There's no way of telling how much Stefan Kalb's startup, Shelf Engine, had deposited in the Silicon Valley Bank (SVB). After all, at one point, he loved working with SVB so much that he had invested much of the company's money in it. In recent comments, he has said that Shelf Engine had raised more than $60 million and that SVB held most of it. This isn't the only case, as the bank had earned a reputation of resembling more a startup than a financial institution, and that's why founders loved it.
Then, panic set in. When one company executive sent him a desperate message, Kalb had to act quickly and move as many millions as possible via wire transfer to another bank. Unfortunately, the transfer was still stuck two days after the bank's collapse. The impact of the bank's demise went beyond being able to transfer money from one bank to another – Shelf Engine needed the bank to survive, and so did thousands of other startups. As the dust settles, the world learns that, ironically, the fact that SVB's culture was so startup-like could've helped accelerate this crisis.
SVB had become an essential artery in the startup ecosystem within California and the country, at one point having involvement in funding more than 30,000 startups and being involved with around 50% of the startups in the country. People associated the bank with resilience, stability, and promise for forty years. It survived the 2001 dot-com crisis and 2008 financial crisis, then became a primary lender during the pandemic. In fact, on Wednesday, March 8th, 2023, the bank was solid. One day later, it wasn't. When it collapsed, it shed light on the fragility of non-traditional economic institutions and how company culture played an essential role in both the success and failure of SVB and in raising flags for the future.
The bank collapsed after a bank run in 40 hours, though the warning signs had existed long before these recent events. Some go as far back as 2019, and people ask whether they were good or bad decisions. At the time, they seemed right, and that's how complex the SVB collapse can sometimes feel. So we've created what could be considered the best explainer video of the situation, which we hope you enjoy.
SVB's history is filled with atypical stories vital to understanding what happened now. From its conception, the bank like to live in a scrappy way - going against the grain. Back in 1983, the bank came to life during a poker game. Bill Biggerstaff and Robert Medearis wanted to create a bank that would provide credit, banking services, and many other perks to the small, scrappy startup. Silicon Valley was on its way to becoming a technology hub for the entire world, and both founders had come to realize that such a financial institution was necessary. For years, the attitude would persist, helping the bank thrive.
It made little sense to traditional banks if a small startup wanted a boatload of cash to give them a loan. The risk was too high, and the payout could be massive, but it didn't come with any guarantee. So, startups turned to SVB, and it gladly delivered. Thus, small startups became one of the bank's most important sources of income and vice versa. At the same time, SVB also started seeking out more prominent companies, which still weren't desirable targets for traditional banks, and as the bank grew in popularity, big names like Pinterest, Fitbit, and Roku worked with them. The TV streaming provider, Roku, had around $487 million in the bank, but now, there's little to no certainty that it will recover it all.
Clients such as Roku were a particular target for SVB, as they posed a challenge. They could soon become so big that other, more traditional, banks would be interested in them. Now, we can see the great length that SVB went to woo those customers, and it also highlights one problem with these non-traditional banks. If there was one thing that SVB wanted to do right, it was to treat its customers like royalty. SVB offered financial guidance, loans, and credit cards. Still, it went one step further by providing fine wine, all-expenses-paid ski trips, and other benefits no other bank would offer. All this to companies handing in the balance, which could fail or make it big in days. That was the thing with SVB, they didn't want to resemble big names like Goldman Sachs and their cutthroat attitude. Instead, the bank had always wanted to embrace empathy towards the small scrappy companies. Unfortunately, believing so much in one client, and one client alone, meant all the eggs were in one basket, and now we know how it played out.
This obsession wasn't only about clients. Some experts say, and I agree, that this startup culture could've hampered the bank's chances to decide adequately and promptly. As an example, let's see how SVB ran internally and how it also affected its decision. The bank was fascinated by remote work, even when the rest of the world was already changing this paradigm. There's nothing wrong with remote work, but the devil is the details, and it could've played a big part.
During the bank run that would end SVB, the team was scattered across the country, with the CEO on the West Coast, sometimes as far as Hawaii, the risk officer in Washington, the president in Florida, and advisors in New York. The rest of the company was 100% remote, which would become a flaw for the bank. What's worse is that the bank had recognized in an annual report that its WFH culture could negatively affect its performance. All the while, this was a risk that the company was willing to take for its startups. From the outside, it looks like the riskiest move ever, but it made sense in the startup world. Still, its most prized customers, the small companies that relied on the bank to survive, are hanging perilously on balance.
For Kalb, and other founders like him, that culture might have gone a long way when securing funding. The promise of having someone like them makes them believe in their ideas, but now, the same appeal plays against them. As Silicon Valley Bank shuts its doors, thousands of startups are left wondering which will be the next bank that looks just like them, believes in them, and is different enough to provide stability.
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