Lecture 8 Flashcards
What is SVB?
A bank that takes deposits for US technology companies (mainly startups)
● Founded in 1983 and has been backing the tech community ever since
● $200B of assets
○ 16th largest bank in the United States
● They are primarily a lender
○ Venture debt for 50% of startups and venture-backed companies
○ They force you to keep your cash with them (deposits) so they can underwrite
you for loans at better rates
■ Ie if they can see the cash in your accounts and monitor your burn, they
will loan you more money at better rates
○ Most US companies use them for venture debt and for deposits
○ Most Canadian companies keep their deposits in a Canadian bank and use SVB
only for venture debt
How does SVB make underwriting decisions?
When SVB loans money it is in the form of venture debt
● Venture debt is a loan to a startup that is;
○ Secured by the assets of the company
○ Contains covenants
○ Gives them equity upside in the form of warrants
● You can only raise venture debt when you have raised equity from VC’s since the
‘security’ given to a venture debt lender is often the cash in the bank
What happened to SVB from 2017-now?
2017-2021: Bull Market
● SVB was taking in tons of deposits
● Cash was plentiful (they had so much they didn’t know what to do with it)
● They decided to take $80B of their deposits and invest them in a bond product
○ 10-year bond with 1.8% interest
2022-present: Bear Market
● Deposits begin to shrink due to companies burn cash faster than raising new cash
● Funding dried up and companies are in crisis mode
● All of a sudden SVB needs access to some of the deposits that were invested in the bond
Last month
● SVB sells the 10-year bond for a $3B loss (interest rates go up, bond prices go down)
● SVB must raise more equity capital to fund the $3B loss
○ They successfully did so, and had some legitimate investors such as General
Atlantic who bought $500M worth of SVB stock to help cover that shortfall
What is a bank run?
when a bank faces a loss of confidence, sparking many customers to withdraw their deposits
Explain the SVB bank run?
● VC’s told clients to pull out
● Clients rushed to do so
● SVB froze accounts
● Regulators had to intervene
● FDIC insures up to $250K, all the rest will only be paid out later once the assets of the bank are sold or liquidated
● The Fed has announced they will not bail out the bank
What does a seed board composition look like?
Members: 3
- 2 founder
- 1 seed investor
Subcommittees: none
Chairman: CEO
Board role: strategy
What does a Series A/B board composition look like?
Members: 5
- 2 founder
- 1 seed investor
- 1 series A investor
- 1 independent
Subcommittees: maybe
Chairman: CEO
Board role: strategy, financial rigour
What does a Series C+ board composition look like?
Members: 7
- 2 founder
- 1 series A investor
- 1 series B investor
- 1 Series C investor
- 2 independent
Subcommittees: at least 2
Chairman: CEO
Board role: financial rigour, risk management, resourcing
What does late stage/public board composition look like?
Members: 9
- 2 Common/Founder
- 1 Series B VC
- 1 Series C VC
- 1 Series D VC
- 1 Series E VC
- 3 Independent
Subcommittees: at least 2
Chairman: CEO or external Chairman
Board role: financial rigour, risk management, resourcing, going concerns
Why should you use a skill matrix when determining your board?
A company’s needs change over time, so boards must be “evaluated” according to what the company needs at that given period of time
● Best to do this evaluation annually
● The skills matrix is also a key input in making sure to build a diverse board.
○ It can inform the lack of diversity and justify an immediate change to make sure the board is diverse and representative
What are the responsibilities of board members?
- Hire / Fire / Manage the CEO
- The CEO runs the company and makes decisions
- The CEO manages the management team
- The CEO is responsible for strategy and performance
- The Board is a sounding board for all of the above, and can help the CEO calibrate their thoughts - Fiduciary duty to maximize the interests of all stakeholders
- Stakeholders include employees, customers, debtholders, equity holders, etc
- They cannot only act in the best interest of their investment or of their intentions
- They must manage risk accordingly
Who are the different people on a board and what do they do?
Founder / Management Board Member
● Represents the company
● Trying to extract value from the board
● Responsible for preparing materials, making decisions, running the business
● Do not receive any additional compensation for being a board member
VC Board Member
● Represents their funds investment in the company
● Steward of both their funds LPs and the stakeholders of the company
● Usually not an industry expert, but could be
● Do not receive compensation for their role on the board since they are compensated by
their fund
Independent Board Member
● Often jointly appointed by management and VC board members
● Cannot have strong personal ties or bias to any other board members
● Often they are industry experts and current or former operators
● They are often the most valuable board member
● They usually receive some form of compensation. At the earliest stages they would
receive between 0.25% and 1% of the company in equity. At the later stages it may be
some mixture of cash and equity.
What is the conflict VC board members have?
There is an obvious conflict with a VC
board member where they are forced to
wear “two hats” in the boardroom
○ On one hand they are managing their funds investment in the company
○ On the other hand, they have a fiduciary responsibility to act in the best interest of the company’s stakeholder
How are board meetings formated?
Board Meetings are held Quarterly
(typically within 45 days of Quarter end)
○ They typically last 3-5 hours
○ At least 1 board meeting per year should be a “strategy-focused”
■ Usually a board retreat to get outside of the day-to-day
○ Usually they alternate between virtual and in-person
○ Boards will often meet mid-quarter for a short phone call update to address any high profile issues
Organize a dinner the night before
○ Invite the entire management team
○ Builds trust and allows for informal strategic discussion
Invitees:
○ Board Members: allowed to speak in the meeting
○ Management: allowed to speak if the CEO invites them
○ Observers: meant to truly observe and not speak
■ They either dial in or they sit on the walls of the room, not at the table
■ This is important for fostering the right dynamic
How do board meeting agendas usually go?
- CEO Address (20 minutes)
- Review of Last Quarter (20 minutes)
a. OKRs
b. Financial results compared to budget - Budget for Next Quarter (20 minutes)
- OKRs
- Financial forecasts - Strategic Discussions (100 minutes)
- Topic 1
- Topic 2 - In-Camera (20 minutes)
- Potential sub-committee breakouts (60 minutes)
