It’s been a brutal year for Silicon Valley. And the collapse of Silicon Valley Bank has been another brutal blow. But why did it happen? What's next? And what now is the state of tech dealmaking, with the IPO window seemingly closed, and VC activity on the decline? On this episode, we speak with legendary tech dealmaker and SPAC innovator Betsy Cohen, of Cohen Circle, about the state of the market. The transcript has been lightly edited for clarity.
On March 15, 2023, Betsy Cohen sat down the Joe Weisenthal and Tracy Alloway of Bloomberg's Odd Lots podcast, to give her take on the SVB crisis, what's next in venture investing, and her thoughts on the economic outlook for the year ahead. The full transcript from their conversation is below.
Link to Bloomberg article here.
Listen on Apple or Spotify.
Key insights from the pod:
What made Silicon Valley Bank originally so successful? — 3:14
The mood today in Silicon Valley — 6:56
What is the current state of the deals market? — 16:48
What makes for a successful SPAC? — 23:30
Why SPACs were harder than they looked — 28:52
Why investors should slow down and take a pause — 34:10
What could get IPOs going again? — 35:59
Joe Weisenthal: (00:10)
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy Alloway: (00:15)
And I'm Tracy Alloway.
Tracy, I've been thinking about the Silicon Valley Bank crisis, and it's interesting how when we think of tech, we imagine companies that are growing super fast, aiming to be the next Amazon or Google or OpenAI. On the other hand, when we think of banks, we picture companies that should prioritize protecting the downside, embodying conservatism and focusing on steady, predictable deposit growth.
First, do not lose money. I do wonder if there's just this inherent tension between tech and banking.
It's funny you mention that because I was thinking about this too. If you consider the venture capital model, you throw a bunch of money at different companies, assuming that some will fail, but maybe one will be the next Amazon or Google. That seems to be almost the polar opposite of the banking model, which is about having a diversified portfolio, but really hoping that all of them eventually pay you back.
It's a very different model. So here you have this bank that was the chief bank for startups, and even in the best of times, not in a rate-hiking cycle, you'd imagine that the majority of your clients are going to fail, because most startups do. It's an interesting tension that emerges, and it makes you wonder how to responsibly bank the tech industry, even outside of the current situation.
I think it's a fascinating question. And I guess the other question that goes right alongside that is: Are tech companies particularly good at managing their own money?
That's also an interesting question because you have a lot of companies that start with some hacker or coder and have a small team. They're not going to have a big finance group. Is it unrealistic that they would even have someone doing treasury management after they get their first seed check from Sequoia or whoever?
Everyone figured out how to put their crypto in cold storage, right? But not how to buy T-bills through Schwab or Treasury Direct.
If only they had, then we wouldn't be talking about this. Anyway, I think there are some interesting questions here, and I'm very excited about our guest because we're going to be speaking to someone who's been involved in tech finance for quite a while and is a pioneer in many aspects, whether it's SPACs, IPOs, or providing financial services to tech companies more generally, or fintech companies.
We're going to be speaking with Betsy Cohen, the co-founder and chairman of Cohen Circle, an investment group. She's also founded a bank and done much more. So, Betsy, thank you so much for coming on Odd Lots. We're really excited to have you here.
Betsy Cohen: (02:53)
Well, I'm delighted to be here, and thank you for inviting me.
Before this whole crisis with the bank, you must have had numerous partners and clients who have worked with Silicon Valley Bank for a long time. How would you have characterized them? In your view, what made them so influential throughout the valley, and really, throughout the entire industry?
That's an interesting question. I think they were well-located early on, being in San Francisco, which at the time was the only hub of tech development. But that has since changed. They had a deep knowledge of the industry, which made them good lending partners for tech companies because you didn't have to go through a whole description of what was technology, what was a platform, etc.
So having that expertise was certainly helpful. I think somewhere along the line, the opportunity to move from simply being a traditional bank to seeing the opportunity, because health tech, biotech, and FinTech were all growing very quickly, allowed them to take advantage and grow the bank rapidly.
It meant that they took their eye off banking fundamentals. Forget the tech fundamentals, because within a loan portfolio, you do expect losses. It's why banks have provisions for loan loss. It's not that every tech company had to be successful, but they had to have the appropriate provision within their portfolio. I think what they really didn't do as well as they might have is two things, and they're both banking 101.
One is that they had a concentration of industry, which should have given them a better understanding of the current situation of technology companies. The other is really asset-liability management. It's not so much the quality of the underlying bonds or loans, because the quality of the securities in their portfolio is pretty good. But they had 18 months during which interest rates were rising at a quick pace, and not adjusting the portfolio or taking appropriate steps on a duration basis is just mind-blowing to me.
An asset-liability duration mismatch. I was going to ask you what you thought caused the collapse, but since you already answered that, can you maybe just talk about the experience or the mood in Silicon Valley over the past week or so? I assume that you're talking to your various partners. What are they telling you?
The mood in Silicon Valley is sheer panic, surprise, and disappointment, all of which come with having a trusted partner not perform. There are companies that had credit lines — for example, a $100 million credit line. They had drawn $60 million and knew they had $40 million to cover their ongoing period of negative cash flow. So they felt pretty good about themselves because they could see that they would be in a cash-flow positive situation at the end of that period. However, when a bank is taken over by the FDIC, all loans are frozen, so that $40 million is no longer available to them. Add that to the fact that the majority of tech companies felt that Silicon Valley Bank, the 16th-largest bank in the country, was a safe place to put their deposits. It looked like they were not going to have access to their money through the loan mechanism and might lose their uninsured deposits. One piece of that has been resolved, but the second piece has not. So there's a lot of panic.
I haven't heard as much about the line-of-credit issues. So even though there's relief that the deposits are back, it must mean that for many companies, their financial security is still impaired by this, because it's hard to imagine another bank right now jumping up and starting to offer startups lines of credit in this environment.
Well, remember it's not only startups. Startups make up a part of it, and certainly, customer loyalty was reinforced by the willingness of the bank to make loans to earlier-stage companies than other banks might see fit to do. But it's beyond that, and the opportunity to have another bank step in is not going to happen tomorrow.
We started by discussing how tech companies or startups should be banked, and there's an implicit assumption there, which is that that industry is somehow different from others. Do you agree with that, and if so, what is the ideal way that they should be banked and financed?
You were early on in identifying a gap in the existing banking infrastructure for a certain type of fast-growing company. What is it that makes that industry distinct?
We were not traditionally a lender to those companies. We were providing a service, what we call a bank wrapper, for non-bank fintech companies so that they could offer their customers a deposit service. PayPal is not a bank, and so it needs to have access to the banking system. We were the window into the banking system.
That being said, we did do a significant amount of due diligence on the companies with whom we were going to partner on the bank wrapper side. It's a very different position to be in than being a lender to these companies, where you're putting out your money upfront and you are looking at the potential viability of a particular platform. It's sort of the middle ground between equity and traditional debt.
Can you explain what venture debt or lending to fast-growing companies is? It's not quite equity, and it's not quite debt. How should we think about it and why doesn't it quite fit into either category, in your view?
Equity is clearly a bet, maybe a well-researched bet or a bet based on prior performance of a particular company. When you make an investment, you're making a bet that a product will be successful and that the management will be able to navigate changes in the marketplace. Lending, on the other hand, is more akin to having predictability, and many of these companies do not yet have that. That being said, a bank like Silicon Valley Bank, which has deep knowledge of the tech industry, might make that judgment better than someone else.
Your company was providing private-label banking services and the underlying payments technology. What was it like competing with traditional banks at that time? Was it a competitive advantage or disadvantage?
We started in 2000, and at that time, nobody understood what we were doing, so that was an advantage. We then had an advantage for a couple of years because the big banks didn't think it mattered. We evolved into the dominant platform with the deepest knowledge of how to do this, and Bancorp remains in that position today. Many have tried to model themselves after our business model, but nobody has had the length of time, relationships, predictability, or depth of knowledge that Bancorp has had.
You were an early innovator and sponsor of SPACs for years before the boom in 2020. Now that some of them have collapsed and done poorly, what is your sense of the current investment appetite? How frozen are things?
Things are very frozen at the moment. But remember that a SPAC is just a legal vehicle designed to provide capital to an industry that can't get capital through a traditional IPO because there's some gap in the development of the company. Having come out of Bancorp with 15 years of experience with fintech companies, I recognized that some of them had reached a level at which they could be predictable and could use public currency. This was not for the whole portfolio, but at the time the IPO market was open, which it is not today.
The IPO market as a whole was receptive to a vehicle that provided capital to what could be a good public company. Our basket of SPAC companies that are still trading and haven't been sold or had some other disposition are all trading very well. It's the discipline and deep knowledge that we brought to the area that enabled us to make these good decisions.
If we look back at the history of SPACs, they were first used in the nineties when steel companies and others coming out of a recession in 1992 did not have access to capital markets but needed capital. The second round was for real estate companies after 2008, and the third round was in the tech area. I think some people may have confused companies with a highly-predictable path to profitability or experienced executives with those in industries like electric vehicles or biotech, where predictability of performance is low. The public markets are all about predictability and reporting earnings.
Could you launch a SPAC in the current environment, or is the window just closed?
Prior to this upheaval in the banking area, I would have said one could launch a SPAC. Even today, I think it's possible, but it would have slightly different characteristics. SPACs are responsive to the current public market, so they might be constructed differently and include elements that were not needed in the prior iteration. They would take a different shape, but that shape is responsive to external factors rather than the legal structure itself.
Let me ask a broader question on investing. Last year, you mentioned that tech valuations had gone down quite a lot, which meant it was probably a better time to invest. Presumably, as we sit here today, valuations have gone down even further. How are you feeling about the investment landscape in general?
I think valuation is only one component of making a decision. Remember, since the time I probably gave that interview, the war in Ukraine evolved and several other large unnerving occurrences, including the banking issues, give investors pause. It's a matter of looking at the whole package. I do think there are opportunities today, not only because valuations have rolled back, but also because there are companies that have reached a level of scaling, differentiation, and have good executive and internal corporate elements in place to be good public companies or private investments. From the investor's point of view, everyone is nervous.
It's interesting sometimes when you talk to investors, they're still excited and investing in areas like AI or other sectors. Do you think in terms of sectoral opportunities, or is what you're describing less about sectors per se and more about patterns that you like to see among management teams and financial operations, regardless of the industry?
I would say it's the latter. There are elements necessary to make a private company a successful public company, and that has less to do with the sector than it does with the business model and corporate profile of the company. That being said, there is more opportunity to grow in certain sectors, so that is a component of what you look at, but it's not the only component.
It also sounded, in one of your previous answers to Tracy, that many of the companies that went public during the 2021 SPAC boom were not appropriate for public markets due to their extreme profitability uncertainty. So, early-stage electric battery companies, early-stage biotech, or companies that make electric trucks but have never manufactured one – in your view, these were never appropriate for public-market investors.
Absolutely. They weren't appropriate at the time they were brought to the public markets. Maybe they will be in 2024 or 2025 when they have actual contracts, manufacturing facilities, sales and customers. But indeed, when brought to the public markets, they were not appropriate.
Tech is always evolving and trying to solve new challenges. Within your fintech expertise, talk to us about how you see that evolving now, not just in response to the current interest-rate environment and inflation, but also in response to what we saw with Silicon Valley Bank.
You know, I don't think it's shaming. Remember that social media, which is what you're really talking about, has flattened the kind of communication that was not limited to technology companies; it's really right across the board. It's what is driving Meta to rethink their algorithms. It's all of those elements that have changed the way we communicate.
A company like Reddit could not have existed 10 years ago, because there weren't enough people who were interested and there were not enough people who could access it easily, but it's not limited in any way to tech promoters. I think part of the SPAC issue was that it always looked easy.
It definitely did.
But it really was very hard. And so, you know, if you take our own group, where we have a group of people who've been in the public markets forever, through many cycles, and are disciplined in the way that they approach companies and knowledgeable in their field, you know, there were a dozen of those throughout the industry. But most people who thought they could do a SPAC because their brother-in-law had done a SPAC or the guy at the country club had done a SPAC, you know, it wasn't as easy as it looked.
I take the point about social media, but I just want to issue one fact-check, which is, I think Reddit did exist 10 years ago. Because I'm pretty sure my account was...
Like 13 years ago. Well, when I say it, it existed. It did not have the prominence.
Yeah, absolutely. So I mean, Joe kind of asked you about whether Silicon Valley should feel bad about fermenting FOMO among a particular public or retail investor base. And I guess I want to ask you what you think the future of Silicon Valley in general is now that it feels like we are starting to see some of the excesses of recent years of the low interest-rate environment start to wash away.
I think it will be less fulsome. The kind of advice that was very easily given to start-up companies by very prominent, successful people to spend now, grow now, and then see where the chips fall will be less prominent. I think this is a moment in which good management groups with a good product who are willing to restrain themselves and grow at a moderated, not necessarily moderate, but moderated pace will have success. But if the organizational elements underlying the good product are not there, I think there are going to be a lot more failures.
I want to actually go back to a line you said about someone's brother-in-law at the country club did a SPAC and made a bunch of money. No, no. There was a, no, I was fascinated with that because we actually did an episode during the SPAC boom. We were talking to Howard Lindzon, who had done at least one SPAC and he told us, I was like, where'd this all start? He's like, oh, well we had in 2019 on the golf course. No, remember he said there was a, he was like, oh, in 2019 we had dinner with some folks at Carbone.
And Chamath was doing a SPAC and everyone got excited. Can you talk a little bit about the, how that dynamic works? Because I find that fascinating. It's like you see all the FOMO on social media, but you are actually in those rooms and you hear it. Can you talk a little bit about your firsthand experience of the FOMO cycle, and people hearing about your success and what they do then, and how they're like, I gotta get mine.
Look, the Silicon Valley mafia, as one might refer to them, was, for many years — because remember, the whole cycle's only a 20-year cycle — an ingrown, self-involved environment measuring success by what the guy down the street did. It's why maybe five years ago people began to look for companies that were in Minnesota, Kansas City, or in places that were more isolated. It's why John Templeton early on moved from New York to the Bahamas, because he didn't want to hear the same stuff all the time.
He wanted to be able to think for himself. So, there are cycles, maybe the initial cycle and the stimulation of having a one-industry town, which is what it was. I guess it would be like talking about wheat in Minnesota when General Mills was there, you know, that this is what happens. I mean, the people that you're talking about, Howard and others, are very smart, very knowledgeable folks. And Wall Street, wider than just the tech industry, is really in many respects, like a group of sheep, if you'll excuse me. And the tech community was no different.
So you described earlier the mood in Silicon Valley as one of panic and, you know, maybe there isn't necessarily moral soul-searching at the moment, at least on some people's part. But there is a general discussion over what to do from here. What would be your best piece of advice for either someone who is investing in the industry or perhaps running a startup?
Investing in the tech industry or the banking industry?
Oh, either, but I was thinking specifically of tech.
I think if you're talking about a public-market investor, then this may be a time to take a pause until one can see more clearly what the general mood of the market is. I think in terms of investing in tech, there are a number of ways, all deeply infused with risk. So one of the things that one might ask oneself is: How much risk am I willing to take?
You know, thinking back over the last few decades, I feel like right now, obviously, Silicon Valley is in a slump, but it's been in many slumps before, and that itself is not anything new. It seems like the slumps end in part when some iconic company of the era goes public. So, you know, you mentioned the recession of the early nineties and then I guess it was 1994 when there was the Netscape IPO, which was a little early but sort of like a turning point. Then, several years later, we got tons of tech IPOs, and coming out of the dot-com crash, I would say the Google IPO in 2004 was a pretty big moment of tech coming back.
There were some reasonably big IPOs of companies in the 2010s. I know, I guess nothing like Google quality, except we got Facebook, which has obviously become one of the biggest companies. Do you think it'll be similar, that something to watch for is when one of the, I don't know, like a Stripe or something, one of these companies that people consider to be the blue-chip private company decides, yes, we're going to go for it, it's time for us to make the jump to public markets. Is that something to watch for?
Absolutely. I mean, you take a look at where Stripe is today, and they've had a couple of opportunities to go public, which they didn't take and decided to raise this current round privately.
If, and I'm just using Stripe as an example because you just used it, if the management of that company were to decide that there is enough stability in the market to go forward and do an IPO, it would, in fact, take a specter off the market. But remember, you are talking about a series of events which occurred three and five years apart. So maybe there is a three to five-year period before we get back to what we thought of as being normal.
I think that's a great place to leave it. Betsy Cohen, thank you so much for coming on the Odd Lots podcast.
It's my pleasure. And thank you for your good questions.
A real pleasure, thank you so much. Yeah, it was lovely having you.
Tracy, I thought that was a fascinating conversation. I really appreciate, in a sort of crisis moment, getting to zoom out and talk a little bit of broader history and broader sweep.
Oh, absolutely. And I think Betsy was really the perfect person to have that conversation with. I can't believe I completely forgot about that, starting SPACs with celebrity endorsers over dinner at Carbone moment. But I do think, when you look back on that low-interest-rate environment, those types of moments are really going to be emblematic of some of the excesses.
I thought it was really interesting too, how some people talked about SPACs and the boom back then as if people wanted to be invested in venture-type companies or something like that. Or that this is a chance to let the public in on earlier-stage companies. And maybe there is an opportunity, but that doesn't necessarily mean that companies with incredibly uncertain outlook profiles and huge financing needs and highly uncertain path to product-market fit or anything like that are appropriate for public investors.
Right. The vehicle doesn't automatically lend itself to that. But I also took her point about Silicon Valley being inherently cyclical and sometimes just having to stand back and wait for the uncertainty to play out.
To her point, Betsy mentioned that a Stripe IPO would lift something off the market that might reopen capital markets. So, I do think that's an interesting thing to watch for. Will there be some moment in which it's safe to go back in the water because some company went and did it?
Saved by the Stripe. I guess we'll see. It could either be a good thing or go badly. It seems like the options right now are pretty binary. On that happy note, shall we leave it there?
Let's leave it there.