At first glance, the Silicon Valley Bank debacle appears to be a hard core financial caper. The executives of the 16th largest bank in the United States made the wrong choices by managing what appeared to be a fortuitous situation – a list of customers, teeming with venture capital funds, handing over billions of dollars in cash to store them in the coffers of the institution. But bank officials misjudged the risks of rising interest rates and inflation. Couple that with a mini tech downturn and the bank’s spreadsheets started to change color. When news of his perilous situation spread, panicked depositors withdrew their money. After a government takeover, everyone’s money was safe.
But although no depositor has lost any money, the saga looks like a traumatic event whose consequences will linger for months, if not years. Things have happened that we cannot ignore. The SVB saga reminds me of what my true crime journalist wife says when people ask her why she finds the murder stories so interesting. A murder, she would say, reveals the previously private and shrouded actions that define the way people live. During the investigation of the crime, lives that seemed ideal on 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 businesses, but a carefree cheerleader for start-up culture. VCs and angel investors who funded new ventures regularly sent entrepreneurs to the bank, which often managed both the company’s accounts and the personal finances of the founders and executives. SVB celebrated with technicians and winegrowers, another sector in which they were deeply rooted. Some bankers had wine fridges in their offices. Hi !
Normally you should have taken my family hostage before I became a banker – I guess the buttoned prig who hired Mary Poppins. But I might think differently if the bank were a world of parties, high-end cabernets, and nudges with geniuses of the universe keeping millions in the bank and taking out mega-mortgages. By all accounts, SBV shared and perhaps amplified the freewheeling vibe of the swordsmen he served. This is not necessarily what you expect from a fiduciary. And as we learned this week, the CEO of SVB would have surrendered in one of the worst things a founder can do: sell stocks when things go wrong.
When this issue came up, we also learned a lot about the investment lords of the valley giving founders the millions they need to move fast and get things done. As news of SVB’s weaknesses began to trickle in, VCs who presented themselves as the smartest people in tech had a choice: help bolster the financial partner holding the industry’s assets or withdraw funds immediately. This latest course would trigger a panic that would ensure disaster for the startup ecosystem, but not Youbecause you were on the front line.
Despite years of talk about how companies in the tech world are united in a beneficial joint mission, some of the biggest players have gone into self-preservation mode, essentially firing the starting gun for a bank run. A notable bailout leader was Peter Thiel’s Founders Fund, which had early insight into SVB’s problems and advised all his companies to get out as soon as possible. As the news spread, a classic bank run took shape, with other venture capitalists request withdrawals, until unable to connect online with SVB to transfer funds. When a group of VCs got together to pledge of support for SVB, its virtual doors were closed. In the mad rush for lifeboats, hundreds of companies were stranded on deck. When the Federal Deposit Insurance Corporation (FDIC) took over Silicon Valley Bank last Friday with all business frozen, those whose holdings in the bank far exceeded the $250,000 limit on insured accounts really faced the challenge. ‘abyss.