4 lessons for founders from the SVB Crisis

As Recur Club encountered a distressed group of founders who had invested their personal and business funds in Silicon Valley Bank, LinkedIn updates began to flood in, detailing their desperate attempts to retrieve their money. Despite opening accounts with other banks and attempting to wire funds out, their efforts proved futile.

The downfall of Silicon Valley Bank, which had been the banking choice for more than half of tech start-ups, was not due to reckless investments or dubious cryptocurrency deals. Rather, it was caused by an old-fashioned bank run, triggered by a series of poor decisions made in 2021.

The collapse of this renowned bank occurred rapidly, beginning with : 

8th March : an announcement on March 8th that it had sold assets at a loss of almost $2 billion.

9th March :  By the following day, its stock had plummeted by over 60%, leading to concern from many VC funds who advised their portfolio companies to withdraw their deposits.

10th March : By Friday, the bank was declared insolvent as a result of the bank run, with the FDIC stepping in to take control of customers' deposits. This caused a wave of anxiety and uncertainty among the bank's clients, with the FDIC insuring deposits up to $250,000.

12th March : However, federal regulators approved plans to backstop depositors and other financial institutions connected to SVB. Anxious clients were reassured that they would have access to all the funds they had deposited with the bank, which was a significant relief given that over 90% of deposits exceeded the FDIC insured limit.

The FDIC has now put SVB into receivership and will auction off the bank's assets. So, what can we learn from the second-largest bank failure in US history? 

So, what are the learnable moments coming out of the second-largest bank failure in US history? With the most immediate crises from the Silicon Valley Bank run averted in as elegant a way as possible, founders can wipe the sweat from their brow and focus on what they learned that will protect them in the future : 

1. Proactive board members : 

It's important for board members to have a conversation this week with their colleagues about managing counterparty risk, as this is a crucial aspect of corporate governance that extends beyond just banking. To ensure the health of the business in all areas, it's imperative that board members discuss this matter with their CFOs or, if applicable, their treasury departments.

Board members need to be proactive and gain an understanding of how diversified and risk-averse the company's asset distribution is among different banks. This will enable them to make informed decisions and take necessary actions to mitigate potential risks and safeguard the company's assets in crisis like these. By prioritising risk management, board members can help ensure the long-term stability and growth of the business.

2.  Sharp crisis management communication skills :

When a business underperforms, striking the right balance between communication and transparency can be tricky. One must consider how much to communicate and when to do so.

In light of the Silicon Valley Bank's collapse, we must ask ourselves if they communicated early enough. Could they have restored trust by sharing information about the strength of their balance sheet as the market grew increasingly anxious and sought explanations for their loss? Perhaps adopting a phased approach to communication would have been more effective, rather than releasing all information at once and creating a massive unease among customers and investors.

As board members of private and public companies, we must learn from this experience and recognize the importance of not putting all our eggs in one basket. This age-old adage takes on a renewed significance as we reflect on the risks of relying too heavily on one bank or institution. Moving forward, it's crucial to diversify our assets and maintain a healthy balance sheet to mitigate potential risks and ensure the long-term success of our businesses

3. Online customers add to the domino effect :

The events at Silicon Valley Bank may not have caused a panic at most normal, midsize regional banks. Typically, banks sell assets and raise short-term capital without causing alarm among their customers. However, S.V.B.'s depositors are not your average clients. They are start-up founders and investors who pay close attention to risk, volatility, and scrutinize banks' securities filings. Most importantly, they communicate with each other regularly on the internet.

Once some tech insiders began questioning the bank's solvency, the news spread like wildfire through Slack channels and Twitter feeds, sparking panic among many people. Would this have happened if the bank's clients were regular small business owners like restaurant owners and dog groomers?

‍4. Specialists are non - negotiable when it comes to finance :

Having a venture capitalist on your board or within your network should not replace having a qualified CFO or equivalent financial expert who has a thorough understanding of financial regulations and can oversee the financial health of your key partners. While many VCs possess engineering, operational, or marketing skills, they may not be experts in finance and governance. The bank's collapse was triggered by a day of panic, primarily driven by VCs advising their founders to withdraw their funds quickly. However, for those who were paying attention, warning signs of the bank's underlying issues were visible weeks, if not months, in advance.
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To know all about the Aftermath of SVB Debacle, read here