SVB used its influence over venture capital investors to make sure startup loans were repaid. If it is broken up, this power is lost.

Photo by Julius Drost on Unsplash

Credit funds are scrutinising the “mythical, enormous” Silicon Valley Bank loan book before bids potentially come in today, according to an in-depth story in the Financial Times.

Of the $74bn total, SVB has about $6.7bn of loans to early- and growth-stage companies and about $10bn to $12bn worth of loans that SVB had made to other companies.

A key question for an acquirer is how many of these loans are worthless and won’t repay? Historically, SVB used its outsized influence with venture capital firms to make sure they were made whole or the general partners would risk being dropped for their personally more lucrative subscription lines, which help bridge the period between when a fund buys a company or makes an investment and so juices up the internal rate of return so they can earn performance fees, as well as their wineries, homes and personal loans.

This was the real magic of SVB —  getting the VCs personally borrowing and then they would happily sacrifice any and all portfolio companies to the bankers to keep their own lifestyle intact. It’s a cruel world for a startup/limited partner if they’re being sold down the river by their investor/general partner.

But if the FDIC breaks up SVB and sells off the assets in chunks then the relationship is broken and non-payment of loans by companies could soar. Already we’re seeing plenty of cram-downs — cases where creditors are forced to accept debt restructuring arrangements . As the ever-excellent Kate Clark at the Information notes: “As cash-burning startups run out of money-raising options, cram downs will become a more normal part of the Silicon Valley discourse. It’s all part of a necessary correction to overheated equity prices. Sadly, not all of these companies can be saved, and more importantly, they aren’t all worth saving.”

At least 18 publicly traded American “unicorns” have more than $3bn in cumulative losses, of which three have more than $10bn, according to Jeffrey Funk, independent technology consultant: “The percentage of publicly traded American unicorns that are profitable is also declining, falling from 19% in 2021 to 12% in 2022.

“The unprofitability of publicly traded unicorns suggests privately traded ones are also unprofitable because profitable ones probably went public first.”

This is why the FDIC wanted to find a buyer for the whole bundle but any big bank views startups as a rounding error — 1% at best of their activity — and so none were incentivised to take the chance it seems when they can cherry pick clients for the bits of business they actually wanted.

The realisation that SVB is worth less than the sum of its parts is now hitting home and its unique business model built over generations has vanished in the blink of an eye.