The sudden collapse of Silicon Valley Bank (SVB), sent shock waves through the tech industry and stock market Friday, sending tech investors into a frenzy.
The 40-year-old firm was the biggest bank in Silicon Valley and was one of the largest in the United States. Friday's collapse is the largest bank failure since the global financial crisis in 2008, and second biggest in U.S. history.
O'Leary provided insight into the decisions that were made leading up to the bank's meltdown.
SILICON VALLEY BANK SHUT DOWN BY REGULATORS
"The management here bet billions of dollars when we had historically low rates basically sitting under 2%," he said. "They bought long paper and then all of a sudden the Fed jacked up the rates, their cost of borrowing was 4%. They were losing the spread, they were losing 30%. So they bought in all their old debt, lost $2 billion. Assume they can go to the market to raise it. Got a lead order from General Atlantic for half a billion. That's not enough. They were in a quiet period. They're not allowed to talk about it. And every one of our companies was pulling out cash by the millions. And they couldn't even make a comment because they're in a quiet period."
The United States Federal Reserve building in Washington DC, USA.
O'Leary described the actions he took Thursday ahead of what was to come.
"The first thing we did in our portfolio, yesterday was to go to all our CEOs and say, what's our exposure to Silicon Valley Bank right now? How much have you gotten out? How much are you leaving in, if any?" he said.
The "Shark Tank" star explained that SVB has long, deep relationships in the venture community. "We're fortunate we were able to get out all of it except $10.1 million," he said. "And that may sound like a lot of money, but in the context of a portfolio, luckily it's not that much. I don't know if we'll ever see that again."
O'Leary said he told all of his portfolio companies that he does not want to see more than 20% of any liquid assets in any one institution.
(Kevin O'Leary - Ting Shen/Bloomberg via Getty Images)
"People felt that way about Bear Stearns," he added. "They felt that way about Lehman Brothers. Banks blow themselves up all the time because of weak management or management mistakes. This happens. So you need diversification, not just of your holdings in terms of portfolio assets. You need institutional diversification."
O'Leary said that Silicon Valley Bank told many of these startups if they wanted to attract good loans, they had to have all of their deposits with the Silicon Valley Bank.
"So many of these startups, it took down 10, 20, 30 million from venture capitalists like me, put it all in that one bank to attract and get these loans from the Silicon Valley Bank, said O'Leary. "That was the hook they had. I think that should be made illegal. That's a marketing strategy, that force and over-concentration. And I'm sure the regulator will look at that."
O'Leary called the collapse an "absolute mess" and warned that this is an important lesson for every company, not just start-ups and not venture community.