Don't Blame the Short Sellers for the Fall of SVB

(This originally ran at Empire Financial Research.)

When people start blaming short sellers for the downfall of a company – or the world's woes – it's often the time to wonder why...

It's a lazy and frequently wrong argument, but more often... it's a diversionary tactic.

I learned that firsthand when I was a journalist, spending much of my time talking to short sellers... and getting my fair share of blame when stocks I wrote about went down.

Almost always, those who screamed the loudest had the most to hide.

I eventually co-founded two short-biased research firms. And for a very brief moment, I fancied myself becoming an activist short seller... before pulling the plug on that idea.

What I learned was that, in general, successful shorts often did deeper, longer research... and picking an argument with them was foolhardy. They had a knack for sometimes finding things that were hiding in plain sight, but somehow were being ignored...

Such as the financial risk at Silicon Valley Bank ("SVB").

That doesn't mean the shorts always get it right, and their timing can be terribly off, but they should never be ignored...

In fact, the best investors I know seek out short sellers to hear the other side of the story to see if there is anything they're missing. The best compliments I ever received when doing short research were "you kept us from buying more" or "you kept us out" of a stock that collapsed.

Sometimes it's not about shorting, but?not buying.

All of this is a long-winded way of backing the latest controversy surrounding the failed SVB... something I'm sure you're as sick of reading about as I am of writing about. With news cycles and attention spans as short as they are, SVB is?so?two weeks ago.

But since its collapse, something else has been going on...

Silicon Valley venture capitalist David Sacks of Craft Ventures has been posting some anti-short-selling nonsense on Twitter.

Now here's the deal...

I don't know Sacks, and to be honest, until recent days I couldn't have told you who he is. We've simply never crossed paths... And living in San Diego as I do, with a focus on individual companies, I'm not up on who is in and who is out in Silicon Valley. Frankly, I couldn't care less.

But based on what I've read, it's hard not to respect what Sacks has accomplished.

He was the first chief operating officer of PayPal (PYPL), and according to his bio...

He has been a successful founder and investor for over two decades, building and investing in some of the most iconic companies in tech. David has invested in over 20 unicorns, including Affirm, AirBnB, Bird, ClickUp, Eventbrite, Facebook, Houzz, Lyft, OpenDoor, Palantir, Postmates, Reddit, Slack, SpaceX, Twitter, Uber, and Wish.

Sacks also has roughly 60% more Twitter followers than I do. In other words, he's smarter, richer, and more popular than I am.

So, given his pedigree, what I don't understand is why Sacks has been posting a few?really?silly tweets in recent days focused on the shorts...

There's this one from earlier this week...

And this one as well...

I have no idea how Sacks reached that conclusion... because based on my observations, the shorts were raising red flags over SVB long before they hit the mainstream – almost as if the shorts were trying to warn people.

I chronicled some of it in the?March 13?Empire Financial Daily , where I noted that Raging Capital Ventures was tweeting about its short position in January... an analyst at Seeking Alpha wrote a lengthy report raising concerns in December... and in November, Gator Capital went so far as to tweet...

They were all citing concerns with the company's balance sheet... notably, its investments.

But they weren't the only ones...

Hedge fund manager Alex Beinfield of Blue Duck Capital Partners started shorting SVB last September. He wasn't doing so because of the financials, but because of the "VC bubble" – a term coined more than a year ago by my colleague Enrique Abeyta, referring to the unsustainable valuations on VC-backed private companies during the stock market bubble.

And long before Beinfield, with a similar thesis, short seller Nate Koppikar of Orso Partners had initiated a short position in SVB. As he told Michelle Celarier in?New York Magazine?recently...

A substantial portion of money that went into venture capital somehow ended up at this bank...

I could tell their deposit franchise was much flightier than people actually believed, because it was a bunch of start-ups that burned money so that deposit accounts were constantly in a state of decline, and the only thing that could keep them going was more venture capital being invested...

The only way that would be sustainable was if venture capital continued to grow exponentially, and I knew that was not possible, because I knew this was a giant bubble.

This gets back to the reason we're here...

Was it the shorts who caused the bank run? Or was it something else... an effort to divert attention from what was?really?going on?

You be the judge...

As SVB was unwinding, there were a bunch of media reports that billionaire entrepreneur Peter Thiel's Founders Fund and a bunch of other VCs had pulled money out of SVB and had encouraged their portfolio companies to do the same.

In a world of Twitter and mobile banking, that was akin to shouting "fire" in a crowded theater.

As Eminence Capital's Ricky Sandler tweeted yesterday in response to Sacks' first tweet...

Or as Koppikar told?New York Magazine...

You had a handful of VC firms that spoke on behalf of their companies...

When they say "pull," they all pull at the same time. One VC firm can get maybe 100 or 200 of its portfolio companies to take their deposits out. That's why this went so fast.

Which is why the claim that short sellers caused the run was comical... and annoying. And that's why when I saw Sacks' tweet yesterday, I retweeted it with my own comment...

?

Bank runs may be over, but one thing I know for sure is that – like it or not – this story isn't.

By the way, if you missed it, I was on CNBC yesterday talking about SVB – you can watch the clip?right here .

As always, feel free to reach out or opine via comments below or [email protected]. I look forward to hearing from you.