- By Benjamin Pimentel | Examiner staff writer |
- Mar 15, 2023 (SFExaminer.com)
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The Silicon Valley Bank meltdown was tough and complicated on different levels for Henrique Dubugras, founder and co-CEO of Brex, which offers banking and financial services to tech startups
The San Francisco company was an SVB client so Dubugras’ team had to move fast to take their money out of the Santa Clara institution during last weekend’s bank run.
But Brex, a fintech powerhouse launched in 2017, is known as a major competitor to Silicon Valley Bank, the once-revered institution that for 40 years had been the go-to bank of tech startups.
A subplot in last week’s bank run turned the spotlight on Brex.
One of Brex’s backers is the investor Peter Thiel, who is also one of the founders of Founders Fund — the venture capital fund that created a stir by reportedly urging companies to move their money out of SVB. That triggered speculation that Brex was poised to benefit from the fall of a rival.
Dubugras rejected the speculation, noting that Founders Fund is not a Brex investor. Founders Fund was not the only VC firm that urged companies to withdraw from SVB, he added.
“Everyone was saying it,” he told The Examiner. “I think it’s a little bit unfair to them to basically say that they started the whole thing. I think everyone contributed to it.” And what happened to SVB, he added, is “potentially net negative for Brex.”
Dubugras elaborated in a wide-ranging interview with The Examiner in which he shared his insights into what happened – and why he doesn’t think a new Silicon Valley Bank will emerge.
This interview was edited for clarity and brevity.
Tell me about the moment you realized there were problems at Silicon Valley Bank. I was in my home office and we started seeing a lot of inflows to Brex, way more than normal. And I was like, “Something’s up. Something’s going on.” We saw that a lot of them were from SVB. Then a lot of people started getting texts. “Hey, they’re taking their money out. Some people are saying this.”
So we decided to take our money out very quickly. We had some money there. They’re a partner to us. So we kept some money there. We took the money out and kind of waited.
It was interesting. We asked the people who most understood banking and they all said it was gonna be OK. And then people who understood nothing about banking all said this is going to be terrible.
It was interesting because who was right was wrong and who was wrong was right. Because if you understood a lot it was like, “Hey, they have so much capital. They have so much liquidity. Unless there’s a 50% bank run, they’re gonna be fine. And the chance of that is minimal.”
At what point did you realize, “OK, this is bad?” Probably Thursday afternoon, because we saw that they blocked all the wires going out of the bank.
You said you noticed a huge inflow into Brex. How much more compared to a normal day?
Maybe like 10X.
What is your own take on why this happened? I’ve been reflecting a lot on that. This is my personal view. They bought long-term securities with deposits that were shorter term. I kept thinking why they did that. My subjective analysis is that in 2021 everyone in the ecosystem was making so much money and benefiting so much. And I think the executives there were thinking: how can we benefit more? What can we do to increase earnings?
I think some of it was like, “Hey, our entire ecosystem, everyone around us, all of our friends, all the people we bank, everyone’s creating enormous amounts of wealth. What about us? What do we do?”
This was one of the mechanisms they had to have a better spread on deposits that increased earnings and increased the stock price at the time.
Obviously, looking back, it was a bad decision. But at the time, no one batted an eye. Regulators were fine. Everyone was fine.
When the interest rates started going up, then a lot of people started seeing problems. I don’t know if you saw news about a leaked email (reported by Bloomberg) from Green Oaks. They basically said, “Look, SVB is in trouble” back in December because they are paying more for deposits than they’re making investing these deposits. You’re having to pay 3% for deposits, but you’re making 1% and that’s that’s a big issue.
I talked to hedge funds. There’s a lot of short sellers on the stock. So this has nothing to do with, “The bank is gonna go bankrupt.” This is all like, “Their stocks are gonna go down.” That’s what everyone was worried about or thinking about.
The risk that regulators and others didn’t assume is, because so much of the deposits is concentrated in the technology community, the speed of communication. It was so fast that everyone took their money out at the same time. Which is not true for banks in which the community is not as tight.
Think about a regular bank. It’s like, “Hey, there’s some high net worth individuals.” They don’t know all the other high-net-worth individuals. So it doesn’t spread as quickly. With Tech Twitter and WhatsApp groups and everything, it just went really quickly. Then the math is: “Hey, if there’s a 1% chance that this becomes a problem why wouldn’t I take my money out?” I think that’s the issue.
It’s been described as the first bank run triggered by Twitter. I don’t think it was just Twitter. I think Twitter is where people see it. But there were a lot of private texts and private WhatsApp and private connecting going on.
One of the reports said Founders Fund put out word to its companies urging them to get out of Silicon Valley Bank. And there’s been chatter that because Brex is backed by (Founders Fund founder) Peter Thiel, that you’ve benefited from what happened. Can you address that speculation? Yeah, a couple things. One, yes, we were backed by Peter. But Founders Fund is not an investor in Brex. They even invested in a big competitor of ours. (Founders Fund led a $200 million equity funding round for Brex rival Ramp last year.)
So I would say that that’s not the relationship that Peter and I have in any way shape or form.
Number two, this is actually pretty net negative for Brex. I think one thing that may happen – and that’s why I think it’s important what the government did – is that everyone just says, “OK, the only option is banking with a Big 4 bank. (The Big 4 are J.P. Morgan Chase, Bank of America, Wells Fargo and Citibank) That’s the only safest thing, and that is terrible for our business. It’s terrible for our community.
Founders Fund was not the only one who said stuff like that. Everyone was saying it. I think it’s a little bit unfair to them to basically say that they started the whole thing. I think everyone contributed to it. And no, there was not a strategic thing (for Brex). And I would say it’s potentially net-negative for Brex.
So there’s the view that these banks are too small to save as opposed to the ‘too big to fail’ institutions. Yeah. I think it’s very bad for the American banking system if everyone just concentrates in four banks. And it’s very bad for the customer.
It was reported that you tried to raise a billion dollars over the weekend to set up a line of credit for startups that may be impacted by the SVB collapse. We had over 3,000 people opening accounts with us over the weekend. 3,000 companies from SVB. The concern was all the same: how am I gonna make payroll?
These are really high-quality companies (who were saying): “We have the money. We just can’t access it.”
So we were trying to find a solution. We weren’t trying to make any money out of it. We were just trying to connect the lenders who wanted to provide the lending to the companies.
I think the reason we were uniquely positioned to do that is these big lenders can’t operationalize 3,000 loans. It’s not what they’re set up to do. They’re set up to do big loans to fewer counterparties.
We were opening accounts the same day for people. We had actually like over a billion dollars lined up until the Fed said they were going to solve it. I was never so happy to waste work in my life. It was amazing.
How do you see this crisis unfolding in the next few months, next few weeks? This week, everyone is kind of freaked out. There’s gonna be some best practices that are going to be shared around what to do so we’re not at risk of this again.
I think this is going to look something along the lines of, “Hey, open an operating account of whichever bank you’d like. That’s where you’re gonna interact most day to day. You’re calling them. You’re making payments or doing stuff. Leave three to six months of money there. That’s just your day to day money runway etc.
Then open two other bank accounts, one with kind of like a big bank because it’s always good to have one. And another one that’s just contingency.
You can keep money you’re not going to use between these two accounts. In case there’s an issue, you have access to it.
I think that’s probably the smartest thing to do. That’s what we do. That’s what I would do if I were starting a startup.
So you have multiple banks for your own company? Yeah, we have multiple banks for our company.
Do you think that this 40-year business model that enabled SVB to thrive and become the dominant bank in tech – is that over or is that going to morph into something else? Um, I don’t think there’s gonna be a new SVB.
I think the regulator’s won’t allow it because it was too concentrated.
If you look at the product breakdowns that they had, I think the operational piece of it – the wires, the ACH (automated clearing house), the payments – that’s gonna all go to fintechs because it’s just better. Brex, Mercury and others were just better. Better user interface. Better systems. The app is better. Everything is better technology.
I think asset management, where you keep the large funds and treasuries — that will end up going for the big banks. Everyone’s gonna be comfortable having multiple bank accounts. I think that’s gonna happen.
Do you think this will lead to more fintech companies trying to get their own bank charter in order to be less reliant on traditional banks? I think it’s the opposite, actually. Before this, everyone was trying to be a bank. Now, banks can have bank runs, you know. So I don’t want to be a bank. I want you to have your money safely wherever you feel it’s safe. I’m just the interface, everything around it. I think that’s more the direction it’s gonna go.
How do you react to the way the federal government responded? I think they did the right thing, but they were still too slow. I feel that, again, the last thing that we need for the American banking system is more concentration. If everyone thinks that their regional bank is gonna lose their money, that is terrible. It’s gonna concentrate even more on the big banks. The big banks are going to be even more too big to fail. The problem is by even letting people go a whole weekend thinking that, that already generated a lot of panic and a lot of fear.
They could have sold SVB faster if they didn’t let a whole weekend go like this. Because everyone was then taking their money. Everyone was scared. Now it’s really hard to sell the bank.
It’s important to protect our community and our smaller banks. I think that’s very important for America. I’m from Brazil, and we have a very concentrated banking system. And I can tell you, it’s terrible. Customer service is terrible. I think the fact that America has such strong regional and smaller banks is one of the most important things for the country.
What was the low point for you over the last few days and how do you think this still could go wrong? I think the low point for me was probably on Friday, seeing so many people on private text telling their founders and VC telling their companies to move off of SVB and publicly supporting SVB.
So sending double-edged messages.
Yeah. Like in private, “Take your money out,” but tweeting, “Yeah, SVB – amazing.” I would say that was pretty disappointing. I think it could have been avoided and this kind of behavior was part of it.
What’s the worst thing that can happen? It’s what I said: that lack of confidence in anything that’s not a Big Four bank. I think that’s terrible for the American banking system. It’s terrible for customers or for businesses. It’s terrible for everyone. It’s like, if you can’t trust that your money is going to be safe, except if you’re J.P. Morgan, that’s pretty bad.
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Benjamin Pimentel
Benjamin Pimentel is The Examiner’s senior technology reporter.
