their investment (20 percent), seniority over all other investors (31 percent), or other important terms.
The Silicon Valley Bank stock is up more than 78 percent in the last 12 months and 222 percent over the last five years. Here is how one prominent venture capitalist described the business model:
The bank, which recently opened an office in Santa Monica, is more willing than others to focus on a startup’s growth prospects rather than its current financial condition and to lend money so businesses can expand while awaiting the next round of venture capital funding, said investor Mark Suster, a client and managing partner at Upfront Ventures in Los Angeles.
When the music is loud at the bubble party and everyone is dancing, Silicon Valley Bank may be the stock to own. However, when the bubble music stops, it may be the best stock to short or use as a hedge.
The rapidly declining fundamentals in private tech don’t align with the current stock price.
A recent investment presentation of Silicon Valley Bank narrowly describes two fundamental growth drivers:
Essentially, the growth of the bank is dependent on more speculative investment in startups and more exits. On these matters, you don’t have to guess: Valuations, funding, and M&A activity are all slowing down in private tech. Acquisitions by large tech companies are on track for the fourth consecutive yearly slowdown, according to CB Insights.
This is not a situation where you have to guess what will happen in the future. The bank highlights “net warrant gains have exceeded early-stage loan losses over time.” The bank cites $88 million in aggregate warrant gains net of early stage losses between 2002 and YTD 2017. The “over time” part is cute, but how are those startup warrants doing now?
The bank’s net gains on warrants collapsed by 46 percent in 2015 to $38 million and then to another whopping 81 percent in 2016 to $7 million. The values are not as important as what the trends and implications are.
The bigger picture is the warrant portfolio was not able to match up with the net charge-off losses during the last financial crisis. Warrants less NCOs were $58 million in 2009 and are
