The dramatic collapse of Silicon Valley Bank (SVB) in 2023 not only sent shockwaves through the financial world, but it also had significant consequences for startup companies in the U.S. and abroad. For many founders and their venture capital backers, SVB was the bank of choice. As entrepreneurs look to navigate the post-SVB landscape, they can glean valuable insights from the bank's collapse. This blog post will discuss the lessons entrepreneurs can learn from the second-largest bank failure in U.S. history.
How did SVB collapse?
SVB's collapse can be attributed to a combination of factors, including its aggressive pursuit of higher investment returns, the Federal Reserve's interest rate hikes, and a resulting bank run. In an effort to maximize investment returns, SVB significantly increased its holdings of long-term securities over 2021. However, the market value of these bonds decreased as the Federal Reserve raised interest rates to curb an inflation surge, causing substantial unrealized losses on the portfolio.
As borrowing costs rose, some SVB clients withdrew funds to meet their liquidity needs. In response, the bank announced that it had sold over $21 billion worth of securities and borrowed $15 billion, in addition to holding an emergency sale of treasury stock to raise $2.25 billion. This announcement, coupled with warnings from prominent Silicon Valley investors, led to a bank run in which customers withdrew a staggering $42 billion.
On March 10, 2023, the California Department of Financial Protection and Innovation seized SVB and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC). Ultimately, the FDIC reopened the bank as a newly organized bridge bank, Silicon Valley Bridge Bank, N.A., with the aim of auctioning off all or parts of the bank.
Lessons for Entrepreneurs
Diversify financial relationships
The collapse of SVB highlights the importance of not relying too heavily on a single financial institution. Entrepreneurs should consider diversifying their banking relationships to reduce the risk of being negatively affected by the failure of a single bank.
Have a contingency plan
Entrepreneurs should develop contingency plans to ensure they can continue operations in the event of a financial crisis or bank failure. These plans may include maintaining relationships with multiple financial institutions, having access to alternative sources of capital, and regularly reviewing and adjusting financial strategies.
Monitor macroeconomic trends
The increase in interest rates and inflation played a significant role in SVB's collapse. Entrepreneurs should stay informed about macroeconomic trends and be prepared to adapt their business strategies accordingly. This may involve adjusting pricing, managing cash flow more conservatively, or seeking alternative sources of financing.
Prioritize financial stability
The aggressive pursuit of higher returns led to SVB's downfall. Entrepreneurs should prioritize the financial stability of their business over short-term gains. This may involve maintaining a healthy cash reserve, avoiding excessive debt, and focusing on sustainable growth. In the late 1990s, Amazon focused on sustainable growth and prioritized financial stability, avoiding the fate of many dot-com companies that collapsed due to unsustainable business models.
Build strong relationships with investors
In times of financial uncertainty, having strong relationships with investors can be crucial for entrepreneurs. Building trust and maintaining open communication with investors can help ensure continued support during challenging times. During the early days of Tesla and SpaceX, Elon Musk maintained strong relationships with investors such as Jason Calacanis, which helped his companies secure funding even during challenging times.
Be prepared for the unexpected
The collapse of SVB serves as a reminder that even seemingly stable institutions can falter. Entrepreneurs should always be prepared for unexpected challenges and have contingency plans in place to mitigate potential risks.
As an entrepreneur, navigating the uncertainties of the business world can be challenging. However, adopting a proactive approach and staying adaptable can significantly enhance your resilience against financial crises. Embracing these qualities will not only contribute to the long-lasting success of your venture but also foster personal growth in the dynamic world of business.
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