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Perspective: The lessons of the Silicon Valley Bank failure

When the bank failed, political tribes took sides. Utah leaders, however, came together to find a solution

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A woman who was part of a line entering the Silicon Valley Bank’s headquarters pauses for a selfie in Santa Clara, Calif.

A woman who was part of a line entering the Silicon Valley Bank’s headquarters pauses for a selfie in Santa Clara, Calif., on Monday, March 13, 2023. The federal government intervened Sunday to secure funds for depositors to withdraw from Silicon Valley Bank after the bank’s collapse. Dozens of individuals waited in line outside the bank to withdraw funds.

Benjamin Fanjoy, Associated Press

Entrepreneurship is a journey that can be bumpy, sometimes lonely and always uncertain. Having a supportive financial partner is often what bridges the gap between an idea and a business. For some, financing may come from friends and family. Others slowly build their business at night while they work a full-time job. Some turn to investors to provide capital.

As a seed-stage venture capitalist, I meet with entrepreneurs in the earliest stages of their journey. Entrepreneurs come into our office, tell us about their business, and paint a picture of the world as it will be when they are successful. We fund individuals and businesses that have the potential to move the needle for a promising idea.

Firms like mine, Kickstart Seed Fund, provide capital in exchange for ownership in those companies. Often, we will join their board, a formal role that involves advising the company on strategy and helping them reach their goals. We also provide access to mentorship and resources — including trusted banking partners.

Often that trusted banking partner was Silicon Valley Bank, which believed in entrepreneurs and their visions, and trusted them enough to provide bank accounts and guidance, to be an ally on the journey to success. 

In my experience, Silicon Valley Bank was more than just a bank; it was a team made up of individuals with a passion for entrepreneurship and innovation. But as everyone now knows, things went catastrophically wrong for Silicon Valley Bank in recent weeks.

Banks are businesses that are fundamentally about managing risk, and to boost profitability they invest their excess deposits. Silicon Valley Bank had a lot of bonds in its portfolio, especially U.S. Treasury bonds which are considered very safe but pay low interest.

As the Federal Reserve raised interest rates to fight inflation, these bonds were less attractive and less valuable compared to new bonds that paid higher interest. The bank’s bond portfolio lost value and became unprofitable. Somehow the risk management department neglected to appropriately hedge against interest-rate risk. 

Last week, Silicon Valley Bank disclosed the sale of these bonds and the resulting $1.8 billion loss. It tried and failed to raise $2.3 billion through stock sales to cover those losses. Skittish shareholders did not respond kindly. The stock price dropped dramatically after hours on Wednesday.

The next morning I got a text message from the CEO of a company where I am a board member. “Just spoke with a close friend. One of their board members called to tell them to move their money out of SVB. What do you advise?”

I advised this entrepreneur to stay calm and to consider his long-term relationship with an institution that for 40 years had not only been a strong bank but a reliable partner to companies of all shapes and sizes. It had survived multiple macroeconomic cycles, including the economic crash of 2008. It had taken a loss, but was in the middle of an equity raise. I was optimistic that everything would be fine.

However, many CEOs were being advised to pull their money out of the bank.

And so on Thursday, we witnessed a full-on bank run, fueled by panicked phone calls and 280-character posts on social media. Less than 24 hours later, tens of billions of dollars had been withdrawn, the bank was placed in receivership under the Federal Deposit Insurance Corporation, and the trusted banking partner my industry had worked with for decades collapsed.

The news rocked the tech and investor communities, and seeped into the public consciousness, evoking images of Great Depression breadlines and full economic collapse. 

But the swift action taken by Utah government and business leaders demonstrated our ability to bond together in crisis, and ensure that innovation and progress will keep our economy thriving.

Since the collapse of SVB, many are asking who is to blame. One thing is clear, the CEO and board failed to hedge their interest-rate risk. In addition, people are finding fault in the strategy of providing services to startups, blame former President Donald Trump for rolling back provisions in the Dodd-Frank Act, and more. Some even claim the failure of Silicon Valley Bank is due to “woke” ideology.

I take particular issue with the idea that the bank’s failure is due to a focus on innovation. Silicon Valley Bank had a loan-to-deposit ratio of 42.8% at the end of 2022, which was among the lowest among its banking peers. This means that the bank lent out less than half of its deposits. While some may cite inherent risk in making loans to growing companies, SVB’s low loan-to-deposit ratio showcases a conservative approach to lending. 

In today’s ever-polarized environment, every moment becomes a team sport. Significant events occur and we rush to decide who is right and who is wrong. Reflexively, political tribes often take the opposite side of their opponents on any issue. But few things in life are so simple. Reality is nuanced and complex, and so is the failure of Silicon Valley Bank. The government has entities that will spend time analyzing and diagnosing the root cause, and while it is important to comprehend the full picture, it’s also essential that we don’t allow this incident to further divide us.

As is so often the case, Utahns found an opportunity in crisis and stepped up to lead. The polarized takes on social media read in stark contrast to the on-the-ground camaraderie and hard work that happened in Utah over the weekend.

Rather than infighting about who was safe and who was left exposed by the bank’s collapse, Utah’s tech community and government leaders banded together to find immediate solutions to help the hundreds of affected Utah companies find alternate sources of capital, make payroll for thousands of Utah workers and set up temporary backstops that would allow Utah’s innovation economy to move forward. 

The Treasury, Federal Reserve and FDIC issued a joint statement on Sunday evening that all Silicon Valley Bank deposits would be covered and made available immediately on Monday, which meant that the “Utah Backstop” was no longer needed. We had faced extreme uncertainty with coordination and focus, created an action plan, and were ready to proceed.  Utah’s stakeholders had each other’s backs and passed the test.

Banks like Silicon Valley Bank provide services to small businesses and local communities that big banks are often hesitant to serve. While the failed bank had “Silicon Valley” in its name, it served individuals and entrepreneurs globally, and in Utah and in other states.

Silicon Valley Bank offered tailored services and specialized guidance from experienced bankers who understood the nuances of a rapidly growing business that was venture-backed — an understanding that is often lacking in the larger banks. 

The premise of the American dream is the idea that anyone in the United States can achieve success and happiness through their own efforts and abilities, regardless of their background or circumstances. 

Utah has long been an incredible hub for progress and innovation. If we are to maintain that ground we must focus on enabling, supporting and nurturing the spirit of entrepreneurship.  

No doubt the next few months will continue to present challenges and opportunities for the Utah tech ecosystem and the broader economy. This past weekend offered a glimpse into Utah’s ability to resist panic and polarization and focus on helping each other. If we can keep doing that, we can be confident that the American Dream will stay alive in Utah for generations of pioneers and entrepreneurs to come.

Kat Kennedy is a general partner of Kickstart. Previously, she was president and CXO of Degreed, a company dedicated to changing how people develop skills, build expertise and grow their careers.