Much has been written over the past two weeks about the collapse of Silicon Valley Bank (SVB),so we thought it would be good to do a simple overview of some of the lessons entrepreneurs can take away from this “black swan” event. A “black swan” is defined as a high-impact event that is difficult to predict under normal circumstances but that in retrospect appears to have been inevitable. First let’s break down why this was a “black swan” event.
The high-impact event: SVB collapses, and the FDIC takes receivership on March 10, 2023.
It was difficult to predict: The 40-year-old SVB was the 16th largest bank in the US with $200 billion in assets. No one ever thought that the very venture capital firms that kept SVB growing would selfishly create a 1930s style run on the bank – unlike anything we have ever seen before, thanks to social media.
It appears to have been inevitable: SVB was a boutique bank that catered to the consumer tech industry. It was heavily influenced by 40-50 of the largest venture capital firms who tightly controlled, through investments, the majority of the bank’s depositors. It only took a handful of venture partners calling their portfolio CEOs to tell them to move their money out before the run was unstoppable.
Here are some unique takeaways:
Don’t rely on the “Too Big to Fail” myth. As we all learned in school, the FDIC guarantees deposits for up to $250,000 for each depositor. This does not mean per account but totaled across all accounts. This level of coverage has been in place since 2008 and was made permanent in 2010. I am sure this collapse will start a new debate on whether these limits should be updated to better reflect the times. Until that happens it is best to accept the rules and prepare by having your funds distributed over a variety of banks to eliminate an unnecessary risk. Given the banking technology that exists today, moving funds can be done easily on your phone. Pick larger, less regionalized, and more diverse banks to protect your valuable cash to reduce your risk. JP Morgan Chase, Bank of America, and Citigroup are the largest and most diverse, all with more than $2.3 trillion in assets, more than 10 times of SVB. Each of those banks are more than likely “Too Big to Fail” but don’t bet on it. Remember, that is exactly what they said about Lehman Brothers in 2008.
Do your own due diligence on any partners that are potentially a single point of failure in your business. This goes beyond your own banking relationship and into critical partners that you use for payroll, ecommerce platforms, employee benefits, ERP, payment processors, accounting systems, etc. In addition to the depositors, other companies were burnt from the secondhand impact of SVB’s sudden collapse. Many company’s employees woke up Friday morning expecting a payday deposit in their bank account as was usual every two weeks. But if you were using Rippling as your payroll processor, those deposits didn’t happen because your company’s payroll money was routed through a deposit account at SVB, without your knowledge, because they banked at SVB. Why did Rippling use SVB? Because Y Combinator, Sequoia Capital, and Kleiner Perkins were their venture investors and that is how it works.
Understand that only you have your own best interest at heart. We have all heard that those with the money make the rules. This is very true when it comes to the venture community. You and your company are first an investment that VCs hope to see at least a 10x return on over the next five years. Secondly, you are a person with a life and family. Remember that most VCs are independently wealthy and don’t need you or your start-up to succeed for them to be financially secure. Your success is more of a professional achievement that helps to build their resume for the next fund they raise. You on the other hand are risking it all and your success is knotted to both your financial security and professional career. Do your own diligence and make the best decisions based on that research. Any investor that demands you to do anything that goes against your own judgment is not someone you want to get near your business.
The SVB collapse was a disaster for many, but in the end turned out ok for the depositors thanks to the government backstopping all deposits. The management and equity holders got wiped out along with many bank employees who suddenly are without a job. Every “black swan” event is an opportunity to learn and hopefully make it more difficult for the next one to happen.
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