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| By Chris Graebe |
Over the past several weeks, a lot of people have been asking themselves, “What do I do if my bank fails?” And, “Is my bank safe?”
That’s largely the result of the domino effect put in motion early last month …
On the morning of Friday, March 10, texts from people I know throughout the private equity community started rolling in.
The first came from a funding portal representative, breaking the news about Silicon Valley Bank’s imminent collapse:
“Have you seen this news on SVB? They are saying it's a ‘bank run’ situation.”
Just about everyone in the startup world knows Silicon Valley Bank. It served startups, venture capital firms and others in what it called “the innovation economy.” That is, before the feds stepped in over the weekend to take it over.
Now, everyone knows Silicon Valley Bank’s failure as the second biggest in U.S. history. And although the trouble extends beyond the private capital community, that was hit the hardest.
Soon after I received the first text on that fateful Friday morning, I reached out to a company I'd worked with to see if they'd heard the news.
Me: “Are y’all with SVB?”
Founder: “No, thankfully. Although several of our partners are. Rough day all around for them."
As I was typing a response, a message came in from another funding portal rep responding to the same question.
Me: "Y’all with SVB?"
Portal: “Yeah, but we moved all our money out yesterday. Many, many, many startup companies work with them. Don’t know of any fallout yet."
So far, things didn’t seem so bad. But then I remembered one of my favorite company founders, someone who has deep roots in the tech world.
Me: “Are y’all with SVB?”
Founder: “We were with SVB, unfortunately.”
Then the calls started to roll in. Some came from founders who were able to get payroll processed before SVB collapsed. Now they are scrambling to figure out their next moves. Other founders said how thankful they were that their current funding rounds hadn't closed. Which meant the committed money hadn't yet been wired to SVB.
The panic dial was turned all the way to 10. Obviously, the news of such a big bank failure is a big deal for all involved. Plus, this failure extends far beyond the funding community.
Of course, the Fed stepped in and covered all deposits. I had several founder friends sending me updates as they received them.
What happened? Here are just a few of the angles swirling about this disaster:
• The Old Debate: Bailout or Not?
• SVB CEO Sells Millions of Personal SVB Shares Days Before the Bank Collapse
Today, however, there is one very specific thing that I want to focus on that I believe is at the core of this entire mess. And for me, it all started on a podcast interview back in May 2020.
The Pride
Before the Fall
In the early days of the pandemic, a founder of a promising startup based out of San Diego asked me for an interview. As we wrapped up our podcast, I started asking some questions about this founder's journey.
I thought his company would be a great candidate for equity crowdfunding. I asked him if he had ever thought about raising money this way. But in a matter of seconds, the founder's countenance completely changed. You would think I kicked his dog by the way his voice and body language switched!
He explained to me that the day his company came into being, he had a very clear three-part plan:
1. Raise money from professional angel investors and venture capitalists.
2. Bank with Silicon Valley Bank.
3. Sell for a desired multiple to some private equity firm.
On one hand, I appreciated his vision. But, on the other hand, there was an air of arrogance and elitism. It was clear he believed raising money from retail investors was beneath him.
And as he shared that he would only bank with Silicon Valley Bank, he carried a level of pride in his voice that made me wonder if SVB was as arrogant as he was.
SVB was the 16th largest bank in the U.S. in terms of assets. Less than two years later, it’s the biggest bank failure since the Great Recession, and the second largest in U.S. history!
This Startup
Saw Trouble Coming
As the pieces started to come together over the weekend, I reached out to those in my network to make sure they were OK.
This led to another interesting text conversation with a good friend and founder who I deeply respect. And it confirmed my question above.
Me: “Are y’all with SVB?”
Founder: “We were, severed with them a couple years ago. They were terrible to work with.”
Me: “Was it an arrogance thing or just bad service?”
Founder: “Total arrogance. Banking is a commodity, and they approached it like they were something special because they worked with so many startups.”
In the end, Silicon Valley Bank failed because it had lost clients' confidence and there was a run on the bank.
Several factors contributed to these final moments before the bank permanently closed. But as you can see from this small sample of my texts, some customers saw past its prestige that so impressed that podcast founder I met a few years back.
A Lesson
in Humility
This is my opinion, but everything I’ve seen and heard suggests that SVB believed it had become untouchable. For any person, startup or even a bank, that's a scary place to be.
Ultimately, it was a contributing factor to its demise. In fact, in the startup investing space, the character of the founder(s) is just as important as the business itself.
If the people at the top don’t operate with humility, integrity, gratitude and grace, it doesn’t matter how great their ideas or how solid their financials are. These qualities provide a window into how they will handle themselves — and shareholders’ money — when the stakes are high.
In Silicon Valley Bank’s case, the stakes are huge for its depositors. TV streamer Roku (ROKU), for example, lost access to half a billion dollars. The company is already operating in the red after turning unprofitable last year and seeing its shares drop 82.2% in 2022.
SVB Sparks a Crisis of Confidence
& Potentially Some Changes
Regulators took control of the bank’s assets and announced they are starting to release access to funds that have been locked up. But my contacts have made it very clear to me: Confidence is shaken throughout the startup community.
The “typical” path of raising from VCs, banking with SVB and getting some extremely high multiple on an exit doesn't quite seem as clear of a path as it did about a month or so ago. This, I think, will open the doors for some great startups to walk through to equity crowdfunding.
I don’t know if there was any hope for my podcast buddy. But I can confidently say other startups are becoming even more open to the idea of being backed by the strongest investors: American retail investors.
Change is a good thing. It's not always fun how it happens, but I think we’re on the front of a wave of opportunity for retail investors like you and me.
You Are Part of History
as It’s Being Written
No matter what comes our way, let's make sure we stay humble as investors and keep our eyes open to founders who carry themselves with integrity and are willing to be transparent to shareholders.
Founders who are excited to open their doors to everyday investors like us, and who are not just focused on making more money for venture capital firms.
Again, history is being written right now, and we are in the front row for this amazing ride.
Just last week, I unveiled an opportunity in crowdfunding for a startup that’s well-positioned to disrupt a $100 billion industry. That deal filled in less than one day, which demonstrates just how popular these opportunities are.
With private equity crowdfunding, you no longer have to be an accredited, institutional investor. Click here to learn more about how you can invest in private equity.
Happy Hunting!
Chris Graebe
Editor, Deal Hunters Allliance
