Silicon Valley Bank’s collapse is the story of a classic bank run, in which the announcement of a loss-covering share sale caused panic among depositors who could withdraw their money at unprecedented speed, but arguably its greatest strength was at the heart of its undoing.
Why it matters
Bank runs are as much about mood music as economics, and a reminder that this area of inquiry (like the layer of micro-economics that marketing occupies) is one of social networks and the proliferation of messages.
Which is the interesting thing about SVB: what made it successful in the close-knit world of technology also helped to engineer its downfall. Silicon Valley Bank held funds for half of all US venture capital-funded life science and tech start-ups.
That the relationship networks which might have talked up the panic were the very networks that had helped the bank to largely track the successes of tech is an ironic testament to the power of such a strategy.
What happened
For a proper run-down of the financial grit, read Matt Levine’s Bloomberg explainer on the topic, but for our purposes here’s the story in six steps:
VC-backed startups don’t tend to ask for loans from banks, and instead use banks to deposit the money from investors.
Floating rate loans (based on charging higher interest than the central bank base rate) are a vital source of profit for most retail banks.
In the absence of a large loan book, SVB had put most (56%) of its assets into long-term fixed-rate government bonds, a safe bet in an era of low interest rates.
As a result of higher interest rates, clients were depositing less and withdrawing more (to pay employees and pay for overheads).
Once interest rates rose, those bonds lost value and the bank needed to offload them at a loss of around $1.8bn. To plug this hole, SVB announced a stock sale to raise funds.
Panic takes hold as the bank starts to look financially shaky, while clients – many wondering how they’re going to pay their staff – start to take all their money out.
Herd thinking
SVB’s customer base is key to the story, as is the bank’s history with that community.
“SVB was like the cherished local market where people behind the counters know the names of their customers”, writes Sequoia Capital partner Michael Moritz in an eulogy published in the FT. “Before SVB sprang to life, it was difficult, if not impossible, for a start-up to secure a relationship with a large, established bank,” Moritz added.
Given that early-stage start-ups spend money very differently to profit-making companies, a deep understanding was critical to attracting young companies and their investors. Headquartered and named after the tech industry’s epicentre, the bank and that sector were profoundly, symbiotically aligned.
The reasons for a bank collapsing are usually multi-faceted, but Silicon Valley Bank’s particular predicament came down to two things:
Existing in the era of banks with great UX, which meant that withdrawing money didn’t require clients to queue up outside branches.
Servicing a tech community that is almost exclusively online and is organised around the influence (and money) of a relatively small number of individuals.
“Nobody on Earth is more of a herd animal than Silicon Valley venture capitalists,” writes Levine in Bloomberg:
“If all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other to Add Value and Be Influencers and Do The Current Thing by calling all their portfolio companies to say ‘hey, did you hear, everyone’s taking money out of Silicon Valley Bank, you should too,’ then all of your depositors will take their money out at the same time.”
The power of community
It’s not fair to say this all came down to its community – there were significant strategic and regulatory failures here, too, as well as some unhelpful scaremongering among some extremely high-profile figures within the community – but it’s a useful way of thinking about how one bank grew to service over half of an industry.
Community had once been a term for a social media following, explained the strategist Zoe Scaman on the Branding podcast last year. At its most powerful, however, it means a “real peer-to-peer interaction” that adds value both to the community and to the brand that engages with it. For a deeper dive into her thinking, check out Scaman’s substack.
The question for brands is, she argued, “How do you connect advocates to one another so that your role as a brand becomes ‘facilitator’ rather than ‘megaphone’?”. This can be in the shape of a feedback loop, practitioner cohorts, and a deep network, all of which SVB had done very well. Then the money ceased to flow, interest rates rose, and the music eventually stopped.
What’s interesting, of course, is how community thinking can apply to brands that are not quite so dependent on the confidence of a community of depositors in as tough times as banks. Confidence in the financial system appears to be normalising, but as the dust settles on the collapse of tech’s local bank, it’s worth saving the good lessons from the bad.
