The Silicon Valley Bank Story No One Has Told

It’s almost an eerie coincidence.

Nearly three years to the day that the World Health Organization declared the novel Coronavirus a global pandemic, Silicon Valley Bank collapsed. The mass exodus of deposits that fled the bank in the 48-hour period between the time that SVB filed its 8K and the time the FDIC shut it down gave Americans a real-time view of what happens when there is a run on a bank.

Except this time, the bank run was led by the CEOs and founders of startups who are using technology, data, the cloud and payments to change the world —  worried that their deposits would vanish.

Ironically, the venture capitalists behind many of these startups stoked the bank run that brought SVB to its knees. Between 2020 and 2022, Silicon Valley Bank’s deposit base nearly tripled, growing from $60 billion in 2020 to roughly $175 billion in 2022. Flush with cash, VCs poured capital into startups with big ideas who found SVB much more eager to do business with them than traditional, risk-averse banks. In many cases, banking at SVB was part of the terms and conditions for getting loans. SVB claimed it banked 50% of U.S. startups, and no one doubts that it was the main bank for tech startups.

To protect their investments, VCs sent mass emails to their portfolio companies on Wednesday and Thursday of last week to pull their deposits. Some very quick-on-the draw startups managed to do that successfully. For most, the weekend was one filled with uncertainty about if, when and how much of their deposits would be recovered.

An auction by the FDIC of SVB assets on Sunday failed to produce a buyer. Shortly thereafter regulators said they would release all funds to SVB depositors today (March 13). SVB’s balance sheet will be used to make depositors whole in an effort to keep the contagion contained and restore confidence in the financial system, regulators said.

However, that contagion has already spread to another bank. NYDFS Superintendent Adrienne Harris said that her agency took over Signature Bank yesterday (March 12) in an effort to protect depositors. The $110.6 billion bank which banked crypto companies was declared insolvent. That situation continues to develop.

Today, Silicon Valley Bank is no more. Many stories have been written about the shoddy risk management of SVB’s CEO and executive team, their glaring blind spot to the obvious shift in startup market dynamics, the regulatory shortcomings that gave SVB the wiggle room to operate more aggressively, and the obvious client concentration risk that drove the depositors’ rush to liquidate and that ultimately caused the FDIC to declare it insolvent.

Here’s a story that hasn’t been told.

When COVID Moved In, Innovators Stepped Up  

Where were you when the world shut down in March of 2020?

Everyone remembers that day. No one was prepared to navigate the palpable fear of being exposed to a deadly virus that was spreading uncontrollably and the abrupt, overnight shutdown of the physical economy. I remember walking home from the PYMNTS office in downtown Boston during the early afternoon of March 27th past shuttered storefronts — I was literally the only person on the street in a part of town that was always vibrant, bustling and filled with office workers and tourists. It seemed surreal, like being in a movie about the apocalypse — except without the lights, camera, action and Hollywood producer.

Almost overnight, the world was forced to shift dramatically to digital — and all the inertia on the part of consumers and businesses to adopt digital ways to access and pay for products and services simply disappeared.

Innovators that had spent the better part of the last decade paving the path to a more digital and mobile economy became the world’s lifeline. Mobile phones, easy-to-use apps, websites and digital payments made that digital shift less onerous and more age-independent. Many seniors went online for the first time and were able to get food and medicine delivered to their doorsteps — a tribute to the efficiency of the technology and the seamless user interfaces and experiences those innovators had created. Businesses reprioritized investments in digitizing the office of the CFO to pay their people and their vendors, collect payments and monitor cash flow.

We all shudder to think how things might have turned without the efforts of those innovators — and the investments made in them by VCs and strategic partners years before the Black Swan called COVID swam into our global waters.

Naturally, those whose businesses and business models were natively digital saw their business shoot up and to the right. Those whose weren’t partnered with startups to fast-track their own digital shift. Still others reprioritized their own internal digital transformations. Government stimulus for consumers and businesses drove consumer spending and kept the lights on at many small businesses. Digital payments took off, and the payments ecosystem flourished. New businesses emerged to capitalize on the newfound consumer and business appetite to become digital. The collective focus was on using tech, the established payments and financial services ecosystem and connected devices to eliminate the risks and uncertainty of doing business in the physical world.

Three years later, the physical economy has reopened for business — but digital is now embedded in the DNA of consumers and businesses.

Consumers may have returned to stores, but PYMNTS data suggests that just as many continue to shop online as they did during the pandemic. Despite Census Data reporting to the contrary and pundits poo-pooing the pandemic digital shift as a blip, PYMNTS analysis shows that the pandemic did, in fact, accelerate the online shift when it comes to retail shopping and spending, making it a durable part of the consumer’s day-to-day.

The physical world is now an extension of our shift to digital, not just another channel — whether we are working from home, ordering groceries, banking or watching a movie. High earners and younger consumers are the most digitally transformed, but digital’s reach and impact are relatively consistent across the population in the U.S. — and becoming that way in every other part of the world. Embedding payments and credit into these digital experiences offers choice and eliminates friction for consumers and merchants. For others, it creates an important and inclusive onramp to the digital economy.

Businesses continue to digitize their payables and receivables processes, moving away from paper processes and payments. Whether it is disbursing instant digital payouts to consumers or businesses, making vendor payments at scale more efficient for payors and payees, moving the industrial economy business online or creating new business payments networks to make payments between buyers and suppliers more efficient with greater choice, the conversations about ditching the paper check are not about “if,” but “how” and “how fast.”

Thanks to innovators — who until late Sunday night were pondering their own futures in the wake of SVB’s collapse — there is no going back to party like it was in 2019. The world is not digital-only, but it is very clearly digital-first, here in the U.S. and almost everywhere in the world.


Hubris Inside the Echo Chamber Got Louder and Innovators Lost Their Way

Well before SVB shuttered, startups — and FinTechs in particular — were navigating a different existential crisis.

The pandemic-fueled digital shift turned the startup funding crank to unprecedented levels. Investors, fearful of missing out on the “next big thing,” threw caution to the wind and produced term sheets in a matter of days just to get the deal. Sequoia Capital and its investment in FTX is the poster child for that behavior, but that VC had plenty of company.

As a result, startups raked in funding with great-looking decks and lofty valuations.  More startups followed, and then more after that. Customer acquisition was the name of the game, and VCs gave startups the checkbook to play that game.  What’s wrong with spending $500 to acquire a customer that might churn three months later? Nothing, if instead of the viability of the business and business model, the KPI (key performance indicator) is the number of accounts.

Or changing the world.

As in literally changing the world: To live in the metaverse, pay using cryptocurrency, mint NFTs and use them as cornerstones of a new digital economy, transacting over decentralized, permissionless networks that were smart because developers said they were.

Who wouldn’t be tempted to invest in the face of compelling data? A 2022 McKinsey report said that by 2030 — a little less than 7 years away — the metaverse could be valued at $5 trillion with big consumer use cases in banking, retail and eCommerce. In 2022, $120 billion was plowed into metaverse companies, up from $57 billion in 2021 and $29 billion in 2020.

In January 2022, NFT Marketplace Open Sea raised $300 million on a $13.3 billion valuation. Chainalysis now reports that the size of the NFT market at the end of 2022 was $44 million. Pundits say that those who got in the NFT game early did well. How insightful.

Crypto is the poster child for the investor craziness and funding bubble. An odd bundle of technology, a business model, and ideology, cryptocurrency enthusiasts have been claiming it is going to change the world for thirteen years and counting, with frequent twists and turns on just how it is going to do that. Crypto startups attracted $30 billion of VC capital each year in 2021 and 2022. Then crypto trading fueled by speculation plummeted, exposing FTX and other crypto fraudsters and revealing the instability of stablecoins.  Most recently, Circle’s USD coin broke peg on Saturday when it was disclosed that more than $3 billion of capital is tied up at SVB. A crisis in confidence produced a run on USD, and its future remains cloudy as company executives publicly calm currency holders and its prospects for recovering its money at SVB grow more certain. Before the FDIC news, Circle had recovered from its low of $0.88 and was trading under a dollar at $0.9717. This morning, it was trading at $0.9895.

These dynamics created a startup ecosystem that became highly interdependent on the success of each other to stay in business. Startups became service providers to other startups whose VC-powered bank accounts drove sales to complementary businesses who counted these startups as their customers. The herd mentality ruled — what one VC did was good enough for the other. VCs invested in similar businesses to grow the pie and then consolidate share later. And as we know, half of those startups banked at SVB.

The herd mentality became infectious outside of the startup ecosystem, leading other businesses to divert time and money away from initiatives that solve real-world problems and toward things that possibly never would. If VCs were investing billions into these things, why shouldn’t they?

So the beat went on. Capital was plentiful and, for a while, cheap. In 2020 and 2021, VCs that wanted to take the time to do more diligence found themselves on the wrong side of a deal, so they didn’t. Businesses that couldn’t show scale at speed and at all costs found themselves on the wrong side of getting funded.

Everyone knew, of course, that the decade-long streak of free and easy money and low inflation was destined to end, and that the valuations of businesses with no easy path to profit couldn’t be real. And that the consumer was unnaturally strong because of the lasting effects of the stimulus money and low unemployment. And that businesses without a “there” there wouldn’t survive.

Seasoned and serial entrepreneurs who had seen this movie in 2008 or the early 2000s recognized the warning signs flashing early in 2022 and started their own pivot to profitability. Many others didn’t until they were forced to.

Until March 10th 2023, alive and well in their own Silicon Valley echo chamber, SVB believed that there would forever be more money, more funded startups to replenish those who may have washed out or burned cash to take themselves out, just like always. IPOs and big paydays were right around the corner. How could they not be?

Had the FDIC not prevailed, SVB’s collapse would have hastened the failure of some of the startups that bank there, those who likely wouldn’t have made it anyway. For a while, they will live to see another day.

The larger tragedy would have been the hit to the innovators with great businesses and solid business models with real prospects for profitable growth and scale. The ones working the phones last weekend trying to figure out whether they could survive without the capital they needed to run their businesses and the infrastructure they used at the bank to power their businesses and support their clients. Happily, they will live to see another day, too.

The Lessons to be Learned

Looking back over the last several decades, there is one thing we know for sure. Entrepreneurs have come up with powerful ideas that have enabled them to build businesses that make the everyday lives of people and businesses so much better while building fortunes for themselves and their investors.  That’s the American dream — and what makes our economy and our country the envy of the world and inspires innovators to dream those dreams.

We also know that the digital transformation is in its early years of sweeping through the traditional economy. PYMNTS research of 15,000 consumers in 11 countries every quarter over the last year shows the breathtaking adoption of digital — even though, as a global economy, we are not even a third of the way to having digital become a part of every one of the 37 routine activities we track.

Sudden twists and turns take us to a new level. That appears to be the case with AI which, as others have said, has reached an inflection point. As infatuated as we are now with ChatGPT, the potential for AI to improve outcomes in business, in healthcare, in the industrial economy, in credit and lending — in every facet of our economy — is breathtaking in its potential.

More so than I can remember, today tech investing seems to be driven by hype and buzzwords, with too little thought into whether startups have a plausible solution to a real problem that people and businesses have and that can lead to enough demand to sustain a profitable business.

It’s time to go back to serious analytical work, to frameworks for assessing the probability and profitability of innovation, at scale, in a timeframe that is relevant for people and businesses. I’ve written about the value of such frameworks many times, and developed many of my own. Our FIT framework and ignition frameworks have helped guide our view of innovation over the last two decades. It’s why we said in 2014 that Apple Pay’s innovative digital wallet would be slow to adopt and ignite, why merchant-driven payments schemes are dead on arrival, and why Early Warning’s digital wallet probably is too.

There will be backlash in the aftermath of the SVB and Signature Bank failures, hearings on Capitol Hill and everywhere else in the world. There will be recommendations to tighten the regulations that allowed SVB to operate without adequate risk management controls.  President Biden has already said that “those responsible” for the SVB collapse will be held accountable.

A harder issue, though, is how to address the herd mentality — and the echo chamber — which accentuates risk and makes it unpopular to take the opposite view.

An unfortunate outcome of the collapse of two banks whose demise was the result of their own bad decisions would be to have the herd mentality shift to putting the brakes on funding good startups with great ideas more generally. It would be a shame for investors to think that the bloom is off the digital rose just because their big bets on bad moonshots, perhaps deservedly, never got off the launchpad.

Instead, I hope we set aside the metaverse for innovation that solves real problems in the real world.  Innovation that doesn’t seek to literally change the world in which we live, but to make living in the one we have better, healthier, smarter, more diverse and equitable.