A Dearth of Secrets, an Excess of Capital: SVB’s Explosion

It has been said that there are only two ways to make money in business: bundling and unbundling. This is wrong. Instead, the past few days of panic, collapse, panic again, stress, scare, and sweet relief have illustrated a third way to make money: secrets. Secrets are when you know something no one else does and take advantage of that information to make a profit. But a secret isn’t forever. Eventually, word gets out, a secret transforms into common knowledge, and returns go to zero. 

What’s happened these past few days is a story about a little-understood secret converting to mass hysteria in record time.

For the blissfully unaware, the tech sector has just gone through a collective period of trauma that began with the collapse of Silicon Valley Bank (SVB). If you haven’t found a new wrinkle, gray hair, or stress ulcer over the last 72 hours, consider yourself lucky. For now, it appears that depositors will be made whole and the sector will be OK. However, as I type this at 7 a.m. EST, shares of First Republic Bank, a regional bank closely affiliated with the tech sector, are down 66.6% in premarket trading, so we may not be out of the woods yet.

The magical thing about secrets as a business strategy is that what counts as a secret is not just things that are whispered in the back of smoky rooms. A secret can also be a piece of information that is totally available to anyone in the general public as long as it goes unnoticed. Or as Peter Thiel describes it, “A secret is an important truth about the world that other people don’t realize.” 

After all, the signs of SVB’s potential implosion were there last year. However, all it took was a few VCs to act on it before the whole thing spiraled out of control. Here is a grossly oversimplified version of events:

1. SVB gets lots of cash deposits over the past two years from startups and VCs
2. They use that money to buy dumb, underperforming securities like mortgages with a 1.75% interest
3. Some stock sales happen in February 2023 from the CEO that, in retrospect, could be “problematic” 
4. SVB’s customers start pulling out cash faster than SVB can handle
5. It gets so bad that SVB ends up being technically insolvent last September 

This is when things really start to pop off. The secret begins to leak out—SVB may be in trouble:

1. People begin to notice SVB’s struggles from a SeekingAlpha post on December 19, a viral tweet thread in January, and a newsletter post from Byrne Hobart on February 23, 2023
2. Pretty much every VC I know starts to pay very, very close attention to SVB earnings
3. On March 8, SVB has to raise capital to help resolve the insolvency issue. It communicates why this is happening—poorly.
4. Peter Thiel, USV, and Coatue send out messages to portfolio companies to pull out funds 
5. Tech Twitter catches word of this and mass hysteria spreads through group chats 
6. A bank run happens on Thursday, March 9
7. SVB collapses and is taken over by the FDIC on Friday, March 10  
8. Sunday, March 12, the Federal Reserve guarantees depositors, meaning people who banked there will be made whole