The Exchanges

Q run in history. You have, you know, a lot of really legitimate concern about, uh, these investments in mortgage bonds and, um, questions to leadership about whether they should have known better. And so you, you know, a lot of people are trying to figure out, like, who's responsible here? Any thoughts on, like, what precipitated this historic run on the bank, and, you know, where you think responsibility lies?

A I think responsibility lies in several different places, honestly. I think Frankly, uh, the bank is at fault. And it's not the folks who I was just talking about. It's not the, the, the frontline people who were doing, uh, the work with the companies. Uh, they made money. This is not a problem with the business model I was just talking about. They did really well. Um, the, the bank did really well financially issuing and making those loans. But I'm an investor in a financial services company that, that issues loans to, uh, you know, that issues essentially what, what are more or less residential loans. And so we have a warehouse facility, and we originate loans into that warehouse over a period of months and accumulate loans into that warehouse. We always hedged that warehouse. Every, we not only hedge the warehouse to the extent that we were able to, we hedge, um, the loans that are authorized, but not yet issued. And that was always an expense of doing business, and we always looked at it and monitored it at every board meeting, and we never thought about taking off that hedge, and then it was an expense until in this rising interest rate environment, we continued to make money on those loans because of the hedge, right? So a hedge is an expense until it saves your ass. They didn't do that. I don't know how you invest In these, you know, the government collateralized mortgage…

AI assessment note: “I think responsibility lies in several different places, honestly. I think Frankly, uh, the bank is at fault.”

Q fell considerably, almost 30%. We also saw a decline in later stage rounds, and also in early, uh, seed in Series A rounds. So, It was, you know, down in a lot of different areas, and it was kind of a surprise that it was down in, in early stage investing. I'm just, can you reflect on this decline and how it impacted your investment strategy over the year? Gabriel?

A Gabriel? Yeah, I, I think of that in two ways. One, where did it and how did it affect me and us in our work with our portfolio companies? That's the first side of it. And then two, how did we think of it and affect us and how we were doing new deals in companies in which we had not yet invested? Very different processes that inform each other, but you have to think of them separately. Most of the companies, not all, but many of the companies to most of the companies, we were working with them to expand runway, but very consciously not get through twenty-twenty-three because twenty-twenty-four is going to be better and we'll be able to fundraise. But if you had a large round that you'd raised in twenty-twenty-two or, uh, early 23, what could you do to make it through twenty-twenty-five? What could you, or into twenty-twenty-five or beyond if possible? What could you do to focus on Profitability rather than just growth. What could you do to make your company attractive to investors once this cycle had worn out? And, you know, Carly, going back to what we were, what we slightly disagreed with, I wanted my companies, if they could, if they were, if they were looking like they might be cash out in June of 24, June of this year, I wanted them to get to Q one or Q two of 2025, because I thought that's when we would be maybe in some sort of more normal environment. Plenty of risk to t…

AI assessment note: “I think of that in two ways. One, where did it and how did it affect”

Q And how unique is that? There are a lot of banks in this country. Why is that different from the way a lot of other banks operate?

A Short answer, other banks are more risk averse on the traditional financial metrics That you do to, to measure the quality of a loan. Um, but Silicon Valley Bank, understanding the startup ecosystem, understanding how these companies grew from a Series C or Series A to profitability in the long run, having been there for years and years around the ecosystem, had expertise that allowed them to lend to companies, uh, on all of these different lending instruments in ways that traditional banks or other banks weren't able to do. Many companies would graduate from Silicon Valley Bank to other larger or more traditional Wall Street banks. Um, they would keep the relationship with SVB, they would continue to borrow and work with SVB, but then they would layer on other, uh, debt providers, uh, afterwards. But the first lender, the lender who was willing to go in and lend money when it was the most important to the company, uh, was SVB.

AI assessment note: “other banks are more risk averse on the traditional financial metrics”

Q but there's a lot of questions about what parts of the business will be sold off, what happens to the lending business, uh, you know, what kind of waves does this make at other banks? Will it be harder for startups to raise money generally? Like, what, there are a lot of ripple effects here that people are just trying to grapple with now. What do you think those are?

A Companies have just lost a really great source of funding for them. If you raise ten million dollars in equity, and you suddenly, instead of being able to raise four or five million dollars of various forms of debt to supplement it as you're building your company for the next 18 months, you can only raise two or three million dollars, that's gonna slow down company growth. If you raise those two or three million dollars on worse terms, That's going to slow down growth. Or if you raise that money on terms, uh, that you're a little bit nervous about the counterparty of, you know, meaning who is the, on the other side of that loan? How are they going to behave when things, uh, Get tough. If things get tough, you might think more closely about taking on that debt. All of those things slow innovation. It's not going to stop innovation. It's not going to stop climate tech, but it's going to slow it down. It's going to provide more friction. Silicon Valley Bank, I would often say to CEOs and boards, ok, they came in a little bit higher in their cost of capital, or a little bit more And the warrant coverage that they required or some, you know, detail of the loan, right? But we know that if we need an extension on that loan, we know that if there's some covenant trigger that is significant, but not life threatening and does not damage the prospects of the company to repay that loan. Th…

AI assessment note: “Companies have just lost a really great source of funding for them.”

Q Um, okay, so what's a sector that you started off the year unsure about, or, you know, you were learning more about, and then you became more interested in over time?

A You know, I'm gonna actually go with the same answer, right? Like, I still am really interested in AI, and if a credible source makes an introduction, I still take First meetings with those companies, because I do believe that, like, a slight play on what Carly said, it's going to become a necessity. I do believe that companies that are doing something that other companies are doing, but have figured out a way to use this tool in a, to a competitive advantage, will have, will have an advantage, you know, that isn't, yes, it's replicable. Yes, somebody will get there, but Can give you a really good head start. So I still keep looking there, and I started out, uh, three, uh, relatively AI ignorant, especially for climate. So that's one for me.

AI assessment note: “I started out, uh, three, uh, relatively AI ignorant, especially for climate.”

Q You're gonna invest in a bunch of hydrogen wildcatters?

A We, we're not gonna invest in that. It's not gonna be hydrogen wildcatters. It's not like that. It's funny. We invested in, not last year, the year before, um, in, in one of the companies, and it's amazing To see what is written about it and what is talked about it publicly versus what the reality is in the ground. Thank you for the pun. But this is real. It, it's real. It's, it's accessible. There's still risks to it, but this could be something that is fundamentally changing of the energy landscape. I'm comparing, I was about to compare it to the shale gas boom, so maybe that's a little bit of hubris right there, but It's the only source of hydrogen. Where it's a source of energy. Every other way of making hydrogen uses energy to make it. If you make, if you have an electrolyzer and you need solar or wind, you're taking energy and you're sort of using it. Hydrogen becomes an energy carrier. Uh, and then maybe you do something else with the hydrogen. Maybe you use it to make chemicals or you make ammonia or you burn it or whatever, but geologic hydrogen, the hydrogen itself is a source of energy and that is unique.

AI assessment note: “We, we're not gonna invest in that. It's not gonna be hydrogen wildcatters.”