E120: Banking crisis and the great VC reset
All-In with Chamath, Jason, Sacks & Friedberg Podcast Recap
Published:
What Happened
The recent banking crisis has seen the collapse of several banks, including Silicon Valley Bank (SVB) and Credit Suisse, which is considered a globally systemically important bank. This crisis is largely attributed to the Federal Reserve's rapid interest rate increases, from around 0% to nearly 5% within a year, as a response to inflation fueled by excessive COVID-19 spending. Critics point to the loosening of Dodd-Frank Act regulations in 2018 as a contributing factor.
David Friedberg and Chamath Palihapitiya discuss the complex relationship between SVB and venture capitalists (VCs), where VCs might have directed startups to bank with SVB due to favorable loan conditions. The collapse has highlighted inadequate risk management and prompted advice for founders to diversify their banking relationships. Chamath suggests banks should regularly disclose their holdings, similar to Circle's USDC stablecoin.
The American banking system faces significant challenges, with an estimated $2 trillion exposure due to underwater assets, excluding the top four banks, which may also have a $1 to $2 trillion gap. The Federal Reserve has established a facility to act as a buyer of last resort, allowing banks to exchange devalued assets for loans at a 4.9% interest rate. Critics argue that interest rates might need to be reduced to inflate asset values and repay these loans.
The venture capital industry is undergoing a reset, with significant valuation adjustments. For instance, Stripe has taken a 50% valuation haircut, and Sequoia's returns since 2018 show a poor performance with only $40 million returned on an $800 million investment. Y Combinator's shift back to early-stage investments and Tiger Global's 33% write-down of their private book further indicate market recalibrations.
Amidst these challenges, there is optimism for new investment opportunities, particularly in AI. The average venture fund takes 5 to 7 years to call 90% of its capital and return 1x DPI, and while current asset prices may not reflect the fundamental business value, they present strategic investment opportunities. Chamath emphasizes the need for financially sophisticated actors on startup boards to navigate these market conditions.
Technological advancements like superconductors and quantum computing are discussed, with the potential to revolutionize industries by significantly reducing energy consumption and enhancing computing power. Ranga Diaz's controversial claims about room temperature superconductors are under scrutiny, yet if proven, they could lead to major breakthroughs in energy efficiency and storage. Quantum computing could facilitate these advancements by allowing molecular-level modeling of superconducting materials.
Key Insights
- The banking crisis, including the collapse of Silicon Valley Bank and Credit Suisse, is driven by rapid interest rate hikes from 0% to nearly 5% in response to COVID-19-related inflation.
- Venture capitalists' relationships with banks like SVB are scrutinized, as VCs may have directed startups to bank there due to favorable loan conditions, highlighting a need for diversified banking strategies.
- The Federal Reserve's facility allows banks to exchange devalued assets for loans at a 4.9% interest rate, but the American banking system faces a $2 trillion exposure due to underwater assets.
- The venture capital industry is resetting with significant valuation adjustments, such as Stripe's 50% valuation cut and Sequoia's poor returns, while AI presents new investment opportunities.
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