Betsy Cohen On Tech Investing and How SVB Failed Banking 101

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:17)

Tracy, you know, I was thinking something with the Silicon Valley Bank crisis that, you know, it's funny when we think of tech, we think of like these companies that are growing like super fast, shooting for the moon, trying to be like the next Amazon or Google or OpenAI or whatever. And when we think of banks, we think of these companies that really should be about like protecting downside, like conservatism, sort of like just first-

Tracy Alloway (0:42)

Steady predictable deposit growth.

Joe Weisenthal (0:44)

First do not lose money. And I do think, I wonder if there's just like this inherent tension between like tech and banking.

Tracy Alloway (0:51)

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 companies. You kind of assume that some of them are gonna 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.

Joe Weisenthal (1:18)

Yeah, no, it's a very different model. So here you have this bank that obviously was the chief bank to startups. And even in the best of times, right? Not in a rate hiking cycle, not that you imagine that 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.

Tracy Alloway (1:45)

I think it's a fascinating one. And I guess the other question that goes right alongside that is are tech companies particularly good at managing their own money?

Joe Weisenthal (1:52)

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, so they're not going to have a big like finance group. And 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?

Tracy Alloway (2:11)

Everyone figured out how to put their crypto in cold storage, but not how to buy tea bills through Schwab or Treasury Direct.

Joe Weisenthal (2:18)

Yeah, 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, and sort of like pioneer in sort of many aspects of whether it's like SPACs, 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, an 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.

Betsy Cohen (2:53)

Well, I'm delighted to be here, and thank you for inviting me.

Joe Weisenthal (2:56)

Before this whole crisis with this bank, you must have had numerous partners and clients who have worked with Silicon Valley Bank for a long time. How would you have characterized them? What, in your view, made it so that they were so, sort of like, influential throughout the Valley, and really throughout the entire industry?

Betsy Cohen (3:14)

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 hub 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, et cetera, et cetera. 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 were 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, off what were banking fundamentals. Forget the tech fundamentals because within a portfolio, a loan portfolio, you do expect losses, and whether they're due to a mortgage to an individual who dies and there's nothing to do about it or some other personal and probable event, it's why banks do have provisions for loan loss. 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 101 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 both the loan and the quality of the securities in their portfolio is pretty good.