March 15, 2023
The Story of SVB: A Cautionary Tale of Risk and Collapse
Everyone is watching and talking about the closing of SVB. Silicon Valley Bank (SVB) is a California-based financial institution primarily catering to the technology and innovation sectors. Since its founding in 1983, SVB has been a key player in the tech industry, providing venture capital, loans, and other financial services to startups, emerging growth companies, and established enterprises alike.
This is not a political issue but a business one
While several politicians have jumped on the bandwagon of blaming a “non-male, non-white” board, there is plenty of data showing that boards with people from different backgrounds may actually improve profitability and post better shareholder returns. This does not track the facts in this case. While ESGs (Economic, Social, Governance) investments do not fare well as some traditional investments, this does not appear to be the cause of SVB’s failure. See this article from Harvard Business Review to learn more about ESG’s.
Problems began with Tech Startups
In recent years, the bank has faced several challenges that have raised concerns about its long-term stability and viability. In particular, the collapse of several high-profile tech startups has led to significant losses for SVB, calling into question its risk management practices and its ability to weather economic downturns.
One of the most significant collapses that have impacted SVB was the failure of Theranos, a health technology startup that was once valued at $9 billion. SVB had been one of Theranos’ biggest lenders, providing the company with a $100 million line of credit. When Theranos’ fraudulent practices were exposed in 2015, the company’s value plummeted, leaving SVB with significant bad debt.
This loss was just the beginning of SVB’s troubles, as the bank also had significant exposure to other troubled tech startups, including Zenefits and LendingClub. Both companies faced scandals and regulatory scrutiny, leading to major losses for SVB and other investors.
These losses have raised questions about SVB’s risk management practices and its ability to assess the financial health of its clients accurately. While the bank has historically focused on serving high-growth startups and emerging tech companies, some critics argue that it may be taking on too much risk by lending to companies that have yet to establish a solid track record of success.
In addition to these challenges, SVB has faced increased competition in the tech banking sector. As more traditional banks and fintech startups move into this space, SVB may struggle to maintain its market share and retain its position as the go-to bank for tech companies. The large investment in government bonds, also played a large part in this collapse.
Creative Planning has a great explanation of how SVB set the course for failure in the interest rate boom. Creative Planning
Risk Management is the key
If you are keeping up with the news, I believe we all are looking at the need to view our banks as our partners and make good decisions about where to put our money. It’s easy to take the path of easy solutions when placing our business with a bank, knowing that banks’ practices are very important.
Risk management is the key here. The fed has been trying to tamp down the frothy inflationary culture, but with traumatized companies struggling to get short-term cash for payroll and bills, some think this might make them think twice about continuing to raise rates.
For ourselves, the biggest lesson is probably remembering to match our spending with the term of borrowing. Remember the basic rules of not taking out a 7-year loan for a car that is expected to last 5 years or putting anything on a credit card you can’t pay off immediately. Matching risk applies to all of us.
Find more information on SVB
‘Wokeness’ Killed SVB, Conservative Politicians Commentors Saying -no bad risk management bank run. | www.fortune.com
Don’t panic: The ‘too big to fail’ banks – yes, likely your bank – have ample liquidity. | www.usatoday.com
An Inconvenient Truth About ESG Investing | www.hbr.org