don't think it's over yet. I'm curious to see if China somehow has a way to weigh in on this. because VC investing is so important to the Chinese economy. You know, the lawyers I spoke to, said that the Shanghai Pudong venture is a small and discreet business. But I just have a feeling that there's somebody in Shanghai sitting there trying to think like, how can we leverage this crisis for our opportunity?
What can we do that'll increase our standing, you know, again, like pure, crazy speculation? This is not reporting. This is just me. You know, mulling things that like if I would be President Xi's advisor, I'd be like, dude, we need to find a way to put a monkey in the wrench. Just as a way to say like look, China matters and you're about to like do something important with a big bank that has a global footprint on technology. You need to ask us for permission. Total speculation, guys. I'm just spitballing and everyone I've spoken to says I'm. So take it as your own free will. It's just this feeling that I'm waiting for the shoe to drop.
Bernard Leong: Okay, and definitely find us Analyse Asia on the YouTube channel and Shai, we will talk very soon.
Shai Oster: All right. Take care.
References:
- SVB's Chinese Customers face logjam in moving money, The Information
- U.S. to Backstop All SVB Deposits; Regional Banks Look Likely to Prevail in Sale, The Information
- Chamath's comment on the China tech startups being affected in the All In Podcast
- 9 Questions about the Silicon Valley Bank's collapse answered, Vox.
Podcast Information: The show is hosted and produced by Bernard Leong (@bernardleong, Linkedin) and Carol Yin (@CarolYujiaYin, LinkedIn). Proper credits for the intro and end music: "Energetic Sports Drive" and the episode is mixed & edited in both video and audio format by G.Thomas Craig (@gthomascraig, LinkedIn).
