- After last week’s bank run on SVB, many limited partners for VC funds had lots of questions.
- One LP was unhappy with how VCs in the funds they back handled the SVB crisis.
- Some LPs are wary of the tech industry’s heavy reliance on the bank.
As the Silicon Valley Bank fallout continues and VCs have pointed fingers at each other for who is at fault in public, one group has remained largely silent: limited partners, or the largely secretive investors who bankroll venture capitalists and their funds.
Known as LPs, these are the individuals and organizations like university endowments or family offices that invest their money in the hopes of reaping hefty returns from early bets on the next big startup.
But after last week’s bank run on Silicon Valley Bank, caused in large part by warnings from several prominent VCs to their portfolio companies to get their money out of the bank, LPs have mixed feelings about how it all went down.
An LP, who spoke to Insider on the condition of anonymity, said they were frustrated by how some in the VC ecosystem reacted. This LP invests in multiple funds and said that their operational due diligence team would have typically looked into the banks where VCs were stowing cash, but they did not raise flags about SVB.
“I think what it points out is that VCs, as well as entrepreneurs, didn’t know the risks associated with having cash at one bank,” said the LP. “I think that’s going to create changes in operations.”
Another LP, who also spoke on the condition of anonymity, told Insider that the funds they’ve invested in did not directly bank with SVB, but several of those funds’ portfolio companies did. They said they were impressed by how their fund managers offered to cover payroll for their affected startups, even though “the fed acted so quickly that none of that had to happen,” the LP said.
And another LP, who also asked to remain anonymous, said they received an email from one of the fund managers they work with last Friday detailing “to the penny” what their exposure was, how much money they had in SVB, and then the same for each of their portfolio companies.
Venture-capital behemoth Andreessen Horowitz, also recently sent an email to its LPs to quell their concerns in the aftermath of SVB’s collapse. The firm notified LPs of its plans to diversify its bank holdings and is currently in the process of opening “additional accounts” at another financial institution, according to a leaked email.
Many critics of the SVB bank run have pointed out that the venture-capital industry may not be as educated about banking and finance, and as Insider’s Linette Lopez points out, rely on gossip in the industry as if it’s gospel.
Earlier this week, regulators announced that SVB’s depositors would have access to all of their funds, even if they exceeded the $250,000 limit typically insured by the Federal Deposit Insurance Corporation. Investors and startup founders breathed a collective sigh of relief after getting this assurance from the US government, and some, including a16z, have decided to continue banking with SVB in the aftermath. More than 650 venture-capital firms have also pledged their support to continue working with the bank.
Yet many startup founders, spooked by the swift collapse of SVB, learned a tough lesson in the fallout, and have decided to move on from the bank entirely or put their money in several different banks. Those include one of the “big four” banks — JPMorgan Chase, Wells Fargo, Bank of America and Citibank – or one of several neobanks like Brex and Mercury.
Josh Schlisserman, founder of banking and financial services startup Series, and an LP in multiple emerging funds, said his fund managers texted him directly as everything unfolded to detail their exposure.
“We kind of saw tech at its worst, with a lot of finger-pointing and blaming. And we also saw tech at its best,” he said. “There were a lot of fintech companies in particular, and banking companies that banded together to come up with solutions overnight.”