The collapse of Silicon Valley Bank has sounded an alarm for the entire banking sector.

Big European banks including giants Deutsche Bank (NYSE:DB) and Credit Suisse (NYSE:CS) had their foundations shaken, while several cryptocurrency and regional banks in the U.S. failed.

Yet, while the first reaction of startups and depositors operating with Silicon Valley Bank has been to withdraw their funds before the ship went under, some businesses in the space are calling for more objectivity and less fearmongering.

"The truth of the matter is there’s not a more safe bank on the face of the planet than Silicon Valley Bank right now," said Jeff Ransdell, managing director and founding partner at Fuel Venture Capital Partners.

Depositors collectively withdrew $42 billion in one day as Silicon Valley Bank went under, yet in an interview with Benzinga, Ransdell stated that his fund continues to hold several million dollars in SVB.

How One Tech VC Skipped The SVB Crisis

Fuel is a Miami-based venture capital firm that has deployed over $700 million in the tech space since 2017.

Its portfolio includes companies one would normally expect to find in Silicon Valley, but which come from all corners of the world: from satellite manufacturers to payment solution platforms and virtual reality studios.

When explaining its business model and strategy, Ransdell points out that of 34 companies in his tech portfolio, only four had exposure to Silicon Valley Bank, and just one of those was affected.

That's because the thesis behind founding a VC firm outside of Silicon Valley that works with global startups was devised with a scenario like this in mind. The firm aims to provide tech investors with diversification in a very undiversified space.

"As a professional investor, rule number one is diversification", says Ransdell. "My peers in Silicon Valley, their exposure is 90 to 100%, because [Silicon Valley Bank] is their bank. It’s in their backyard."

Why Do Some VCs Continue To Choose Silicon Valley Bank?

"It was a very niche bank. It was created to serve a specific niche in the asset classes," says Randsell.

Traditional banks like J.P. Morgan (NYSE:JPM) or Bank of America (NYSE:BAC) "have traditional customers with traditional needs." That means that for 90% of their customers, the standard insurance of $250,000 provided by the FDIC is enough to cover them in the event of bank failure, because most traditional customers don't have larger amounts in their deposit accounts. That makes most big banks immune to the kind of bank run that hit SVB in a matter of hours.

Conversely, Silicon Valley Bank was a "brilliantly executed business plan that was grown out of the largest tech ecosystem on the face of the planet – Silicon Valley," Ransdell said. Adding that 90% or 95% of SVB's customers had over $250,000 in their accounts.

The reason Ransdell's firm banked with Silicon Valley Bank is because its products and services catered to companies exactly like Fuel Venture Capital.

"We are still there right now," he said. "One of the greatest things about living in the United States is we live in the United States. The U.S. president has guaranteed that everybody’s deposits would be taken care of."

While Fuel has moved "large positions" into Stifel Financial, Ransdell is confident that there's no reason to leave SVB altogether.

In his view, the collapse was not related to the bank's business model, but due purely to human error, as the leadership and strategy team decided to "go long on the yield curve in an environment of interest rates that were increasing."

He said the bank's fundamentals did not deserve a bank run.

While it wouldn't be problematic for his firm to remove all funds from SVB, the decision to stay comes from a place of leadership in the VC space. "I don’t want to create this unnecessary contagion of fear because I don’t believe that it should be feared. I view myself as a leader. I view my firm as a leader and I want to set an example," he said.

What The Future Holds For Silicon Valley Bank

"I don’t think that you can go through something like what we’ve gone through in the last weeks and expect that business is going to be as usual. It’s not," Ransdell explained.

First Citizens BancShares Inc (NASDAQ:FCNCO) announced on Monday it is acquiring SVB. First Citizens stock went up 47% in just a few hours after the news was made public.

Randsell, who was interviewed before the acquisition was known, mentioned that such an event was the most likely outcome for the bank.

"It’s too good of an asset to just let go down," he said. "It could be, quite frankly, the most coveted customer list of all banks in the United States."

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Tuesday, March 28, 2023

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