The collapse of Silicon Valley Bank has long tentacles.
Last week, I wrote about how the failure of SVB could have been avoided by not narrowly focusing on specialized markets such as tech startups and VCs. The SVB debacle also highlights the incredible value of building trusted global networks of experienced leaders who will pitch in during a crisis.
Since then, we’ve seen the financial markets roiled by the SVB crisis and its impact on both regional banks such as First Republic Bank as well as larger financial institutions such as Credit Suisse.
As the wide-ranging effects of the SVB situation continue to play out, we asked Michael Keithley, CIO at United Talent Agency, to share his insights on the SVB crisis and the ramifications for CIOs at our National Advisory Board meeting on March 17th. Not only is Michael a top-tier business technology leader, he’s also a start-up advisor, a limited partner at GTM Capital and a CXO advisor at leading venture capital firms such as Greylock Partners, Lightspeed Venture Partners and Sequoia Capital.
As Michael shared in his presentation, Silicon Valley Bank “built a franchise around the Silicon Valley startup ecosystem, and they really catered to an ecosystem in ways that no other banks did. They catered to the startups, the founders themselves, their employees, their families, the venture capital firms, virtually everything in that whole ecosystem.”
Although the bank was very successful over the bulk of its 40-year run – deposits rose a whopping 86% in 2021, which is unheard of in the banking industry – as startup capital began to dry up and venture investments fell by one-third in 2022, SVB began to lose deposits from its clients. Meanwhile, the value of the 10-year treasuries and 30-year mortgage securities that it bought when money was cheap also began to tank, Michael explained.
“And then on March 8th, SVB announced that they had sold a chunk of their holdings at a loss. In my opinion, the fatal mistake was also announcing that they need to sell additional assets at a steep loss,” Michael shared. “Had they sold these assets already, and then told the world about it after the fact, then we probably wouldn’t be where we are right now. But clearly that sparked fears about the bank’s solvency, and it led to a good old-fashioned bank run, resulting in $42 billion withdrawn on March 9th. By March 10th, the funds were frozen and over the course of the following weekend, this led to panic in the Valley.”
“It took four decades to build Silicon Valley Bank into what it was. And it took just 36 hours to dismantle it,” said Michael. “When you think about it, technology enabled this this flash bank run. I think history will reveal this to be the first Twitter-driven bank run. This facilitated news about the situation in lightning speed around the world. Add to this that you have an ecosystem of startup people and venture capitalists who are very tech-savvy and connected. Once customers became spooked, they whipped out their phones, opened their banking apps and within a few taps and swipes, $42 billion was gone within a matter of hours.”
In Michael’s opinion, the demise of Silicon Valley Bank will put a damper on innovation in the enterprise. “Startups will face new fundraising challenges and effectively higher-priced loans,” says Michael. Basically, the cost of capital is going to be higher for them.”
As Michael notes, robust financing is critical, especially in the early-to-mid stage for startup companies because they only reach profitability when they get to a certain scale.
“These companies would otherwise have a really hard time getting a line of credit or a loan from traditional bank,” says Michael. “And that’s just going to be not possible now. This is going to lead to a void. And someone’s going to need to fill this void. But I think that’s going to take a while. Big banks just don’t have the risk appetite to invest in early-stage, VC-backed startups.”
While we wait to see how that void is filled, Michael believes we will see widespread consolidation among startups as capital funding becomes even more difficult to obtain. “The amount of cash that companies had to operate was already challenged before this happened and now is just going to exacerbate these conditions,” says Michael. “I think that this crisis will create a lot of buying opportunities for consolidation.”
I deeply value the insights that Michael shared with our National Advisory Board, and it was, as you might expect, a very engaging discussion.
To learn more about HMG Strategy’s National Advisory Board and to become an Advisory Board member for one of HMG Strategy’s regional CIO and CISO Summits, contact Melissa Marr at melissam@hmgstrategy.com.
