"Intellectually, everybody knows what to do because there are so many substacks and VC taught leadership what to do. It's either expense reduction, cost reduction, or revenue improvement. What's interesting is that people are looking for human stories. It's more about emotionality. At the end of the day, it's a human decision by the founder to change their mindset, point of view, or optimism." - Jeremy Au
“Product market fit means you aren’t blowing yourself up with your underwriting when these books are starting to mature. In the early days, people often get really loose with their underwriting standards to show growth. When the market turns, that's when a lot of this stuff blows. At the end of the day, the capital efficiency piece is really important whether you are an investor or a founder. You are in the business of capital allocation and you need to be really honest about how effectively that capital is working for you.” - Shiyan Koh
In this episode of BRAVE, Jeremy Au and Shiyan Koh delve into several important topics, such as the recent implosion of Silicon Valley Bank and its potential impact on Southeast Asia, F Prime’s 2023 report on fintech, and also empowerment and gender equality for women on International Women’s Day. They also discuss the rise of Pay Now and its impact on the payment industry, taking the lead over traditional players like MasterCard.
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Jeremy Au: (01:35)
Hey, Shiyan, another week, another topic.
Shiyan Koh: (01:39)
Happy International Women's Day, Jeremy. Have you celebrated the women in your life yet? I think you're outnumbered in your household.
Jeremy Au: (01:46)
Two daughters, and one wife. It was fun. We swung by a pitch competition and helped judge for Scribd and Launchpad. So it was a Women's Founder's day pitch competition. And it was just nice to hang out and I thought it was a nice community. People, a lot of people are swapping tips and people were talking about ARR and net revenue retention within the audience conversation. I was like, oh, that's quite awesome. So it was nice. And also there's lots of good food, actually.
Shiyan Koh: (02:10)
Oh yeah, I was at the EatonHouse Community Foundation event raising money for less privileged children. They were launching a book featuring female entrepreneurs as a way to fund their efforts. But it's the third gala I've been to this week for international women's. And so I'm a frequent gala attendee. That's a joke, guys. So it's been a bit of a painful week.
Jeremy Au: (02:34)
I think that's a fair part, right? What's your favorite part about International Women's Day? I'll start first, I would say like, this didn't really exist 10 years ago, right? I mean, I think 10 years ago IWD wasn't a thing in Southeast Asia. I think folks are talking about it, discussing it.
Shiyan Koh: (02:49)
Do you know it's a public holiday in communist block countries?
Jeremy Au: (02:52)
What is this? Is this a communist holiday?
Shiyan Koh: (02:56)
Yeah, because I have an Azerbaijani founder who I met yesterday. And he brought me a present and I was like, that's very unusual. Founders don't normally bring me presents. And he's like, Happy International Women's Day. He's like, in my country, this is a public holiday. And so I got you something. And I was like, wow, that's really sweet.
Jeremy Au: (03:14)
Wow. That is a true fact. I had never heard of it.
Shiyan Koh: (03:19)
If you need shipping software, please go check out MagicPort. For any shipping operators in our audience, MagicPort will help you streamline your operations. But yes, I did learn that it is a public holiday in communist former Soviet block countries.
Jeremy Au: (03:32)
You know what's interesting is I think when it first came out, I think a lot of folks were very skeptical about it. And now I think I was at a couple of meals and I just a lot of women really liked having that day to celebrate, hang out, to discuss some of the topics. So it was nice in a milestone in some way, to receive some thoughts, and consideration, and get a message from HR about some events on that day, but it just felt like a nice moment for them. And I thought it's like ok, cool.
Shiyan Koh: (03:54)
Jeremy, that's a low bar. It's like, it's really nice once a year that someone acknowledges you exist and maybe we should think about bigger issues that you face. Come on man. Let's do better than that.
Jeremy Au: (04:08)
You make it sound like the rest of the year is like International Men's Day.
Shiyan Koh: (04:12)
I mean, it kinda is. We live in a man's world. Okay. I'll tell you my favorite part of the International Women's Day. There is a Twitter, where every time a corporate handle tweets Happy International Women's Day, it tweets out what the wage differential is between men and women in that organization. And it also now, this year, tweets the Delta from last year. So I find that very hilarious. And I think that really speaks to, okay, great, let's have a celebration. Let's raise money. But what are we actually doing in our organizations to improve gender balance or gender equity?
Jeremy Au: (04:46)
You gotta start with the honey, right? And then, a drop of honey will something, something, make everything sweeter. I mean, the point is, this is the nice stuff and like the stick is very painful and it comes later down the road. Okay. We start first with everybody agreeing is a good thing, to recognize this, to think about it, and then the tough conversations come later, right?
Shiyan Koh: (05:04)
Okay. Fair enough. Fair enough. I just don't like papering it over with all this feel-good stuff if no action actually happens.
Jeremy Au: (05:11)
Ah, you got this. Step one, be nice. Step two, tweet about it. HR sweats nervously. Yes. Step two, no marketing sweats at number, step two. Step three is when HR starts sweating.
Shiyan Koh: (05:26)
Well, yeah, so my friend said that his HR sent out a survey for International Women's Day where everyone was going to vote on the most attractive, best-dressed woman in their office. And he was like, I don't think this is what International Women's Day is about, and we probably shouldn't be commenting on our coworkers’ physical appearance.
Jeremy Au: (05:44)
You've gotta be kidding me. Wait.
Shiyan Koh: (05:46)
No, and it's a US company, but this is local HR apparently. But still, I mean, this does not pass the, like, did we think eight seconds about this before we hit send on the email?
Jeremy Au: (05:58)
I am sorry. I'm just imagining how HR has to figure out how to, like do they just like actually announce the results, actually announce the winner once they hear the complaints? Or do they just ghost everybody from there?
Shiyan Koh: (06:12)
I think they should just go. They should just be like, oh, somebody hacked my account, we would never do this.
Jeremy Au: (06:20)
Using Outlook. We retracted our email one day afterwards.
Shiyan Koh: (06:24)
But what's worse, right? When you see a retracted email, it makes you wanna read the email more, because you're like, well, what happened? Why did they pull it back?
Jeremy Au: (06:30)
I think maybe ghosting might be the best. Sending a correction email afterwards is also pretty tough. I think.
Shiyan Koh: (06:37)
But at least it's more honest.
Jeremy Au: (06:38)
I guess so.
Shiyan Koh: (06:39)
Give people credit for being like this, this was misguided. We probably shouldn't have done this.
Jeremy Au: (06:44)
It's true. I think transparency is the best answer. It's just that, aww, poor HR.
Shiyan Koh: (06:47)
Jeremy Au: (06:52)
Oh, well. So on the note of International Women's Day, I thought it was quite interesting because last night just watching pitches, about half of them were actually about fintech. And recently we wanted to talk about fintech because F Prime came up with this capital report, obviously very US and global-centric fintech. But I thought it was interesting that topic to like dive into a little bit more. Because fintech has been pretty hot in Southeast Asia. Southeast Asia focuses on fintech funds like the 1982 ventures with Herston. So, yeah, would love to dive into this. What was your favorite insight from the report, which we'll link to in the transcript and show notes?
Shiyan Koh: (07:26)
My favorite slide is slide 19, in which the title is fintech companies are now valued more like incumbents and in some cases at a discount given their capital inefficiency. And why do I like that slide? I think it's like a timely reminder, right? This is like a lot of what some fintechs are doing, is to replace incumbents and so in the early days, you're kind of selling this story about like either you are like growing faster than the incumbent, or you are like a more capital-light version, blah, blah, blah. But it just hasn't happened yet, right? Like you're going to get there. And when the music stops, you kind of have to be really honest about like, are you actually really on a path to be more capital-efficient or was that just a story you were selling the street? I think we make this mistake a lot in things that are fundamentally lending businesses and people try to value them like software businesses but lending businesses are basically valued as a multiple book. And then you have to ask yourself, okay, in a lending business, what are my levers? Right?
There's the cost of capital, cost of acquisition, and quality of my underwriting, and you're not gonna beat a bank on the cost of capital. It's actually quite hard to beat a bank on the cost of capital. Cost of acquisition maybe. And I think that's why I really like embedded models that have distribution built in. And then quality underwriting, like, product market fit in lending is not because lots of people want your like cheap money, right? Product market fit is like, you actually are not blowing yourself up with your underwriting when these books are starting to mature. And I think in the early day, people often get really loose with their underwriting standards to show growth. And then when the market turns, that's when a lot of this stuff blows. I think the sort of like the capital efficiency piece is really important. And ultimately at the end of the day, whether you are an investor or a founder, you are in the business of capital allocation and you need to be really honest about how effectively that capital is actually working for you. So that's my favorite dorky slide.
Jeremy Au: (09:26)
To be dorky with you, I think the tricky part, as you said, is about, the quality of underwriting, right? And because you're getting repayments, as interest payments and so forth. And then you had to get paid back on the principle as well, right? When you're doing lending. And so I think there's a tricky part where revenue seems large, as a function of a book. But the question is what's the net interest margin you're gonna collect at the end of the day? Right? And I think the other part, think about it as well, quite a bit is that the quality of underwriting, I think everybody says like, oh, all the risks are relatively known and they're uncorrelated, so it can balance, so, so forth. Right. But I think one thing that often happens, especially for those that, obviously doing B2B or even B2C financing, is that there's something called recession that happened every seven to eight years, right? And so all these like uncorrelated risks when you're underwriting all become correlated.
So, a good reminder itself is like the Asian financial crisis wasn't that long ago. And everything went horrible at once, right? I think we saw that recently in crypto. Everything horrible happened at once, underwriting-wise. And we've seen a whole bunch of, institutions that led to a lot of crypto funds that felt like, the underwriting was good, maybe individually, but correlated.
Shiyan Koh: (10:31)
Silvergate just went down.
Jeremy Au: (10:32)
And it's, more shit is gonna probably gonna happen from there. And I think it's a speed run of what happens when landing goes bad, right? For me a favorite slide to have was actually looking at the fintech index going up. So it kind of went up from about slide seven. It was like, okay, the finance in fintech index was around, 200, 300 billion and it hits 1.3 trillion in late 2021, and now it's like 400 billion by December 2022. Oh, shout out to n, who is the principal there. So my old university, UC Berkeley classmate in Social Impact Consulting we used to recruit and work together on social impact and nonprofits and social enterprises consulting.
So, but I think the fact that it was just like down by 72% from the peak and obviously it is much sharper correction than the S&P, it's also sharper than the tech correction. And it kind of reminded me of what was driving in the first place, and kind of goes back to what you said earlier, right? It's the cost of capital, cost acquisition and quality of underwriting. And I think the part that was really unclear at the point in time was that cost of capital was not only low, where there were like 0% interest rates, but it was effectively negative, right? Where the US Fed was actually penalizing folks for holding cash, right? And so I was pushing all these limited partners to push money of cost into VC funds that would blow up these evaluations.
We've talked about it in the past, but also pushed money into lending and venture debt and all these other debt vehicles. And so people are just trying to get as much money out through the door because they knew that maybe the quality of underwriting might be shit down the road. But then, it didn't matter because if you held cash, you're definitely losing a couple of percent, consistently. And so I think what happened was that I think fintech companies have had this double tailwind, right? Obviously, they had this valuation spike as VC funds that had a lot of capital, wanted to put more money in, and I think they had a lot of access to low-cost credit, right? And that let them basically have, report tremendous net interest margins cause cost capital's low, and also, calm and peace and conviction, that is not gonna change for a while, right? And so you get very aggressive because interest rates are always low, then you're just thinking yourself, like, things aren't gonna change. Let's just go out there.
And now with so much venture debt, it's all packed to the standard interest rates. Every time the interest rate goes up by 1% and then you are plus 4%, right? And it keeps rising, rising, rising. And then everybody's like, well, underwriting centres got to go up because now you have to hit like a hurdle rate of like effectively 12% to even break even on some of these loan vehicles. It is actually quite difficult to lend actually or to feel comfortable lending. Right. And now I think the Fed has recently announced they want to, they may have to increase interest rates higher than expected. I think it's gonna be a little bit tougher for the lending side.
Shiyan Koh: (13:17)
Yeah. I think, but this is kind of related, right? Which is like I think there's always this battle between fundamentals and momentum, and so there is this moment where you're like, hey, if the money's there, you should take it, right? Ride the momentum but then you have to know at some point you're gonna have to pay the bill, right? And that's where fundamentals like, and so I think being honest with yourself and not being fooled by the momentum of fundraising, which is sort of different than the momentum of actual business traction is important for founders to keep in mind.
Jeremy Au: (13:48)
Yeah, the wisest founders I found were the ones who were like, okay, I know this valuation is stupid, so I'm gonna be much more, blah, blah. I know I did good job fundraising, but let me just be smart and wise about how I spend and everything and be able to proactively do layoffs, et cetera. even, I mean, let's be real, right? When everybody tells you you're smart and you know everything's going well, I think it's very hard to be wise, right? It's very hard to like you just said, have that equilibrium. It could mean, I think that's what founders eventually go through.
Shiyan Koh: (14:14)
Do we not all have Asian parents who constantly are beating us down? That's the voice in the back of my head.
Jeremy Au: (14:22)
But it's like so nice when you have, all that love that you're like, oh, it's amazing finally. I mean, Cassandra was not very popular for predicting the fall.
Shiyan Koh: (14:31)
But I mean, I know my father always says is there a substance or not? Right? And it's true, It's like you need to be intellectually honest with yourself about what's happening in your business.
Jeremy Au: (14:44)
Yeah. And I thought that was interesting because obviously, this report kind of like shows two sides of it, right? They felt like SaaS was doing a better job of it. That's one. And now they started talking a little bit more about I think my other favorite one was kind of like, over the past 12 months, less than 25% of fintech companies were profitable but now over the next 12 months, half of them expect to be profitable. And I'm like laughing a bit, right? Because you're like, wait, so 50% expect not to be profitable over the next 12 months, and then only 25%? How can they actually get there or not this question, right? But I was like, ah, I think there's gonna be quite a lot of pain. And I think they talk a little bit about it, right? They expect a lot of down rounds for some sectors which is actually good news, right? I think you can raise any capital or down round or flat round. I think you're really I think to be applauded honestly, for being able to keep the plane flying, right?
Shiyan Koh: (15:31)
Yeah. So one benefit of these gala dinners that I was complaining about earlier is that I actually got to see a lot of people at them. And one founder basically told me, we're cash flow positive in Q4 and that's continuing to track and how incredible that feels because she's like, hey, I'm in control of my own destiny, I don't have to raise another dollar. And this business, we're starting to understand the growth drivers and we're making money, right? Not just on a unit level, but at a whole company level. And I was like, high five man right now.
Like, that feels freaking awesome. And then at the same time last night, I had a conversation with a founder who was like, can you tell me stories about founders who had to make difficult decisions? And how did they steer the ship? Right? How did they make cuts? And so we kind of talked through that, right? Which is that like people are always afraid of cutting marketing because they're worried that it'll slow growth, right? And then you're in this like no win where you're not growing but then there's this sort of like, that's item one, which is like, I think Airbnb did a great job in the pandemic, they cut marketing and then they haven't really ramped up spending since because they found other channels and organic to be just as if not more effective. So I think it's one of these things where like, a necessity is the mother invention. And then the second thing is that people just have to cut projects and narrow focus and that's always really hard. So you say these 50% of companies that are gonna be profitable in the next 12 months like it will be interesting to kind of see what other fall on impacts.
Are they all announcing like business units that they're no longer gonna spend money on and focus on the core? Are they announcing new pivots? Are they coding, and marketing spend, separate from the layoffs, right? The other variable spent other than headcount is this marketing spend. But I don't know, Jeremy, in your portfolio, what are you seeing for folks trying to really kind of, get shipshape?
Jeremy Au: (17:30)
I think intellectually, everybody knows what to do because there's so many, Substacks, and VC taught leadership what to do. And I think, obviously, I think it's quite straightforward, right? I mean, it's either expense reduction, cost reduction, or revenue improvement, right? So either there's a function of efficiency function of leverage, a function of just like prioritizing, which are the best channels, for example, that work for acquisition and just cutting everything else that doesn't matter, right? So I think everything that needs to be done is done. But I think what's interesting, like you said is people are looking for these stories, right? And I think it's more about the emotionality and, not a bad way, I'm just saying, but at the end of the day, it's a human decision by the founder to say, I need to change my mindset, right? And I need to change my point of view, my optimism about, for example, downstream investors investing and the last multiple. These are things I need to do. And I think that's where I think what you shared, you shared parables, in that sense, like human stories. And that's so important because that's what people are asking for. People are looking for human stories. Like, how do I do it? Are people gonna be angry at me?
How am I gonna feel afterwards? What do I need to do? How do I say it? It's all very human. And I think, and that's why I'm a big believer, is that obviously, the whole company is a function of the leadership, right? Terms, the decision making and the decision making is a function of the founders, right? And I think that's really the crux of it is that the founder has to make a decision based on obvious data, the levers, by adding the human parable is important to unlock it. And I think that's where obviously we talked about this, like how founders are a relatively new phenomenon over the past 10 years of Southeast Asia. So hasn't necessarily gotten scarred by the global recession slash financial crisis, the Asian financial crisis, obviously the stock market Silicon Valley boom and bust right back in the 2000s. I think now we're finally seeing parables and I think the founders managed to do it already earlier on, maybe they got publicized on DealStreetAsia or Tech in Asia, et cetera. But I think they're starting to get a lot of questions from other founders as well, be like, how did you do it? Right? So I think that, and again, it's like, how did you do it? It's not very hard. Right? Again, because the levers are clear, it's more like how you as a human person choose to do it. How did you manage it? Right. So I thought it was interesting. Set of requests. Dimension of it.
Shiyan Koh: (19:39)
Yeah. Tell me a story. Well, nobody wants to hear a story about zero-base budgeting.
Jeremy Au: (19:44)
So, Yeah. And, the concept is quite simple, right? Which is, you start from scratch and then you go line by line and everybody's to justify why you should be part of the budget. Right? And that's, very hard because there were a bunch of promises you made three months ago over dinner to a manager, and then you presented a budget to the board of directors six months ago and it got approved and now you gotta redo it all over again. And then also, it's so much work that you have to do while trying to keep the board afloat. Like who wants to do zero base budgeting over again, right?
Shiyan Koh: (20:13)
Yeah, it was an interesting question, right? He was like, well, I think exactly at this point, right? Which is like, I have a budget that's approved by the board, but I think some of this stuff isn't gonna work the way we think it is, and so, how much do I cut? Because I think it's not productive, but then I have to go back to the board and say, we've revised our numbers. It's totally about expectations setting and management.
Jeremy Au: (20:39)
I think that's the big thing, right? This is, I think a lot, I'll say this is what people expect, especially founders, some founders expect boards to be the boss, right? And so they can't treat them like a boss because all of us were employees at some point. So we treat them as if the boss knows everything, what I would say is like, not right. I mean, the founders are still the boss because they understand the business and they're clear about what needs to be done and it's looking day in, day out. I feel like if in that situation, founders, I think the biggest mindset changes that the founders are still the boss.
Shiyan Koh: (21:08)
Well, it's a symbiotic, it's a symbiotic relationship, right? Because also they want their investors to participate in the next round. And so it's, how does that conversation go, right? Is it like I told you X, but actually it's gonna be Y. And then the investor's like, wait, how come? Or it's like, hey, here are the assumptions that we had when we said the X was gonna happen. Now that we've been in the market with this strategy, here's what we're learning and this is why Y is gonna happen. And although this means, Y is less than X, we think that on a like contribution margin basis, this is actually better for the business, and so then I think you help somebody understand, right? But I think from the investor point of view, if you have a founder who's constantly changing what they're saying, it also doesn't inspire confidence, right? And so part of the communication is like, how did we arrive at this? Not just, hey, we're changing the numbers, right? That always freaks people out.
Jeremy Au: (22:08)
Yeah. A hundred percent. I think that's, communication language is so key. So it's kind of like, define that a little bit clearer, and I'm thinking more about the mindset, which is don't look at them as a boss, you can't change it or you can't disagree with them. But neither are they subordinate to you in a sense. But I think working with them as really smart co-founders and hopefully, you picked well, good advisors and mentors that you trust and you're gonna have this deep thinking with them. Right. And then, being okay to have this, like the expansion of the logic, right? And so, I think it can be a very nice, wonderful window moment of truth, right? And I think it can be wonderfully confident, inspiring to have someone say, hey, these are things we've de-risked. These are things we have not de-risks. These are things we did well.
These are things that we haven't figured out because most VCs should understand that this entire startup space is a giant experiment, right? Every startup has experimented with multiple things to de-risk and be able to be part of that journey together. This is a trust-building exercise. I think when you're able to go deep. So it can be a net positive, right? It's not a confidence destruction measure. Neither is a confidence neutral measure. I think if well done can be a confidence-building measure actually. So kind like on that note, obviously they talk about the future a little bit. They talk about a couple of key themes.
They said there was, payments orchestration, and vertical fintech. Private asset infrastructure, novel consumer data APIs, instant payment rails, crypto compliance. So obviously these are all very much US trends, right? And they share how they think that fintech has only taken less than 10% of US total revenue. So in the sense that they're kind of arguing that, all incumbents are still, 90% and only 10% belongs to startups. Very quickly, what do you think about Southeast Asia and what do you think the stage of fintech roughly looks like?
Shiyan Koh: (23:57)
Yeah, I mean, I think the payment rail stuff I think is applicable to Southeast Asia, right? Our payment rails are still pretty heterogeneous and uneven across markets. I think the data guys here have struggled a little bit more. And partially I think that's due to the nascency of our ecosystem which is like, working with incumbents or legacy banks who may not have an API strategy, it's hard to like plug-in data APIs and then build stuff on top of it, and then you think you're gonna sell to fintechs. And fintechs are like, well, I'm so busy trying to build a bunch of infrastructure on my own. Like I can't even consume this data to do something with it. And so I think those sales cycles have been pretty slow. Vertical fintech, I think is relevant, right? A lot of the companies that went out in the SMB kind of like accounting space they all sold visions around vertical fintech and embedded fintech. So I think that's actually pretty relevant. I think payment orchestration is a little ways off from us, right? Because we're still trying to get people off of cash. So yeah, I think that's like a less relevant trend.
And then similarly for private asset infrastructure, right? Because I think, outside of a couple of cities the capital base just isn't really there. So you don't have as much of a market there. And then crypto compliance, I mean, yeah, I think regulators are becoming more active, but if I'm a regulator, I think I'm focused more on some of the core things that are being shipped out throughout my ecosystem. Crypto is not necessarily at the top of the list outside of a couple of jurisdictions that are trying to become crypto hubs like Singapore and Hong Kong. Although actually, that's not true, I think, I think OJK is also spending more time looking at crypto these days. So I revise my statement there. So I think of these six trends, I would say, I think the three that are more relevant for Southeast Asia are vertical fintech, payment rails, and crypto coins.
Jeremy Au: (25:35)
Yeah. I think me, I think Southeast Asia is interesting because obviously a lot of digital bank transfers have been orchestrated by the government, so there are actually zero-cost, transfers now. So Visa MasterCard, obviously they're not getting outflanked by startups, they're getting outflanked by Pay Now. The Pay Now integration in Singapore, integrating of India is this kind of really interesting to see the government really taking on the active orchestration role for payment transfers at a consumer level. And I think that there's a lot to be done in Southeast Asia.
I think there's a lot of tin file consumers who have very little data and how you make them thick files is the big question mark, right? Because you need a thick file in order to make better decisions. But the truth is, yeah most folks are underbanked in Southeast Asia answers yes, but I think underbanked is a very low quantum in terms of what you can loan them and so, so forth. So I think it'll be interesting. I think that's why a lot of folks are trying to do it. Verticalize it on property tags, for example, or ring cars for example. Or like ErudiFi for higher education. Like, what's the biggest vertical loan? That's the biggest quantum for an underbanked consumer. That's also relatively clear about how we partner and figure out the principal and every payment.
Well, we're back all of a sudden because while in the middle of recording the fintech episode, we heard the news about Silicon Valley Bank imploding. So the overall situation is that Silicon Valley Bank, obviously face issues and effectively has been placed into receivership, which basically means it's now nationalized by the FDIC. So there was a meltdown, implosion crisis. So from your perspective, Shiyan, and what do you think happened and why?
Shiyan Koh: (27:15)
At the root of it, there was, I mean, I think management has, some responsibility to bear here, I think to some extent this was avoidable. And so, I think as recently as a week ago, right, Gary Becker was at the Upfront Summit in LA talking about how they were a great partner. But basically the underlying issue was there was a mismatch between some of the assets they held. So they had bought a bunch of low interest rate bonds in the runup, and then as rates rose, there was a mismatch between the things they held and what they needed to pay out. They actually did take steps to correct some of this.
There was a deal with General Atlantic to point in 500 million. There was an additional share issuance. I think there was a bond offering, but a lot of this pretty poorly communicated. And so, when they sold some of their liquid securities, which was reasonable by the way, at a loss in order to buy new securities at that bore a higher interest rate. This triggered a little bit of doubt about what was going on. There was a town hall where the CEO got on, which did not inspire confidence, and part of it was bad timing. Silver Gate Bank had just gone down for a totally different reason for their crypto exposure. And that started to cause the murmurings of people to be hey, is there something we don't know? Maybe we should move our money just to be safe. And as this is a very sort of classical prisoner's dilemma where you don't get any points for hanging around, right? So it's like you should probably defect, right? You should probably take your money out if it turns out to be a storm and a teacup, that's fine. You just move your money back in.
But if it does turn out to be a bad situation, you're safe. And then that just snowballed basically because no one had any incentive to tell people to stay. Everyone's incentive and their responsibilities to their fiduciary responsibility to their shareholders and to their LPs, basically was to say, hey, you should probably do something. And I think the one sort of unusual detail about Silicon Valley Bank is that they bank a ton of funds and a ton of startups. They're actually, for 40 years have been an incredible partner to startups in the ecosystem. And have been willing to, understand and bank startups that, your standard stodgy Big Four Bank wouldn't touch. But at the heart of it, it is not necessarily that they took a bunch of startup risk. At the heart of it was that, they had a bunch of like, I don't know, assets sitting at like one and a half percent when they were needing to pay out four or 5% on, their deposits.
Jeremy Au: (27:15)
I hear you, and I think obviously management error is a big one. I think, like you said, crypto, linked contagion, crowd psychology, and obviously game theory, right? Prisoner's dilemma is like, you don't want to be the last person in the bank run, right? You don't wanna be the last person hoarding, trying to get toilet paper. So, I think that's all of that. I think I'll add a couple more based on my perspective as well. I think there was also structural macro stuff that was there in the background, like, the interest rate hikes over time as well has been a big hidden hand of this because, for us, the global macro environment has basically meant that I think in February, I think the regulators put a report saying that US banks have over 600 billion of unrealized losses on their balance sheets. Obviously didn't say who exactly and where is distributed, but obviously, they created some fear, but it is tough for banks to make money because they don't make money in deposits. They make money on landing. And lots of companies are struggling to repay their staff, right? So these unrealized losses and all that stuff haven't been marked. The book's value hasn't been reevaluated seriously.
And so, people have question marks. And then I think the second thing is that, startups are very sensitive to interest rates, right? So interest rates, effective rate of fundraising, how much optimism. you can put in the future and how much willingness you're able to value future cash flows, right? And so startup overall have less cash, less fundraising future. And so more flighty, I think as a customer base than they would have been, for example, two years ago. Every startup was calm and relatively well funded with these large cash checks. Right? So I thought those were like some macro stuff in the background that's really quite hidden. And I think I think the reason why we're kind of talking about the why's is because I think we have to generalize this a little bit more to what's gonna happen next. Right. So I'll cover of a couple of like predictions. I think that this is gonna slow down fundraising for, I mean, okay, first of all, the first auto impact is people are gonna be tough making payroll, right? I mean, if you are a very small bank below $250,000 of bank balances, you probably weren't at Silicon Valley Bank anyway, but if you were, you probably can still make payroll. So very small companies aren't gonna have an issue. But I think a lot of medium and late stage companies, obviously it's very hard to move your assets off a platform in effectively two days. Right? Finance team, operations team payroll. Yeah.
Shiyan Koh: (31:59)
I mean, I would push back a little bit there. I think 30% of YC companies who banked at Silicon Valley Bank can't make payroll this month. That is what Gary tweeted. And so, I mean, part of it is that even small companies did bank at, at SVB. And so right now, like to give you kind of a sense of the situation, right? Like, I mean with our own portfolio, we emailed every single person to be like, what is your exposure? Can you make payroll? Do you need introductions to other bank relationships? And so every VC now is trying to get a handle on how much exposure there is in their portfolio, whether they can make payroll and how to figure out getting them emergency funds. So I think that'll definitely slow down new financings because everyone is trying to triage their current portfolio. It's actually not dissimilar to the pandemic hit and everyone was trying to figure out how to help their companies get access to PVP loans and bridge through those initial months of the pandemic.
So, a lot of people when they started to hear about the news, were trying to initiate wires out SVB and not everyone's wire cleared, but you don't know, right? You're like logging in, you're like, processing. What does that mean? Is my money out? But I think. On Monday people will get their 250 KFDIC insurance amount, and then anything above the two 50, they're gonna get a voucher for the balance. And then it's gonna take time to figure out how they're gonna get access to the balance and what percent of the balance they will get access to, depending on whatever acquirer decides to cover of that deposit liability.
Jeremy Au: (33:39)
Yeah, I think I agree with you. I think my definition of small was below two 50 grand of balance. So I think that's what I might defined as, it's like, precede or lower. But yeah, I agree with you that I think if you're medium size or I mean larger than that, you're in trouble, right? Because first of all, like if you run off cash, you die. Right? It doesn't matter how you die, whether you didn't fundraise or whatever it is, but it's if it's Silicon Valley Bank doing to you, it really sucks, right? And I think not only that, there's a lot of working capital flows, right? That you need to have your move-in and out. It's not just payroll. And then when your counterparty, is your B2B SaaS company, right? As I say, right? Is also facing that cash flow. I think, this weekend.
Shiyan Koh: (34:15)
Vendor payments. Vendor payments will get delayed, right?
Jeremy Au: (34:18)
A hundred percent.
Shiyan Koh: (34:19)
People will be like, okay, who else? If I gotta pay my employees first, who else can I put off?
Jeremy Au: (34:25)
Yeah, B2B SaaS would get totally hammered because everybody's just gonna, what will show up is revenue, but I think the show up is receivables, right. From their perspective or even cancellations to be honest. Right. So, painful for SaaS. Well, I think Southeast Asia is a bit less exposed, obviously, because Southeast Asia doesn't really bank as much with Silicon Valley Bank. I think there are some companies that move to the US expanding to the US and I think they had a choice between working with either, for example, Bank of America, because it's very easy and convenient or there are choice at Silicon Valley Bank cause it's a relationship. So I think there's gonna be an interesting.
Shiyan Koh: (34:54)
Well, SVB banked a lot of international companies because they were willing to open bank accounts without social security numbers. And so, they actually, they were actually great for that. If you had US operations and you were a foreign company, often you might start out with an SVB relationship.
Jeremy Au: (35:08)
Yeah. And I think on that note as well, because of that openness relationships, I think SVB had a very close-knit relationship, not just with startups, but also the venture capital, right? So lots of funds had the capital on SVB they also worked in terms of debt and, facilities and so on, so forth. So I think financing rounds probably gonna slow down or get even cancelled maybe due to this process, right?
Shiyan Koh: (35:30)
Yeah, I mean, I think the good thing about funds is basically they operate on a capital call basis, right? So it's not like funds have huge, it's not like their whole fund is sitting in the bank account like they call the capital over time as they needed. And, and SVB is a big provider of capital call lines of credit for funds which is a great business and whoever ends up buying SVB is gonna buy all that, buy that book as well. So I mean, I agree there may be short term delays, but I suspect it's more because people are tied up with their portfolios and dealing with that necessarily than funds have too much exposure. Hopefully.
Jeremy Au: (36:04)
Yeah. Well, I think the tricky part, of course, is whether this spirals further right. Because, I've definitely received, the first set of emails from various VCs, right? Or founders forwarding what the VC sent to them. But I think someone just sent me, just a further thing, which is like, their VC is saying, hey, given that SVB, what happened is please be very cautious. Everything's gonna happen to like Mercury, First Republic, Signature, and PacWest. Those are more digital or technology-first businesses. Right. Or even the new banks. Right. So, I think it is true that like, I think a lot of the impacts will get solved because I think you said, I think an acquirer can come in to clean up SVB because SVB has a good set. But yeah, I think everyone's kind of waiting for the other shoe drop potentially as it spread. Right. And if it spreads well then I think that's the big kahuna there. Yeah.
Shiyan Koh: (36:53)
Yeah, I mean, I think SVB is a unique in the startup ecosystem. I mean, yeah, if someone tries to trigger a bank run somewhere else then you know, you, you could have an issue, First Republic is much more diversified. It does not have a huge exposure as much to that. I can't really speak for some of the other smaller banks. But it's like a real, yeah, I mean, you're back to this prisoner's dilemma thing, right? It's gonna be interesting, but I mean, I think the other side is true too, right? Which is, getting emails to say, do you want a bid on these assets? I, I think there are actually a lot of great assets there. And so, my prediction is that they're gonna have a named buyer by Monday when market's open. Like, everyone right now is working through the weekend to make sure this can be done in an orderly way.
Jeremy Au: (37:43)
Yeah. I agree, JP Morgan.
Shiyan Koh: (37:45)
I mean, it blows my mind really because it's like, I mean, I was working in venture capital when, Bear Stearns went down and Lehman went down and yeah, I mean the, the speed is crazy.
Jeremy Au: (38:00)
I think there's a crazy part for our startup founders, right? I, I think it's just like, effectively two days, I think tops. I think that's the definition. I would say from under hearing, understanding, processing, moving money to closure.
Shiyan Koh: (38:14)
Yeah, I mean, I think, we had a founder who couldn't get an answer and so drove down to a branch and basically said, give me my entire account in a cashier's check. I'm walking, I'm not leaving here without my money.
Jeremy Au: (38:26)
That was the right call, and if you didn't make that drive, you know it. It's a tough time. Yeah.
Shiyan Koh: (38:31)
Well also, it's not like SVB has a lot of branches. Yeah.
Jeremy Au: (38:35)
And I think I, I think that's one interesting thing about bank runs these days, right? In the past, like 50 years ago everybody had to like line up at a teller, right? And this is long line and a thousand people lining up basically meant that you had to line up as well, to get your money out, right? But at least, it was like bank runs would like to take place over weeks or months, right? And then obviously the speed of response was slower, et cetera. But now cause of digital, WhatsApp, emails, et cetera, it's like, and everybody's all logging simultaneously.
Shiyan Koh: (39:00)
At point the site went down. Yeah. Because everyone was trying to cue their wires at the same time. It's been a crazy 48 hours.
Jeremy Au: (39:10)
I mean, so what are lessons here? I also have one, the lesson is, it's good to be large like JP Morgan, Citibank, Bank of America, Morgan Stanley, Wells Fargo. Too big to fail is a great strategy. You sit at a Fed, you know you're working with the Central Bank.
Shiyan Koh: (39:24)
Diversifying your bank accounts I think is an important one. I think, big companies do this. Small companies generally don't because it's a lot of hassle to coordinate different accounts. And so, thinking about spreading out your money up to the FDIC insured limit also other, there are other accounts that are insured that you can sweep into that are not on the banks balance sheet. But yeah, I think cash management and treasury management will become more salient for people.
Jeremy Au: (39:55)
Yeah. I think it goes back to the earlier point about underwriting quality is like, it's basically the model, right? Which is when are things uncorrelated risk factors, and when did it become correlated? And I think when bad things happen, everything bad happens simultaneously, right? So.
Shiyan Koh: (40:12)
I mean, I think I'm still kind of in shock over the whole thing. It's just but it's been kind of a whirlwind and we're still trying to figure out, I think I mean, I think the most pressing thing actually right now is payroll. So, can companies make payroll? I mean, we're sort of at the beginning of March, right? But if you're running two payroll runs a month, right? The payroll run is coming up. If you were running a bunch of your stuff through SVB, so like Rippling just did an announcement, like they used to do all the payroll on behalf of their customers through SVB Rails.
So the last few runs have been like, stopped or stuck and then they had to like move rails to another company. So I think, payroll for a lot of technology companies is gonna be really It's kind of clunky for the next couple cycles. You have to change all your stuff. Like people, like your customers were sending you stuff, right? Or you're in the middle of a financing round and all your wires were going into your SVB account. So you need to stop all those wires and get them to like wire to your new account. So, but I think one thing, we kind of started at the top about communication. I think communication is really important.
So, I'm an LP in a number of funds and first thing this morning there were, probably half of them had emailed immediately to be like, we have no exposure. We're in the process of checking with our portfolio companies right now. We'll keep you updated. Same thing with our portfolio companies. The difference between the people who proactively tell you versus the ones you have to reach out to. So I think, even if the answer is we have no exposure, I still think it's worthwhile to proactively communicate that to your investors. So like in, in sort of times of like crisis I think strong and timely communication is really helpful.
Jeremy Au: (41:40)
Yeah. That's an important lesson. I think there's gonna be more pain. I mean, when you say, not making payroll, but I think that also means, honestly, I think they're gonna be companies, I don't know if it's crazy to say this, but I can imagine layoffs. I can imagine startup closures. I can imagine slowdown financing is fear and that will also cause more startup closures and layoffs. So I think there's a little, I think a deeper sense of winter. I think we were kind of like, I think winter and then after that it became like maybe some, spring, I guess, maybe as of a couple of things ago, right? Everyone's kind of like, okay, I think we kinda got a handle on this, and then I feel like winter gonna freeze up tighter. Right. For a bit. Yeah.
Shiyan Koh: (42:21)
Yeah, I mean, I think it's gonna take a while to work through the ramifications of SVB getting shut down. But I think in terms of the broader ecosystem, I'm really hoping that, this doesn't trigger more. I think this is kind of different from the '08 financial crisis and that it isn't like a situation where we're all like, oh my God, we don't have any idea about what the exposure is at various counterparties because we have these highly opaque securities that are valued in very strange ways that no one really knows what the real number at risk is. It is a much smaller sector of the port, of the economy. It's a much simpler set of things. And so, hopefully, the regulators and potential acquirers can move quickly over the weekend and bring this to a reasonable conclusion. Come mark it open on Monday.
Jeremy Au: (43:06)
Yeah, I do think that one thing I do think about is that if you are Southeast Asia startup raising from US VCs, your US VC is probably very busy, this week. right. Portfolio management. Yeah. Thinking about cash. So I think if you're looking to fundraise this quarter, maybe the next quarter, I think, I think a lot of Asian startups were looking at US VCs and Southeast Asia VCs.
Shiyan Koh: (43:29)
I think, I think the US VCs were gonna be slow. Like we're in a risk-off mode, to begin with. It wasn't like people risked on and I think post-21 and mid-22, like people were already pulling back out of their non-core geographies. So yeah, this will continue. This will add to it, but I don't think this is like so much of a seed change. I think people were already kind of risk off.
Jeremy Au: (43:49)
Yeah, I just say that because I met a lot of founders who feel like they get, they keep taking calls with US VC Associates and, everything feels very warm and fuzzy. Right. And I'm just very bearish personally.
Shiyan Koh: (44:00)
I mean, no one wants to be an asshole, right? Like but also just like, you shouldn't until the money hits the bank. Don't, don't count your chickens.
Jeremy Au: (44:11)
Yeah. And I think what's your personal key takeaway from this? Obviously fintech from the finance sector.
Shiyan Koh: (44:16)
I mean, diversification is a real thing. Yeah. Nothing is impenetrable. Yeah. If you need to act, you need to act decisively, right? Like, don't hesitate. I'm hoping this is more of an anomaly. I don't think this is a systemic thing. Yeah. So I'm not sure I have like a great sort of meta takeaway here.
Jeremy Au: (44:37)
I think we're still processing right? And we're still processing on the fly. I, I agree with you. I think this is I think it feels like a more isolated vanilla bank run in that sense. So, I think that there's some familiarity with it around the contours of it. But I think it's gonna be very painful. I think my personal key takeaway, again, is a big reminder. It's like, at the core of every finance and if, if bank lending so, so forth, there's a very core set of assumptions around. You call it lending quality, interest, margins, people paying back on time and there are all kinds of stuff we can say all about, uncorrelated risk and therefore we're diversified across this portfolio. But I think really thinking through those like supposed black swan events, which are every seven years or every, bank around or whatever it is, but all these factors are become correlated, right? Very quickly.
I think this is a good reminder itself to be like can you imagine? Like, yeah. You're a SaaS company and suddenly all your customers all suddenly stopped, and starts delaying their vendor payments, right? That's a very rare thing that shouldn't happen across 10,000 clients, but it could happen in this scenario, right? So I think for me, that my personal takeaway is just like you said, which actually ties to your point about diversification. But it's like really kind of like saying like, where's your true diversification in, even in these scenarios? Yeah. All right. All the best. God speak for the startups out there. Yeah.
Shiyan Koh: (45:57)
Thank you. All right. Take it easy, guys. Bye.