Betsy Cohen On Tech Investing and How SVB Failed Banking 101

And when we think of banks, we think of these companies that really should be about like protecting downside, like conservatism. There's sort of like just first, steady, predictable deposit growth. First, do not lose money. And I do think I wonder if there's just like this inherent tension between like tech

and banking. It's so funny you mentioned that because I was thinking about this, because if you think about the venture capital model, it's basically throw a bunch of money at different company as you kind of assume that some of them are going to fail, but maybe one of them will be the next Amazon or Google. And that seems to be almost the polar opposite of the banking model, which is you have a diversified portfolio, but you're really hoping that all of them eventually pay you back. Yeah, No,

it's very it's a very different model. So here you have this bank that you know, obviously was the chief bank to startups and even in the best of times, right, not in a rate hiking cycle. Now that you imagine that like the majority of your clients are going to fail, because most startups fail, it is sort of an interesting tension that emerges, and it's like, well, how do you like responsibly bank the tech industry is kind of an interesting question even outside of right now. I think it's

a fascinating one. And I guess the other question that goes right alongside that is our tech company is particularly good at managing their own money. Yeah, that's also an interesting question because you have a lot of companies like start with some hacker or coder and they have three people or five people. You know, if they don't have they're not going to have a big like finance group, And it is it unrealistic that they would even have

someone doing like treasury management. After they get their first like seed check from like Sequoia or whoever. Everyone figured out how to put their crypto in cold storage, but not how to buy t bills. Through Schwab or Treasury Direct. Yeah, that if only they had, then we wouldn't be talking about this anyway. I do think there's 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. It's sort of like pioneer in sort of many aspects of whether it's like spacks IPOs providing financial services to tech companies more generally fintech companies. We're going to be speaking with Betsy Cohen. She is the co founder and chairman of Cohen Circle and Investment Group, and she founded a bank and done much more. So, Betsy, thank you so much for coming on odd lots really

excited to have you here. Well, I'm delighted to be here and thank you for inviting me before this whole crisis. With this, 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? What didn't your view made it so that they were so sort of like influential throughout the valley and really throughout the entire industry. Well,

I think that's an interesting question. I think that they were well located, certainly early on in terms of being in San Francisco, which at the time was the only of tech development, but that since changed. I think that 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. Etc. So having that expertise

was certainly helpful. I think somewhere along the line the opportunity to move from simply being a traditional bank as was described, slow moving one thing at a time, let's not grow too fast, to seeing the opportunity because both health tech and biotech and fintech we're all growing very quickly. To take advantage of that opportunity to actually grow the bank that quickly, it meant that they took their eye.

I think of what we're banking fundamentals, forget the tech fundamentals, because within a portfolio alone, portfolio you do expect losses, and whether they're due to a mortgage to an individual who dies and there's no nothing to do about it, or some other personal and probable event. It's why banks do have provisions for loan laws. So it's not that every tech company had to be successful, but they had

to have within their portfolio the appropriate provision. I think what they really really didn't do as well as they might have is, or are two things, and they're really both banking one oh one. One is that they had a concentration of industry. It should have given them. I would have thought a better understanding of the current situation of technology companies, that they were having difficulty raising money and therefore would lean on their deposits more, but apparently

it didn't. And the other is really asset management, asset liability management, and not so much in terms of the quality of the underlying bonds that they made or the underlying loans, because the both the loan and the and the quality of the securities in their portfolio is pretty good. But they had eighteen months during which interest rates were rising at a very quick pace, and not to adjust the portfolio, not to take on a duration basis of

the appropriate steps is just to me mind blowing. Yeah, 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 I should mention, we're recording this on March fifteenth, what's been the experience or the mood in Silicon Valley over the past week or so. You know, I assume that you're talking to your various partners. What are they telling you.

I mean, it's your panic, and it's surprise, and it's disappointment, and it's all of the things that go with having a trusted partner not perform. I think that there are companies that had credit lines. Let's just take a number at random, one hundred million dollars credit line. They had drawn sixty million dollars. They knew that they had forty million dollars let's put this in quotation marks in the bank in order to cover what was their ongoing period

of negative cash flow. So they felt pretty good about themselves because they could see at the end of that period they would be in a cash flow positive situation. As is the case when a bank is taken over by the FDIC, all loans are frozen, so that forty million dollars is no longer available to them in our example.

Add that to the fact that whatever money they had raised, and it's not true of all tech companies, but the majority of them had a very comfortable feeling that Silicon Valley Bank, at two hundred and nine billion dollars, was the sixteenth largest bank in the country, was a very safe place to put their deposits. You know, both it looked like earlier in the week that both they were not going to have access to their money through the loan mechanism and they were not going to have the

uninsured deposits. So 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 that line

of credit or evolving line of credit issues. So even so it's like, okay, relief, you get your deposits back, But that must mean that for a lot of companies now, they're financial security is still impaired by this, simply because I don't know, it's hard for me to I don't know, it's hard for me to imagine some other bank right now jumping up and start getting excited about offering startups

lines of credit in this environment. Well remember it's not only started right, right, Yeah, So startups make a part of it. And certainly customer loyalty was reinforced by the willingness of the bank to make loans perhaps to earlier stage companies than maybe other banks might see fit to do.

But it's really beyond that and the opportunity to have another because everyone is swooping in, I mean, from hedge funds to other banking institutions, and I'm sure that some portion of the credit lines will then become available, but that's not going to happen tomorrow. You know, we started in the intro talking about how should tech companies or startups be banked, and there's an implicit assumption there, which is that that industry is somehow different to others. You

anticipated the next question. I'm sorry, So A, do you agree with that? And B if that is true, if there are some idiosyncrasies or some peculiarities around tech slash startups, what is the ideal way that they should be banked in finance? Well, and if I could just add on a little bit to the question, I mean you were early on this, I mean you started your career. You were like one of the first like financial service at

partners like PayPal and so forth. So it presumably you identified a gap in the existing banking infrastructure for us. Certain type of like fast growing company and so what is it that yeah, what is it that makes that distinct? That we were not traditionally a lender to those companies. We were providing a service what we call a bank rapper 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 a way and a

place to have access to the banking system. So we were the window into the banking system. It's why today I can say very proudly the banking model of Bankcorp is as valid as it was twenty five years ago when we started. 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 rapper side.

So they were not only companies that had a product that they were going to develop that might work, but there was a great deal more depth of understanding of where they were in their process. We didn't care whether they grew to be a very large company or not, as long as they could service their particular needs. That's a very different position to be in than being a lender to these companies where you're putting out your money up front, and you are looking at the potential viability

of particular platform. It's sort of the middle ground between equity and debt, or let me say equity and traditional debt. Can you explain that what is it? Like? What is it then? And so talking about like, Okay, it's not quite equity, it's not quite dead. How should we think about I guess venture dead or lending to these fast growing companies, and that how why it doesn't quite fit in your view into either category. I think that equity is clearly a bet, maybe a good bet. It may

be a well researched bet. It may be a bet based on prior performance of a particular company. But when you make an investment, you're making a bet that a product will be successful, that the management will be able to manage through a variety of changes in the marketplace. All of those things are in the nature of betting, not gambling with a bad connotation, but bets with a

good connotation and with deep knowledge. You know, lending is more akin to having predictability, and many of these companies did not yet have the predictability that being said, a bank like Silicon Valley bank which had deep knowledge of the tech industry might make that judgment better than somebody else. So Bangkor was providing private label banking services, but also the underlying payments technology or additional payments technology as well. What was it like doing that as a competitor to

traditional banks at that period of time? Was it? I can imagine maybe to some extent it was a competitive advantage because a lot of those larger banks tend to move very slowly, especially on the payments portion of things. But on the other hand, you know, you're talking about giants of traditional financial services, and when they decide that they care about something, they can throw a lot of money at it. Yeah, the I remember we started in

two thousand. 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. I mean, I remember attending a conference and I was placed opposite I don't know a banker from a big bank, and he was very clear that we would certainly fail within the next period of time because we were not

offering the services that a big bank could offer. We didn't have to, so we evolved into the dominant platform with the deepest knowledge of how to do this, and the banquet remains that in that position. Today there are many who have tried to model themselves after the business model that we developed, but nobody has had the length of time, the relationships, the predictability, the depth of knowledge, etc.

That the Bancorp was hid. I want to sort of zoom forward and bring to the present day for a second. You were an innovator and early I don't know, sponsor or active in SPACs for years. So we saw this SPAC boom that started in twenty twenty, really like summer of twenty twenty, right after the pandemic. Maybe it's there are a few in the year before. I think like Virgin Galactic was the year before, but you were like several years before everyone else, and I think you've done

more than anyone else. Or maybe it's closed. Maybe it's a time I'm not sure you can correct me. Then a bunch of them collapsed and it did terribly Like right now, like what is it? Just sort of your sense of I don't know, investment appetite, Like how frozen are things? I think very frozen is the short answer. But remember that a SPACK is just a league legal

villa vehicle. It is designed to provide capital to an industry that can't get capital through a straight on IPO because there is some either gap in the development of the company, so they don't have numbers from prior years. If you look back, what you see is really the beginnings of a company, and there was no way under the traditional IPO to talk to investors about what might

come in the future. Having come out of the Bankcorp fifteen years with all these fintech companies, I recognize that some of them had reached a level at which they could be predictable. They did have recurring income, they had an opportunity to make acquisitions, and therefore they could use a 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, therefore, as a whole, was receptive to a vehicle which provided capital to what should be a public or could be a good public company. And we always emphasize it's why our basket of spec companies that are still trading that haven't been sold or some other disposition are all trading very well. It's really the discipline that we brought to and the deep knowledge that we brought to the area that enabled us to

make these good decisions. Will there be I mean, if we look back at the history of specs, they were begun in the nineties when steel companies and other such companies coming we were coming right out of a depression in ninety two, did not have access to the capital markets but needed capital. That was the first round. The second round might have been for real estate companies following two thousand and eight, where they were cut off from

the public markets but actually needed the capital. And the third round was really in the tech area. I think one of the things that happened is that people maybe confused companies that either had a path to profitability which was highly predictable, or had were in fact modestly profitable, which had very experienced executives that were attached to the

company and could navigate and had differentiable products. I mean, I think if you look at the electric vehicle area or the biotech area, those are two areas in which the predictability of performance is at the very nader. So you know, the public markets are all about predictability, They're all about reporting. Next this quarters and hopefully next quarters earnings, and that's what the market responds to. Could you launch a spack in the current environment or is the window

just closed? I think in the next couple of months I would have said, prior to this upheaval in the in the banking area, I would have said one Ndita, I would say so today that one could launch a spack, absolutely, but it would have slightly different characteristics. This spack is not sitting there and out of space, It's sitting in a spacks in space. Does have a good ring to it? Yeah? It does? It does you know, just the next three But in fact they are responsive to the current public market.

So would they be constructed differently probably so. Would there be elements that were not needed in the prior iteration of specs that wouldn't be inducive to the investor? Probably so, so they would take a different shape, But it's a shape that is responsive to external factors rather than to

the legal structure itself. Let me ask a broader question on investing, and I think you did an interview last year where you were talking about how tech valuations had gone down quite a lot, and that meant it was probably a better time to invest. There were a lot of opportunities. 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 that I probably gave that interview, the war in Ukraine evolved, the several other large unnerving occurrences. Certainly the banking issues of today give investors pause. You know, it's a matter of looking at the whole package. I do think that

there are opportunities today. I think they're good opportunities, not only because valuations are really rolled back in ten years, but because there are companies that have reached a level of both scaling and differentiation and have good executive and internal corporate elements at place in place to be good public companies or be good investments on the private basis. You know, I'm not moving away from that. Looking at it from the investor point of view, everybody is nervous.

You know. It's interesting sometimes when you talk to investors in the background, I'm still excited, I'm still investing. We're like excited about AI or I'm really excited about There's still many opportunities. Do you think like that in terms of like sectoral opportunities or because it sounds like what you're describing is 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. That I think that there are elements that are necessary in order to make a private company a successful public company, and that has less to do with the sector than it does have to do 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. But it also did sound in your one of your previous nistors to Tracy,

which I found interesting. The types of companies that came public during the twenty twenty one spack boom. To your view, many of them were just not appropriate for public markets by dint of their extreme profitability uncertainty. So like an early stage electric battery company, an early stage biotech a company that makes you know, electric trucks, but it's still never manufactured one. In your view, these were just like

never appropriate for like public market infestors. Absolutely, they weren't appropriate at the time that they were brought to the public markets. Maybe they will be in twenty four, twenty five when they have actual contracts, actual manufacturing facilities, actual sales, actual customers. But indeed, when brought to the public markets, they were not appropriate. So one of the things about tech is it's always evolving. It's always trying to solve

new challenges. And within your fintech expertise in particular, talk to us about how you see that evolving now, not just in response to the current interest rate environment and inflation, but also maybe in response to some of what we saw with SVP. I think that technology is evolving, and we're at a crossroads in financial technology where we're moving from one level to another level. We call it embedded finance, but it's not a standalone phenomenal. It requires a partner.

One of the reasons that the financial technology industry was slow to scale at the beginning of the two thousands was really that there was nobody on the other side, or there were fewer people on the other side. Consumers were not sophisticated and knowledgeable about how to use their computers, effectively, most of the computing work Internet work that they done did was done it at work. Small businesses and enterprises were not sophisticated about how to run their businesses on

the Internet. Today you have both elements crossing. You have a more sophisticated technology capacity and you have a more sophisticated and knowledgeable user. You know. One of the things again going back to like that twenty twenty one, the

boom the boom years. In addition to taking companies public that probably were not appropriate to public markets, which we saw quite a bit of another phenomenon that existed in a few years in the last few years is like vcs in tech investors like talking to the public in

a way they never did before. A lot of like promotion on Twitter and trying to get people into cryptocurrencies, etc. Like do you think that tech investors in generally sort of like need a little bit of a gut check about what they're promoting publicly when it's public retail money and getting people, Oh you should get excited about this, or if you're not in this, you're missing out. How reckless was that? And how much shaming should people have? What's your what's your gut view of all that. I

don't know that it's shaming. Remember that social media, which is what you're really talking about, and communication flattened the kind of communication that was done. That was not limited to technology companies. It's really right across the board. It's what is driving meta to rethink their algorithms. You know, it's all of those elements that have changed the way

in which in which we communicate. A company like Reddit could not have existed ten years ago because there weren't enough people who were interested and there were not enough people who could access it easily, but not limited in any way to tech promoters. I think part of this back 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 been in the public markets forever through many 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, you know, throughout the industry. But most people who thought they could do a spec because their brother in law had done a spec or the guy at the country club had done a spec.

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 ten years ago, because I'm pretty sure my account was like thirteen. When I say it existed, it did not have the prominence. True, that is very absolutely so.

I mean, Joe kind of asked you about should Silicon Valley 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 people, very successful people that spend now and grow now and then see where the chips full

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 it at a moderated not necessarily moderate, but moderated base, will have success. But if the organizational elements underlying the good product. They're not there. I think they're 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 spack and made about Trainey. No, No, there was no. I was fascinating that because we actually did an episode during the spack Boom. We're talking to Howard Lindzen, who had done at least one spack and he like told I was like, we're this whole story. He's like, oh, well we had a no remember you said there was like oh, in twenty nineteen, we had dinner with some folks at Your Bone and Moth was doing a spack and everyone got excited. Can you talk

a little bit about how that dynamic works? Because I find that fascinating. It's like you you see all the fomo on social media, but like you're actually in those in those rooms and you hear it. Like, can you talk a little bit about your firsthand experience of like the Foamo 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 is one might refer to them was from many years, because remember the whole cycles only a twenty years cycle, and said, we'll call it for many years. Was an in grown self involved measuring your success by what the guy down the street did. Environment. It's why maybe five years ago people began to look for companies that were in Minnesota, that we're in Kansas City, that you know, we're in places

that were more isolated. It's why John Templeton early on moved from New York to Well this was not the only reason 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 industree town, which is what it was. I guess it would be like talking about Wheaton, Minnesota when General Mills was there. You know that this is what happens.

I mean, the people that you're talking about, Howard and etc. Are very smart, very knowledgeable folks, and wool 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 want a 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 I think that 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. They're 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 tech Silicon Valley isn't a slump, but it's been in many slumps before, and so it's not like that itself is not anything new, And it seems like the slumps end in part when some like iconic company of the

era goes public. So, you know, you mentioned the recession of the early nineties, and then I guess it was ninety four there was the Netscape IPO, and it was a little early, but that was sort of like a turning point, I would say, And then we several years later we got tons of tech IPOs, and then you know, coming out of the dot com crash, I would say, the Google IPO in two thousand and four, I think it was was like a pretty big moment of like, okay,

tech is kind of back. There were some you know, reasonably big IPOs of companies in the twenty tens, I I guess, like nothing like Google quality, except we got Facebook, which was obviously become one of the biggest companies. Do you think it'll sort of be similar that? Like something to watch for is when one of the I don't know, like a Stripe or something, one of these companies that people considered to be a sort of blue chip private company decides, yes, we're gonna go for it's time for

us to make the jump to public markets. Is that something to watch for? Absolutely lutely. 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 path, 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 about as being a normal I think that's a great place to leave it. Let's see Cohen think. Thank you so much for coming on odd lots. It's my pleasure, and thank you for your good questions. Thank you, thank you so much. Yeah, I was lovely having you, Tracy.

I thought that was a fascinating conversation. I really appreciate, appreciate, like in a sort of crisis moment, getting to like zoom out and talk a little bit of a broader history, 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, you know, starting spacks

with celebrity endorsers over dinner at Carbone moment. But I do think, you know, when you look back on that sort of low interest rate environment, those types of moments are really going to be emblematic of some of the excesses.

I thought that was really interesting too, how it's like, you know, intuitively, like part of the way some people talked about spacks and the boom back then was that, well, people want to be invested in like venture type companies or something like that, or like 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 remember there

were tons of like alternative vehicle companies YEA with a huge financing needs and highly uncertain path to like product market fit or anything like that. Even an environment where people want to take risks, etc. It doesn't necessarily mean that they're ever really appropriate, like that they're ever going to make sense for public investors, right, like the vehicle

doesn't automatically lend itself. Yeah to that, But I also, I mean I took her point also about silicon Valley kind of being inherently cyclical, but also sometimes just having to stand back and wait for the uncertainty to kind of play out well. And to her point, like Betsy, I forget which words she used, but she said something about how a stripe IPO would like lift something off the market that might reopen capital markets. So I do

think that's like an interesting thing to watch for. Like, will there be some moment in which suddenly, Okay, it's like it's safe to go back in the water because some company went and did it saved by the stripe. Yeah, I guess we'll see. It can either be a good thing or go badly, right, I mean, it seems like the options right now are like pretty binary. But yeah, okay, on that happy note, shall we leave it there. Let's leave it there. This has been another episode of the

Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe Wisenthal. You

can follow me on Twitter at the Stalwart. Follow our producers on Twitter Kerman Rodriguez at Kerman Arman, and dash Bennett at Dashbot, and check out all of the Bloomberg podcasts under the handle at podcasts and for more Odd Lots content than at Bloomberg dot Com slash odd Lots, where we post transcripts of all the episodes Tracy and I, and we have a newsletter that comes out every Friday. Go there and sign up. Thanks for listening.