The VC fund only has a tiny fraction of their fund as cash because most of it is loaned to to their portfolio companies, which have it in cash at the bank their VC partners told them to (because you can't pay payroll with Tbills), which, to a large degree (judging from the comments on the thread from last night) was SVB. It's going to be brutal for every company who didn't get their funds out before this morning's announcement, not to mention the possible contagion risks.
Yes, the companies will be screwed but that’s not what I meant.
What I meant by VCs have a tiny fraction of their fund as cash is that cash is held by LPs and is called upon only when the VC funds a startup. When a VC raises a $1B fund they don’t get the money, they get commitment that the money will be available. So this means that this failure shouldn’t affect VCs ability to invest in the future as most LPs didn’t hold their money in SVB.
That's right. Although there is an interesting thing to consider: if you look at page 13 of the deck they shared on Wednesday[1], it says 56% of SVB's total loans are in the form of lines of credit issued to PE/VC funds, secured by their LP commitments. I imagine many if not most of those are fairly small in size, but it's possible some funds took out much larger lines of credit, secured by their future LP commitments, and were holding that cash at SVB. So we could definitely see some funds affected to varying extents.
What is this? Does this mean that if PensionFundFoo invests in VCFundX as a LP, that PensionFundFoo never actually has to fork over cash to VCFundX to give to StartupZ? Does this mean SVB accepted PensionFundFoo's commitment to VCFundX as collateral and gave a loan to VCFundX to invest in StartupZ?
Yeah, more the latter. VCFundX goes out and raises capital for a new fund, which includes PensionFundFoo as one of the LPs, and once closed, goes to SVB and says, 'hey look we have $100M in signed LP commitments for this fund we just closed' and SVB says 'great - we'll set up a line of credit for you at [x]% of that $100M that you can draw down now (or later) to do with what you want' (obviously to invest in startups, but that would also include their management fees which GPs can pull forward and use to fund their lifestyles and/or invest). And then the future capital calls from LPs, including PensionFundFoo, go to SVB to pay down any amount of that loan outstanding.
The majority of VCs use this product simply to help smooth working capital needs and to be able to make new investments without needing to call capital sooner than LPs would prefer (also to juice IRRs), but there's almost certainly some minority that have basically taken an advance on their entire fund size, or at least a large portion of it. And now any of that cash still held at SVB is obviously at risk.
At the very step of funding, do LPs wire the money to a single bank (SVB) and then the VC dispurses it to the startup in one lump sum? Or do the LBs wire the money to the startup's bank account (at SVB)?
I've heard that UHNW individuals also individually banked with SVB. Wouldn't they have their money at SVB?
Also, wouldn't the VC's long-term relationship w/ SVB give them (the VCs and the startup they're funding) much more leeway with what the bank considers acceptable behavior (ie not money laundering and worth filing an SAR over)? Now that those relationships are gone and the VC has to go through the front door and deal with, say, BankOfAmerica or Chase like the rest of us chumps; doesn't the loss of that relationship materially hurt the broader environment?
Oh for sure. LPs would wire money to SVB and that money may be frozen/will be returned at less than par. Loss of relationship will also hurt. But for the biggest funds LPs are like pension funds, and that money will be available. One thing to consider is that VCs may need to call on their LPs to recapitalize their existing portcos which may leave less space for new investment.
