Listen up growth investors: This is why the SIVB issue matters
Listen up growth investors: This is why the SIVB issue matters
Markets: What growth investors should understand and do now
SIVB 0.00 is the bank of tech startups. It is headquartered in Santa Clara, CA.
Since it was founded in 1983, it has been the preferred Silicon Valley bank for venture firms, pre-IPO and post-IPO tech companies. Their services include commercial banking (credit, treasury management, foreign exchange etc.), lending (loans, revolving lines of credit etc.), venture investment services, merger and acquisition services and a lot more.
How did things go bad?
Well, SIVB realized that they needed to raise funds asap because they did not have enough cash in their coffers.
Cash is the life blood of a bank - It allows the bank to operate on a daily basis, taking in deposits, fulfilling cash withdrawals from customers, lending money, etc. SIVB is dependent on deposits from their tech and VC clients, because they then lend out those funds to other customers and earn interest on the loans.
Over the past 12 months, deposits coming into SIVB have dropped by about 40%.
Why?
Well, tech companies and start ups are usually not profitable and depend on cash for their operations. They raise cash via venture funding, IPOing into the public markets, via secondary offerings (equity and debt) and by borrowing. Only about 28% of startups and IPOs are profitable and can sustain their operations using existing cashflows. Only 40% of tech companies are similarly self-dependent.
Since Dec 2021, when the US Feds started raising interest rates, it has become harder (and more expensive) for these unprofitable, pre-cashflow companies to raise funds. More questions are being asked about their long term viability. More scrutiny and analysis is being conducted before investors give them money. So these companies, in turn, have less cash to park at SIVB.
And thus SIVB has less money to lend out, less cash on hand (in deposits) and their “blood” levels are running very low.
How did SIVB make it worse?
The bank tried to quickly raise funds by selling about 21B of their treasury bond holdings. They took a loss of $1.8B on that sale….buyers could smell that there was a problem and of course, they offered less than market price for the bonds.
SIVB tried to raise another $2.25B in capital and there were very few takers.
Word got out that the bank was desperately trying to shore up it’s cash position.
Customers started withdrawing their deposits. VC firms, businesses, people…all of them started asking for their money back…leading to a classic “run on the bank”.
Yesterday, March 9th, the stock lost 60% of its value. Today, it opened down another 60%ish and now trading in the stock has been halted.
Why does this matter?
If you are a growth investor like me, you likely own a bunch of tech companies.
If these companies are based in Silicon Valley or even originated there, they likely have a business banking relationship with SIVB.
If any of your companies have more debt than cash on the balance sheet, they might have some risk exposure to this situation. Their commercial bank could be “infected” with similar risk. It will be harder for them to raise funds in the future.
If any of our companies are not cash flow positive, they could feel the side effects.
After all this chaos settles down, some VC firms will go down. Perhaps a few more regional or industry sector specific banks will be side-swiped.
SIVB’s fundamentals tell a story
I have always believed that fundamentals, income statements, balance sheets, cashflow statements etc. tell the truth. GAAP accounting metrics are the best way to measure a company’s performance, underlying strength / weaknesses and compare apples to apples. And on this substack, Beachman looks for trends over several quarters.
So let’s take a quick look at SIVB. A very cursory glance itself found these issues:
Current market cap is $6B - this will go lower once the stock starts trading again
Enterprise value is lopsided at $12B - this could go negative because of how their stock price and cash to debt situation will shift
Cash on the balance sheet is about $13.8B, but that is also truly much lower given the recent barrage of withdrawals
Btw, cash has been declining for 5 straight quarters
Total debt is $19.3B. That is not going away
Debt has been increasing for 7 quarters now
Revenue growth has been trending lower for 3 quarters
Margins have been shrinking for 3 quarters as well
And that is what I could find in just a few minutes….
Investor take-aways
For growth investors like us, the take-aways are rather straightforward.
Invest in companies that have healthy balance sheets, expanding margins and improving cashflows…and might I add, declining shareholder dilution
Use GAAP numbers and avoid adjusted or non-GAAP numbers because they are easily “fungible”
Look at longer term backward and forward trends and not just the next quarter’s estimates
Use market dips to buy companies that meet our lofty standards and have nothing to do with whatever issues are spooking markets on a given day
BREAKING NEWS: I just read that SIVB has been shuttered by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (FDIC).
RIP…
Cheers and stay safe out there
$DDOG has been dropping heavily in the last days because I understand rumors of a potential impact from SIBV. Friday price of $65 is below your buy point of $69. Do you plan to buy?
Thank you Beachman. I am learning so much. Would you consider Sentinel One a company that is at risk from SIVB being shuttered?