At first glance, the Bank of Silicon Valley disaster looks like a sliced financial caper. Executives running the 16th largest U.S. bank made the wrong choice in what appeared to be a fortuitous situation — a list of clients on par with venture capital, handing over billions of dollars of cash for safekeeping in the institution’s coffers. But the bank’s management misjudged the risks of rising interest rates and inflation. Coupled with a slight technological downturn, the bank’s spreadsheets began to color. When it became known about the dangerous situation, depositors withdrew their money in a panic. After the government takeover, everyone’s money was safe.
But while no depositors lost money, this saga looks like a traumatic event whose effects will linger for months or even years. Things have happened that we cannot help but see. The SVB saga reminds me of what my wife, a true crime journalist, says when people ask why she finds murder stories so interesting. Murder, she says, reveals the previously private, hidden actions that define the way people live. During the investigation of the crime, a life that seemed perfect from the outside is exposed as an unmade bed of secrets and lies.
Start with a bank. As has been widely reported – only now with a critical eye – Silicon Valley Bank has been not only the bank of choice among Silicon Valley companies, but also an attractive supporter of startup culture. Venture capitalists and angels who fund new companies typically sent entrepreneurs to a bank that often handled both the company’s accounts and the founders’ and CEOs’ personal finances. SVB held parties with tech and winemakers, another sector in which they were deeply involved. Some bankers had wine refrigerators in their offices. Congratulations!
Normally you’d have to hold my family hostage before I became a banker – I imagine the buttoned-up hottie who hired Mary Poppins. But I might think differently if banking were a world of parties, high-end cabernets and running into global geniuses who keep millions in the bank and take out mega-mortgages. SBV appears to have shared, and perhaps reinforced, the free-wheeling atmosphere of the rowdies it catered to. This is not what you necessarily want from a fiduciary. And as we learned this week, SVB’s CEO has reportedly indulged in one of the worst things a founder can do — sell off shares when trouble looms ahead.
When that trouble came, we also learned a lot about the Valley’s investment overlords, who give founders the millions they need to move fast and build things. When word of SVB’s weaknesses began to trickle out, venture capitalists, who call themselves the smartest people in tech, had a choice: help shore up a financial partner holding the industry’s assets or pull out immediately. The latter course would cause a panic that would spell disaster for the startup ecosystem, but no youbecause you were first in line.
Despite years of talk about how companies in the tech world are coming together in a mutually beneficial mission, some of the biggest players have gone into self-preservation mode, essentially shooting the gun in the bank. One of the prominent leaders of the rescue was the Peter Thiel Founders Fund, which sensed SVB’s problems early and advised all its companies to exit as soon as possible. As word spread, a classic bank run took shape, with other venture capital firms clamoring for an exit until it became impossible to connect to SVB online to move funds. By the time a group of venture capitalists came together to pledge their support to SVB, its virtual doors were closed. In the mad rush to the lifeboats, hundreds of companies were on deck. When Silicon Valley Bank was seized by the Federal Deposit Insurance Corporation (FDIC) last Friday, all of its operations were frozen, those with bank holdings well in excess of the $250,000 limit on insured accounts were indeed faced with an abyss.