Greycroft Partners co-Founder and Chairman Alan Patricof joins Yahoo Finance Live to discuss the collapse of Silicon Valley Bank, how it will affect the banking industry, how investors are reacting, and the outlook for venture capitalists.

Video Transcript

BRIAN SOZZI: All right, let's stay, of course, on this. The venture capitalist community continues to reel in the wake of SVB's collapse. So what's next for these upstarts? We're joined by a pioneer in the VC space, Primetime Partner's chairperson and co-founder, as well as Greycroft co-founder and chairman emeritus, Alan Patricof. Alan, great to have you on here this morning. Just have to get your thoughts on the past couple of days we have seen in the venture capitalist community.

ALAN PATRICOF: Well, it's certainly been a roller coaster. It's provided, I would euphemistically, jokingly say, entertainment for a not very relaxing weekend. I mean, this is-- this, in a way, has been a long, long time coming.

I mean, it was-- it's been brought on by exogenous factors that have nothing to do with the basic fundamentals of venture lending, which is really what SVB, and Signature, and many other banks around the country, particularly in the West Coast, have been doing, which is lending to venture-backed early-stage startups, which are, by their nature, startups in high risk, with-- many of them without significant revenues.

And providing lines against those-- to those companies, which were, in my opinion, totally justified or totally explained-- that's a better word-- by their assumption that the venture capitalists who backed the equity of these companies, to whom the banks were extending lines, would come in and supply equity capital almost before the bank lines would be drawn down, or simultaneously with. And that, in the meantime, they were getting huge deposits from the financings these venture capital backed companies had done.

And it was really a kind of lending that in-- 40, 50 years ago, before SVB, would have been called senior preferred type financing. And SVB came in and invented a whole new concept of what they call venture lending, which was to make loans out of things that would have normally been senior equity.

So-- but that, in the end, isn't what-- in a way, what hit them. I gather it was because they went long on their maturity. And they couldn't deal with their short-term demands of these lines being drawn down. And it was-- it created a very dramatic, quick mismatch.

And, of course, they have the deposits of every one of these companies. And as has been stated, and is absolutely true, there are thousands of companies who have deposits with these banks, which are perfectly legitimate deposits. And the banks-- the deposit assets were perfectly fine. But all of a sudden, they're put in jeopardy because of the bank's own problems.

JULIE HYMAN: Right. And Alan, just to be clear here, you guys are based in New York, I believe. You know, but obviously, you're in the startup business as well. Did you guys have-- did you or any of your portfolio companies have money at SVB? And what now sort of happens to the wider community as a result of this bank going out of business?

ALAN PATRICOF: Well, you are asking me a question, which I've been in the venture business 52 years, and to say I don't have any investments that are affected by this would be ridiculous.

JULIE HYMAN: Right.

ALAN PATRICOF: We have-- going back 40 years ago, to when the SVB started, many of our companies took advantage of lines from these banks. And gleefully called down on those loans. And many-- and we have a portfolio. Fortunately, it is not-- Primetime is-- most-- I'd say almost all our companies have not drawn down on their lines.

So they're sitting there with deposits in these banks, for those who used any of these banks, and there was limited-- and limited size of deposits, and limited size of exposure. They are now in a position-- like every other venture-backed company that is expected to draw down on a line as part of their financing plan, are now going to have to-- and that's the key thing here now.

I mean, they're going to have to look for alternative sources of capital. Because my assumption is that this type of lending is going to change dramatically. And that banks are going to be very, very cautious about lending to early-stage startup companies, under the assumption that they're traditional "loans," if you will. And I think that it's going to open up the need for convertible debt financing from other types of lenders, or investors, I should say, or preferred stocks.

But it's going to-- it's going to take more of an equity characteristic to it and not require loan servicing and repayment, which traditionally venture-- the venture loans that were made by SVB, Signature, and all the others, by their character, required at some point. So I think that it's going to open up opportunities for new types of investors, or-- and at the same time, I am sure that the terms are going to become much more severe and more appropriate for the risks that are being taken.

They'll have a senior characteristic to it, that it will be a senior equity, rather than disguised as venture debt, unless there are-- there are firms that have venture debt, that have assets, and have revenues, and maybe profits. And where-- where the-- where the SVBs and Signatures were going to make a lot of their money was not just from the loans and the interest rates, but from the enormous amount of warrants that they got in each of these companies.

So when they made a loan-- extended a line, they were getting warrants, and they were also getting deposits. So, you know, as long as the system kept working, you know, it made-- it made sense. And that's why the banks were prospering in the market. Now it's all come home to roost, and for reasons that had really nothing to do with the fundamentals of the businesses. They didn't overnight change what-- what they were doing. It was really the banks' problems

BRIAN SOZZI: Alan, how concerned are you that what the Federal Reserve is doing, in terms of raising interest rates, and going back to see how far, they have raised interest rates already this cycle, how concerned are you that their efforts will make the situation worse?

ALAN PATRICOF: I-- look, I don't-- I don't have any insight, nor does anyone else on this show. I would guess that they would not raise. At this particular moment in time, I'd let things rest for a while. I'd let the banking system find a level that is comfortable-- excuse me-- that-- you know, the market's opening at-- it just evidently opened two minutes ago. I'm not watching the tape in any way.

We're going to see how the system adjusts to itself. I think a lot of people-- I'm certain a lot of companies are now going to test the ability to, A, get their deposits, to the extent that they need them, just to make sure that there really can access them. And secondly, people are going to test to see the lines they have really are there, maybe even if they don't need it. So there's going to be-- put pressure.

And I think the Federal Reserve has said they're going to make liquidity available so that a lot of companies-- let's say, a young company is-- in very early stage, losing several hundred thousand dollars a month, has a few million dollars in cash in the bank, my guess is they'll access their line, wherever the bank line is, and draw down some-- half a million, a million-- I would doubt whether they'd go-- draw their whole line down-- and see if really the wire transfer comes through.

And I think over the next several days that will probably give confidence that these lines are going to be met where they-- where they have been extended. I mean, the Federal Reserve does not guarantee-- is not going to assume the lines that are outstanding for SVB, or Signature, or anyone else. I mean, they're going to protect the deposits, which is the right place.

But if you had a line at any bank today, you're going to have to secure today to find out whether the line is really still good. And alternatively, if you don't, to seek some alternative type of financing, which may not be-- I would doubt whether it will necessarily be what we've called venture debt in the past.

BRIAN SOZZI: All right, we'll leave it there for right now. Primetime Partner's chairperson and co-founder, as well as Greycroft-- Greycroft co-founder and chairman emeritus, Alan Patricof. You're always gracious with your time for us. We appreciate it. Thank you.