SVB Failure Post Mortem / Rising from the Ashes

March 13, 2024

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Silicon Valley

I, Adam Spector, as a ~15 year citizen of “Silicon Valley” - better known as the mythical place where dreams become reality - the shocking failure of Silicon Valley Bank (SVB) requires a post mortem. What did everyone who considers themselves a citizen of this unique place do to create the failure? What can we learn? How can we mourn? How can we grow stronger from the ashes? 

[Note: part of the below message came from an internal post I shared with my team at levy the day after we spent the weekend working through these challenges on behalf of our clients]. 

SVB’s Collapse

The collapse of Silicon Valley bank is a shock to the entire startup ecosystem (and wider US economy). We are the main (and some could argue only) drivers of innovation and growth. This threatened a haircut of 10-20% of every startup and VC fund that used SVB. That is billions of dollars just sucked out of the ecosystem. Failure, without a bailout by the government, would set everything back (not just in tech but in the US) by years.

The government did what I personally view as the right and maybe only thing: it guaranteed 100% of depositors funds would be paid. This incurs no direct loss to taxpayers (although banking costs for everyone will go up). Equity holders in SVB will lose all of their equity. That is the risk any owner, in any business takes. More upside for more risk.

FDIC insurance is silly when it comes to businesses. It is great for individual/personal bank accounts but it makes no sense when many (most?) businesses hold over $250k in cash at any one time. There is zero chance a company would or could divide their holdings across more than 2-4 banks. Imagine if Apple tried doing this! 

Whose burden?

Those calling for startups/account holders to bear some burden: is it reasonable for any checking or savings account holder to imagine that their cash it at risk. If your bank is a US bank, it has become almost normal to assume that your bank is safe. Most startups were not hunting for higher returns via risky assets but simply receive venture funding, dropped it into a seemingly safe SVB account, and went back to building. Understandably, they did not spend much time vetting their bank (isn’t that the job of regulators?). Could they even have done so? 

Without the guarantee of all deposits by the government, the logical conclusion of every small business would be to bank only with the largest, most secure banks. This is also bad for every niche ecosystem (not just tech startups/Silicon Valley). Remember the “good ol days” when you could talk to your banker and they could trust you with a handshake? While more digital, that still exists (or did) in Silicon Valley and many other industries. JP Morgan Chase does not understand how tech startups work (as is evident by trying to fill out their bank account application which our team helped our clients with all weekend) and certainly will not care to do anything for the ecosystem. They are too big to care (and to fail).

Technology and Culture

SVB has for years underinvested in their technology (i.e. their app was horrible) but they were one of the critical cogs supporting the entire ecosystem. They had their hands in everything from banking, to debt (such as mortgages for startup founders but also corporate debt instruments), to events (as large sponsors). Their teams were well connected to everyone. Even with all the newer competitors, SVB’s loss will be felt as will the job loss of 8000+ smart, caring, dedicated SVB employees.

SVB did not do much “wrong.” There were strategic errors but they should not have been fatal. Instead, they were at the mercy of the “Fed” as much as any of us. They nearly doubled in size over the course of the pandemic (low interest rates + flood of capital) and then when the Fed raised rates faster than at [almost?] any time in history, they were stuck with unprofitable bonds. Should they have known? Maybe. Then again, no one really saw this coming (see every tech co that made massive layoffs over the past ~6 mos or most professional hedge fund investors who also lost a lot of money).

Ecosystem and Regulation

In many ways, SVB was a victim of its own creation. The ecosystem it nourished also killed it. Tech has enabled all of us, with an app on our phone, to move money worldwide in seconds. We can make a video telling our friends about our fear that is then spread virally by algorithms no one fully understands. 

On top of the tech that makes it so easy to have a run on a bank, SVB watered down regulation that would have otherwise protected it. Many libertarians in Silicon Valley cheer for fewer regulations. Regulations do get in the way and slow you down but it’s easy to forget that most regulation is in place to protect and, sadly, is there as a reaction to previous failure. The regulations SVB watered down were in place due to the dramatic banking failures in 2008. Now, more regulations will come in to fix the old. However, without regulation, we would not have the fertile ground on which to build our startups. 

As a foreign-born founder said to me shortly after SVB’s bailout was announced: this is why the USA is the best place to start a company. Starting a company in most other countries is fraught with far more risk due to the lack of regulation, lack of government protections, and graft. It is those very regulations and strong government that create the field for startup creation and success*. 

To anyone complaining about Silicon Valley getting a bailout, remember: we’re all in this together. Do you like your newest iPhone? Do you care that our military has better technology than adversaries? Do you like clean solar power or fresh drinking water? Everything today is technology, built by our smartest, highest-risk-taking, entrepreneurs. A weakness in the tech space is a weakness for everyone. 

From the ashes we will rise stronger

To conclude: SVB was a silent, mostly unheralded foundation upon which many of us built. That will be missed. 

From its ashes, new systems will rise. These systems will be stronger and more resilient. Tech’s impact on our lives will continue to grow at a rapidly compounding rate. That is scary but also exciting. I eagerly look to the future while taking a deep breath of gratefulness that I have the privilege of working in the United States with brilliant peers dreaming of a better future.

*Government can overreach and there should be a healthy play between regulators and those acting to remove regulation.

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