On March 10, 2023, Silicon Valley Bank was seized, an event that went beyond financial mechanics to scrutinize the very essence of venture capital's "founder-friendly" posture. While much attention focused on duration risk and uninsured deposits, the bank's collapse acted as a stark trial for how venture firms behave when markets sour.
In prosperous times, every firm touts its commitment to entrepreneurs, promising long-term alignment and "value-add" services. But when SVB fell, founders faced imminent payroll deadlines and trapped cash. The true test emerged: would investors step in with immediate liquidity, or would they leverage the crisis to demand steep discounts, punitive terms, or control through so-called "rescue" capital?
Crisis Exposes True Incentives
The immediate aftermath saw a flood of "rescue" capital offers, many structured to exploit founders' precarious situations with harsh terms and asymmetric control. This crisis stripped away the marketing gloss, revealing the underlying incentives of investors. As Khosla Ventures noted, "Crisis removes marketing — and exposes incentives."
Firms like Khosla Ventures reached out to over 100 portfolio companies, assessing immediate needs and offering bridges at their own cost of borrowing, particularly for lead or major investors unable to respond. This demonstrated a commitment to keeping payroll alive when cash was locked and deadlines loomed.
Alignment Means Personal Sacrifice, Not LP Capital
Genuine alignment, according to the firm, means VCs absorbing discomfort themselves, not outsourcing it through LP capital. Khosla Ventures offered "no terms" personal loans at their borrowing cost to portfolio companies, covering smaller firms or those with complex structures. They urged other large VCs, especially those collecting substantial fees, to follow suit.
The choice not to help, when a firm had the balance sheet, became visible. True venture assistance shines brightest during inconvenient, unglamorous, and expensive moments—when founders are sleepless and teams face dire financial straits. The reward is not profit, but ensuring the future builders are not unduly harmed.
'Value-Add' Redefined Under Pressure
The crisis also redefined "value-add." It wasn't about platitudes or Zoom check-ins; it was about rapid, no-strings-attached cash infusions. The expectation was simple: offer emergency funds without new documents, punitive terms, or leverage. Founders shouldn't have to shoulder that stress alone.
This starkly contrasted with investors who saw distress as an opportunity for leverage, demanding new documents, harsher terms, or simply ghosting desperate founders. While collective statements signaling confidence were easy to sign, actual wires of emergency capital were scarce. Too many firms acted as vultures in venture clothing.
Don't Blame Founders, Step Up
Amidst the hindsight, some suggested founders should have diversified treasury more aggressively. However, the focus should be on investor responsibility, not founder blame. Founders already navigate immense stress and risk; VC firms exist to absorb shocks and enable continued building. The crisis highlighted the need for VCs to be truly value-add, especially during challenging times for founder-friendly VC practices.
While the Federal Reserve has a role in backstopping depositors during systemic fragility, venture capital cannot rely on public intervention as a substitute for its own responsibilities. The real lesson founders should remember is their investor's true runway: their willingness to absorb risk when everything breaks.
