The Ugly Lessons of Silicon Valley Bank’s Collapse
At first glance, the Silicon Valley Bank debacle seems to be a cut-and-dried financial caper. The executives running the 16th-largest bank in the US made the wrong choices in handling what seemed a fortuitous situation—a roster of clients, flush with venture capital funding, handing over billions of dollars of cash for storage in the institution’s coffers. But the bank’s leaders misjudged the risks of higher interest rates and inflation. Pair that with a mini tech downturn, and the bank’s spreadsheets began turning colors. When word of its perilous situation got out, panicky depositors pulled their money. After a government takeover, everyone’s money was safe.
But although no depositor lost money, the saga looks like a traumatic event whose consequences will linger for months, or even years. Things happened that we can’t unsee. The SVB saga reminds me of what my wife, a true-crime reporter, says when people ask why she finds murder stories so interesting. A killing, she’d say, reveals the previously private, shrouded actions that define the way people live. In the course of investigating the crime, lives that looked ideal from the outside are exposed as unmade beds of secrets and lies.
Start with the bank. As has been widely reported—only now with a critical eye—Silicon Valley Bank was not only the bank of choice among Silicon Valley companies, but an ingratiating cheerleader for startup culture. The VCs and angels funding new companies would routinely send entrepreneurs to the bank, which often handled both company accounts and the personal finances of founders and executives. SVB would party with tech people—and vintners, another sector they were deep into. Some bankers had wine fridges in their offices. Salud!
Normally, you’d have to hold my family hostage before I became a banker—I picture the buttoned-up prig who hired Mary Poppins. But I might think differently if banking were a world of parties, high-end Cabernets, and elbow-rubbing with universe-denting geniuses who keep millions in the bank and take out mega-mortgages. By all accounts, SBV shared and perhaps amplified the freewheeling vibe of the swashbucklers it served. This is not what you necessarily want from a fiduciary. And as we learned this week, SVB’s CEO reportedly indulged in one of the worst things a founder can do—selling off stock when trouble lies ahead.
When that trouble arrived, we also learned a lot about the investment lords of the Valley who give founders the millions they need to move fast and make things. As word began to leak of SVB’s weaknesses, VCs who style themselves as tech’s smartest people had a choice: help bolster the financial partner holding the industry’s assets or pull funds immediately. The latter course would trigger a panic that would assure disaster for the startup ecosystem—but not you, because you were first in line.
Despite years of talk about how companies in the tech world are united in a beneficial joint mission, some of the biggest players went into self-preservation mode, essentially firing the starting pistol for a bank run. One notable bailout leader was Peter Thiel’s Founders Fund, which got an early sense of SVB’s troubles and advised all its companies to get out ASAP. As word spread, a classic bank run took shape, with other VC firms urging pullouts, until it was impossible to connect online with SVB to move funds. By the time a group of VCs came together to pledge support for SVB, its virtual doors were shut. In the mad rush to the lifeboats, hundreds of companies were stranded on deck. When the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank last Friday, with all activity frozen, those whose holdings in the bank far exceeded the $250,000 limit on insured accounts truly faced the abyss.