SVB Q&A with Jason Calacanis (Emergency Podcast)

Jason Calacanis, the prominent Silicon Valley investor, recorded an emergency podcast on Friday afternoon in response to the recent news of Silicon Valley Bank's shutdown.

This is a transcript of the questions asked during the session.

If you're looking for the summary analysis of the podcast, click here.

Should the government come in and backstop this?

JC:

• I believe that the government should backstop many businesses that have second and third order impacts. For example, if an airline goes out of business and that basically shuts down Atlanta because that's their hub, or Southwest Airlines operates out of Phoenix, Arizona, and that shuts down the whole hub, it impacts all these other businesses and jobs.

• I don't have a problem with those backstops occurring by the government. I think it's a good use of government funds – of our funds as taxpayers. However, it has to be under the condition that it is the senior debt, and that they get interest or an equity kicker.

• If the government does take the risk of bailing out Silicon Valley Bank, an airline, or whatever needs to be bailed out in the world because we think it's a good idea to bail it out due to second and third order effects that we can't even anticipate, then they should get paid off like we do as venture capitalists: unlimited upside, they get to own 10 or 20 percent of the company, or they get double their money back minimum over 10 years.

• Make it – I don't want to say painful – but make the risk the government has taken by backstopping something like Silicon Valley Bank, an airline, or the car industry, the automotive industry. Make it so the public gets a big payday. In fact, all of those Obama-era loans that were given to electric vehicle companies like Tesla, Fisker, and Solyndra, some of those didn't work, but some of them got paid back with interest, like in the case of Tesla (and I think not Fisker).

What are your thoughts on emergency funding sources, accelerated recaps, etc.?

JC:

• Going to your venture capitalist and asking for emergency funding is a possibility, but not necessarily probable.There is a chance that the VC's investment dollars are tied up in Silicon Valley Bank, which has been experiencing issues.

• One email from a fund I'm an LP in stated that they had millions of dollars in Silicon Valley Bank that they were unable to access. Now, that Venture firm cannot fund their company, and if a company has Silicon Valley Bank as their treasury, they can't make payroll. Their lead VC is also on Silicon Valley Bank and can't access the money.

• The founder would have to go get emergency funds from another venture capital firm, but those firms are already dealing with the mess of startups during this correction. This is why I believe we may be in the early stages of a contagion, or potentially a contagion.

• If this becomes an acute contagion where many Venture funds are frozen, other Venture funds don't want to solve their problems, and there's a bunch of problems, and people get laid off, this could have cascading effects. I would be lying if I wasn't telling you that this is terrifying.

• This situation has an 80-90% chance that somebody buys it, or the government comes in and backstops this. But if that doesn't happen, I am terrified.

• This is a black swan contagion-like effect that could happen. It's not going to affect people who are not in the tech industry largely, but it could have third or fourth order impacts. For example, private schools could be impacted if parents who have lost their jobs can no longer afford tuition. Mortgages and domestic staff or small businesses funded by people who work in tech could also be affected.

• Emergency funding sources may not be available if this becomes a contagion. If it does, then it's every man, woman, and startup for themselves, and that's scary. It could mean shutdown central.

How does Silicon Valley Bank affect Founders trying to raise seed rounds right now?

JC:

• I think this is going to be a huge distraction and I think any funding that was going to occur or without any discussions that were going on are frozen for 60 days

• I have multiple deals I'm working on now I am getting pulled out of those deals to deal with my existing portfolio companies

• What would you do if you were me trying to save an existing strong startup company where I've already made the bet? or make another bet?

• Think that through for a second. Obviously I have to take care of my portfolio companies first before I do new Investments

• We have multiple Investments that were in the process of working on we're going to keep working on them but my time might get pulled away and if this were to become acute yes I might have to stop investing in startups for 30 or 60 days I hope that doesn't happen but I think a lot of VCS when these kind of things happen they do stop meetings with Founders and they stop investing.

What happens to companies with credit facilities if they just void?

JC:

• That's a great question. If you have a loan that's not void, I think whoever acquires your company would also acquire your loan. However, if you have a credit facility, I think that goes kaput. This means that you would no longer have that credit facility.

• That's why I always advise founders not to rely on venture debt lines or credit facilities to pay for their runway. If you have a factory you're building, it makes sense to get a loan to build it.

• The same applies to hardware or a bunch of guaranteed receivables that you factor. These things can make sense, but I don't think it's a great idea to be living on loans at startups. Nor do I think generally living on loans is a great idea for a country, an individual, a company, or a VC.

What is the impact for startups that have venture debt?

JC:

• This is a really good question. I think whoever acquires your company owns that venture debt. Then, the founders could probably stop paying it until they get some feedback on what to do. It's a holding pattern situation.

• Most founders won't pay their venture debt while they wait to see what happens with the new owners. The new owners might need to sit down with everybody who owes venture debt, restart the relationship, and decide how hardcore they want to be with them.

Regarding Silicon Valley Bank, are all the employees still there?

JC:

• I haven't heard one person talk about that. Are they all laid off immediately? Does nobody work at Silicon Valley Bank now? Or are they working for free or on spec? Do they know where their salaries are? Does the FDIC say that everybody has their job at Silicon Valley Bank and that they need to do it orderly?

• The press release said that the FDIC said it was going to take over operations, but let me double-check that. I think that's what happened. The question is, for how long? One wonders what's going to happen there.

How does this compare to 2008 and what lessons can be taken from that?

JC:

• Well, in 2008 you had Bear Stearns and Lehman, and other places with the risk of ruin, but it was outside of our wheelhouse so we weren't directly impacted. However, the government did famously intervene.

Will Stripe's attempt to raise 6 billion get hurt by this SVB fiasco?

JC:

• It's possible. If the VCs have their money in Silicon Valley Bank, they might have to call down another LP request, requiring another capital call from their investors to fund that. Those are big numbers.

Do you expect companies to start laying off immediately or will they wait a few weeks?

JC:

• My best advice for companies is to figure out what your payroll is. Stop paying any bills and tell all your vendors that you're impacted by the Silicon Valley Bank. Shut down all payments out. Whatever cash you happen to have, even if it's just the $250K you get on Monday, you're solid. Figure out what your payroll is.

• Then, you have to figure out the HR laws. You have to let the employees know how much, if you're going to be shutting down. Let's say your burn for the month is $250K, and your payroll is $250K, and you have $250K. You're going to have to let people know you have four weeks of salary. That means if you were going to give any severance, and in some places if you do a plant shutdown, there are laws around the concept of a plant shutdown. Some places you have to give two weeks' notice, some places four weeks' notice, some places two months' notice, some places three months' notice.

• If you're going to let go of more than 100 people or more than X percent of staff. Those shutdowns, you saw come into effect with the layoffs at Twitter, Google, Amazon, Facebook, all of those people got those severance packages, and sometimes it was 60 days, sometimes it was 90 days, that depends on the state you're in.

• Then sometimes, companies would put a factor on top of that. For small companies, if you're under 100 people or 50 people, you have to consult with your HR company, and you're going to have to get HR involved in this. Ripley and Gusto, whoever you use, you're going to have to talk to them and say, "What is our liability here?"

• I think there might be people who, if they can't get access to the funds and they can't do a bridge round with their existing investors, would be forced to shut down. If they were doing this kind of emergency shutdown, the board and individuals might be personally liable for those people's salaries. I'm not certain of that, but there are some things that will pierce the corporate veil, and I think these kinds of shutdowns are one of them. This could get acute. This is where you have to get legal and HR involved.

Will it trickle over to other banks?

JC:

• That is a possibility, and I have heard that is one of the conversations that is occurring right now. There are also some banks, like Parker from Rippling, who is using Rippling, which is a payment service like an HR provider. He is using SVB's rails and had to move those rails over to JP Morgan, but that payroll didn't go out. So every Rippling customer didn't hit payroll this week, and they're going to hit it next week or maybe early next week, I guess.

• This is where second-order effects and third-order effects are hard to predict. What started all this was the low-interest-rate environment running into interest rates going up so quickly and volatility, and all this money being put into bank accounts.

What about companies with more than $250K in deposits? 93% of funds are not insured.

JC:

• Yeah, that's the problem. I have multiple portfolio companies that are sitting on treasuries of tens of millions, in some cases hundreds of millions, of dollars, and I'm sure some of them are at Silicon Valley Bank.

• Venture capital firms, and now we are left to wonder what some of our strongest and best companies are going to do.

SVB manages over 250 funds on our behalf in a market account at JP Morgan. What do you think is going to happen with that?

JC:

• I actually don't know. This is a gray area, and I wish you luck trying to figure that out. I think you might be okay. I think what everybody's going to learn coming out of this is you need to have three or four banking providers, and you need to split your money across from them.

• If they don't like that, well, that's too bad. It's just the way business should work. You should always have multiple accounts, even if just you have a rogue employee on your side changes the password, you don't have access to it, and you need to hit payroll or something.

What happens to Silicon Valley Bank shareholders? Do they get anything back?

JC:

• I think they are going to be wiped out, but we'll see.

What do you think about the realization of $15 million losses for the acquirer?

JC:

• I guess there's some amount of goodwill in the brand, but the brand now seems damaged. But I think if you keep all the employees, you have the relationships, so that's a great question: what is the value?

What do you think about the CEO of SBB selling 3.5 million in stock in the last two weeks?

JC:

• I can't confirm the accuracy of this claim, so I would need to verify it. If the selling was not part of an automated plan, it may not look good.

• However, if the CEO was selling 1.75 million a week for the last 50 weeks as part of an automated plan, it wouldn't be a problem.

• If the trade was made while the CEO knew there were problems and people were withdrawing funds, that could be actionable.

Are founders allowed to file a lawsuit against SVB?

JC:

• They can become a creditor and file a lawsuit. Even if they were not a creditor, they still have the right to file a lawsuit. The FDIC will try to handle the situation in an orderly fashion.

How much SVB is in the red?

JC:

• That is the question that nobody has the answer to.

What happens to SVB loans to tech companies?

JC:

• I don't know the answer to that. It depends on whether SBB is shut down, and if it is, whether the government will go after the loans and call them or try to recoup them and slowly give them back to depositors.

• What happens if someone has $10 million in deposits at SBB and a $5 million loan? Do they get their $10 million back only after they give $5 million back? That's kind of impossible because SBB has their $10 million. Do they net it out?

• We are in uncharted territory, and a bankruptcy lawyer or an FDIC restructuring person will need to answer these questions. The whole industry is so intertwined, and there are so many conflicts that determining who gets paid when will be difficult.

What happens to General Lennox's $500 million private investment now that the FDIC has taken over?

JC:

• If they have already paid it, they may lose it and become a creditor in the equity stack. I don't know where they stand, and we don't have the documents.

• The transaction could not have been consummated, and the money might not have been wired yet. All of this is the minutia that needs to be sorted out.