What Can Startups Learn?
The Silicon Valley Bank (SVB) collapse took many customers by surprise, but the San Francisco Fed saw it coming. Red flags included the bank’s reliance on low interest rates, borrowing from the Federal Home Loan Banks system and holding more than $200 billion in assets. Still, SVB’s collapse sparked panic among startups, many of whom relied on the bank. What can they learn from America’s third-largest bank failure?
Embracing Regulatory Compliance
A 2018 change to the Dodd-Frank Act — the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA) — meant banks with under $250 billion in assets could escape regulatory scrutiny. Previously, banks with just $50 billion in assets faced heavier regulation.
At the time of its collapse, SVB had around $208.6 billion in total assets. That’s technically not enough to incur the heavier regulations from the EGRRCPA, but it’s over four times the amount of assets that would have triggered changes under the previous iteration of the Dodd-Frank Act.
The lesson for startups? While many business owners view regulations as an annoyance, they often protect customers and businesses alike.
Establishing Risk Management
Silicon Valley Bank did a good job of managing risk by investing in U.S. Treasuries and U.S. Agency mortgage securities. These aren’t traditionally risky assets. However, SVB flew too close to the sun by investing most of its funds in assets with long maturities rather than those that mature quickly.
Therefore, when it came time for customers to withdraw their deposits, most of their money was still tied up in investments. SVB had to reluctantly give deposits back to customers at a huge loss. The collapse of SVB on March 10 and Signature Bank on March 12 triggered hardships among some tech startups.
Startup companies can take two lessons away from this. First, it’s important to choose banks carefully. Startups should research where banks invest their money. Second, new business owners should establish risk management frameworks for their own companies. It’s crucial to have diverse portfolios of investments and take calculated risks.
Putting Clients First
Banks have to make money just like any other business, but their customers are in a uniquely vulnerable position. Silicon Valley Bank focused heavily on turning a profit and put its customers’ needs on the back burner. As a result, it lost all of its clients in the long run.
Although fast growth is one of many startups’ main goals, it can’t come at the expense of its user base. All businesses should prioritize serving their customers while still earning enough to grow. A loyal, steady customer base is worth more than initial gains.
Cultivating Transparency and Accountability
Bank failures often unveil long-festering financial problems, poor management decisions or other undisclosed activities. They may come as a surprise to customers who have no reason to suspect anything is wrong, triggering panic and bank runs when people hear rumors of an impending collapse. Ironically, these very bank runs are often the final straw that triggers a bank to fail.
Startups should be transparent with their investors and customers alike. They must hold themselves accountable for mistakes, allowing customers and investors to decide if they want to do business with the company. Early admission of fault may sting for a while, but it allows startups to recognize their mistakes and fix them as soon as possible.
The collapse of SVB, Signature Bank and First Republic Bank marked three of the four largest bank failures in U.S. history, all of them occurring in the first half of 2023. They serve as cautionary tales for startups just setting out on their entrepreneurial journeys. Once money leaves a person’s hands, it’s a lot harder to control where it goes — and whether it will come back.
Devin Partida writes about investor technologies, big data and apps. She is also the Editor-in-Chief of ReHack.com.