There's no question the collapse of Silicon Valley Bank, the principal unit of SVB Financial Group (SIVB) , has inflicted pain on investors and scared the banking public, causing people to re-evaluate their deposits in regional banks. But the group hurt most by the bank's collapse isn't the investor; it's the countless start-ups that have relied on Silicon Valley Bank's willingness over the years to provide access to capital when most other banks say no.
The dirty secret no one wants to talk about is that for many start-ups that only recently have been incorporated, banks and manufacturing partners often require personal guarantees for access to lines of credit and loans of any kind. While founders typically can guarantee a few hundred thousand dollars or maybe a million, very few have the wherewithal to come up with five to ten million dollars to personally ensure a line of credit to secure a contract manufacturing partner. While it's not impossible to find accredited investors to step in as white knights, you better be prepared for a lofty ask regarding interest rates, warrant coverage and follow-on consulting contracts.
Readily available capital allows young companies to grow more efficiently, meet payroll and avoid the death spiral of never-ending dilution, or at least that's what the venture capitalists will tell you. But there's a negative aspect to this easy flow of cash. too.
I've been investing in and consulting with private companies since 2013. The private market environment definitely became less frothy in 2022, but there's no denying many executives in start-up companies, especially in the technology space, have continued to expect mid- to high-six-figure salaries (not including stock options) and all the typical perks one expects to see an executive collect when working for a more mature company that generates more than a goose egg on the top and bottom lines.
The bottom line is while bank seizures are never a good thing, a considerable number of tech-based start-ups desperately need a reality check. This brand of medicine may be tough to swallow, but it has been needed for several years.
With a bit of luck, the VCs begging for a SIVB bailout -- after helping trigger the bank run by advising their portfolio companies to pull their money from the bank -- will suffer just enough to remember this lesson for more than a few months. A little financial discipline isn't such a bad thing, even if the delivery mechanism is painful in the short term.
On a different note, I received a few questions regarding the iShares Barclays 20+ Year Treasury Bond Fund (TLT) . I still have a partition position from last October, and while I'm not actively looking to sell it, it's clear that we're ping-ponging between $99.50 and $109.50. While folks were disappointed by the clear rejection from above the 200-day simple moving average (SMA) on Monday, I don't see that moving average as the primary pivot. This instrument is range-bound at best until the TLT closes above $109.50.
