Bloomberg Línea — The collapse of Silicon Valley Bank (SVB), a bank used by startups that received investments from Silicon Valley funds, showed that companies in the industry were not prepared to deal with a banking crisis of that magnitude, according to venture capitalist Tim Draper, who has invested in companies such as Tesla, SpaceX, Skype, Twitter, Baidu, Coinbase and Robinhood, among others.
In an interview with Bloomberg Linea, Draper said the crisis has reinforced the importance for startups to diversify the banks in which they keep their deposits, and that many companies today are focused on having a stronger financial base.
“When these problems with the banks happened, there was a general panic and entrepreneurs would come to me and say, ‘I need emergency funding for Monday.’ It was Friday. That really breaks the gears of the system. Fortunately, I was able to get my investors’ money out of Silicon Valley Bank before the crisis. So I was able to offer emergency funding”, Draper says, and who will be in São Paulo this week to participate in the Know How Experience event, organized by Sarah Barros and Filipe Trindade, from the Know How Club network.
Draper will also record in Brazil an episode of Meet The Drapers, his reality show about entrepreneurship, which will include the participation of four Brazilian entrepreneurs. Trindade is one of the judges of the show.
A cryptocurrency enthusiast, Draper also says that he recommends the companies in which he invests to keep the equivalent value of at least two payrolls in Bitcoin, also as a form of protection.
He believes that the banking crisis has reinforced how traditional banks are not 100% safe, and assesses that the upcoming innovations that will be created by startups in the financial industry will have the potential to transform some of the largest sectors in the world.
In his view, the tumbling of the Bitcoin price in 2022, which led to the collapse of several companies in the industry and the accusation of fraud against major entrepreneurs working in the area, is part of a natural movement of ups and downs in the market, but that the long-term trend of digital currencies is one of growth.
“Things move forward in leaps and bounds. There was a crash after the Internet boom in 2000. The bubble burst. All the internet companies had a crash. People were afraid to use their credit card on Amazon. They thought Google didn’t work. There was all kinds of bad things said about the Internet. And the Internet just grew and grew and grew. I think the same thing is going to happen with bitcoin. Over time, it’s just going to grow and grow and grow,” says Draper, one of the founders of venture capital firms Draper Fisher Jurvetson (DFJ), Draper Associates, Draper Venture Network, Draper Goren Holm, as well as Draper University, an educational institution for business courses.
The following interview was edited for length and clarity:
Bloomberg Linea: How did you view the collapse of Silicon Valley Bank (SVB) in March? Why did it happen and how did it affect venture capital firms in Silicon Valley?
Tim Draper: Trust is a big part of an economy. And when trust is shaken, you look for other alternatives. I have been telling the entrepreneurs I invest in to keep their money in at least two different banks. Ideally, one in the United States and one outside the country. And I also suggest keeping an amount of at least twice the payroll in bitcoins on your balance sheet.
What people don’t understand is that if you are a board member, you are personally responsible for payroll. And if you have the equivalent value of two or three payrolls stored in bitcoins, you can withstand the pressure. You have a couple of months to make adjustment decisions. And that is something that people are beginning to understand.
Hundreds of thousands of people could have been laid off immediately. A company could not continue to operate even one day in that situation. Our economy relies on all these people working.
How is the financial situation for startups now? Has it stabilized?
In some ways, yes. But in other ways, startups have seen that they need to be better prepared to face a crisis. This has taken their attention away from their main focus. I mean, the company wants to have confidence behind it so that it can build something of great value.
What other lessons can we learn from this crisis?
Uncertainty is always good for startups. Startups invent new things, develop new processes. And if the current process is not working - and clearly the banking industry, the government, the monopolies, are not working - then entrepreneurs end up bringing solutions.
In my view, bitcoin is one such solution. I think it has been proven that banks are not 100% safe. And people are not that comfortable with the banking system.
The government is even less secure, because it is centralized. We have central banks. Like anything centralized, somebody at the top of command can make a bad decision, and then they can cause what would be the equivalent of an earthquake in the economy and make everything shake.
What kind of opportunities do you see in the face of this recent banking crisis?
I would say that there is a lot of interesting and creative work being done around bitcoin and banking. A lot of entrepreneurs are coming to me in this regard, because of this crisis.
We are seeing opportunities in other areas as well. We are seeing opportunities in the space industry, in transportation, in personalized care in health, robotics, artificial intelligence. ChatGPT has made the world wake up to artificial intelligence. We have been funding AI companies for a long time. But now, suddenly, there is a lot of interest in this subject.
I would say that the world of entrepreneurship is about to enter a new renaissance. That’s going to be extraordinary. The next 10 years are going to be even more extraordinary than the Internet has been in the last 30 years.
In what way?
In the last 30 years, the Internet has transformed communications, the gaming industry, entertainment, media, many very large segments. But bitcoin, blockchain, smart contracts, artificial intelligence, they have the possibility to transform the biggest industries in the world. Banking, finance, insurance, commerce, government, real estate. These are all industries that are ready to be transformed. And these are even bigger industries.
The opportunities are even more vast for entrepreneurs. This is a very special time indeed. For venture capital, it’s a special time as well. The two-year period after a crisis is a good time for people to invest in venture capital.
You talk about bitcoin, but the currency had a sharp devaluation of 67% in 2022. Many companies in the industry have gone bust and entrepreneurs like FTX founder Sam Bankman-Fried are accused of fraud. Doesn’t that hurt confidence in the digital currency?
Well, bitcoin has almost doubled in value in recent months. We are going to see big ups and downs. A bitcoin is still worth a bitcoin. It’s just these other currencies that are volatile as they disappear from use. If you compare trust in government currencies and trust in bitcoin, you will see that trust in government currencies has been falling, while trust in bitcoin has been rising.
This is a long-term trend that has been going on. Once people can pay for food, housing, clothing, everything in bitcoin, they will no longer want to keep their savings in government currencies. They will keep only enough to pay taxes. And in the end governments will realize that it is a more honest system to receive taxes in bitcoin. They will want to do that too.
Was what we saw in the last year just a downturn?
Yes. Public confidence is going to fluctuate. It’s going to have ups and downs. But the long-term trend is up for bitcoin and down for traditional currencies. How much confidence do you have in your currency [the Brazilian real] today? Probably not much. You know they are going to have to inflate. Which means that the currency you have now is going to be worth less over time. But bitcoin is going to be worth more. The long-term trend is that it’s going to be worth more.
What are your expectations for the venture capital market this year? Do you see a chance of a recovery already?
It would be great. But it depends on the regulators. If the regulators want to regulate, which they usually do, this is going to be a prolonged recession. It’s going to be a bad time for venture capital. People are not going to want to put a lot of money into risky investments. But if regulators realize that to grow you have to deregulate, then things will go well. And it would be a much faster recovery.
It’s interesting that regulators tend to blame someone else for this situation. But they should look in the mirror. They kept us stuck at home [during the most critical phase of the pandemic, the time when Covid-19 infections and deaths skyrocketed, overwhelming the health care system, before the vaccine was developed], they shut down companies, then they printed money, and then they overreacted to inflation. All of that was the regulators. They did that. If they are smart, they will deregulate.
Some venture capital firms have raised more capital to invest in Latin America recently. Are you also in the process of raising more capital? And what kind of opportunities do you see today?
I am not allowed to say publicly if I am raising money. But there are many venture capital companies asking for funds, but not so much money being raised. It has been a tough period to raise money for venture capital.
In Latin America, in the boom phase, I saw a lot of venture capital firms looking for entrepreneurs in Latin America. I feel that they have now pulled back. This means that entrepreneurs will need to finance their growth with money from sales to their consumers.
How do you see Latin America as a potential market for investments in startups? Are you also looking for companies here to invest in?
We are investors in many companies in Latin America. We are early-stage investors in Rippio, BitPagos, we are investors in Lemon. We have a lot of interest in Latin America and in growth in Latin America.
Is there still potential for Latin America even in this scenario of less capital availability?
Yes. There are probably better returns for investors. Because there is less money available. But it’s going to be tough. Entrepreneurs are going to have to tighten their belts.
Is your visit to Brazil also related to this? Meeting startups with the potential to invest?
Yes, I am looking for startups, absolutely. At Draper University, we have a disproportionate number of Brazilians coming to us to build businesses. And Brazil is a major stopping point in our global competition on the TV show Meet the Drapers. So, yes. Brazil is very important to us. We are very excited. I have never been to Brazil. And I am excited to see Rio and São Paulo.
What can you say about the Meet the Drapers episode that you will film here?
We had thousands of entries. And now we have chosen four entrepreneurs to interview and evaluate during the show. The show now has something like 40 million viewers around the world. We are very excited about the success it has achieved. This is our sixth season and it is all filmed around the world.
Brazil is one of the 10 countries where we stop to meet entrepreneurs. And they are of a very high quality, because they have been vetted by our team. Our team interviews thousands of them before we choose the four we have in each program.
Translated from the Portuguese by Adam Critchley