Four Lessons for Startups from SVB Shutdown

Here are four key lessons for startups I have extracted from the shutdown of Silicon Valley Bank (SVB).

Four Lessons for Startups from SVB Shutdown

About 10 weeks ago I published a recap post on the Mar-10-2023 takeover of Silicon Valley Bank by the FDIC called “Silicon Valley Bank (SVB) Shutdown – a Recap.” This post is a follow up where I offer four key lessons for startups.

1. Bank Failures Are Normally Rare, But They Can Swarm

Initially viewed as the result of poor management–and by the FDIC’s own admission poor regulatory oversight–the problems that triggered the collapse seem less specific to SVB and more pervasive. There were three significant bank failures in 2023 (so far, based on FDIC Rep0ort “Bank Failures in Brief Jan-May 2023” )

Bank Failures Jan-May 2023
Bank Name, City, ST FDIC Release Closing Date Est. Assets
First Republic Bank, San Francisco, CA PR-034-2023 May 1, 2023 $229 Million
Signature Bank, New York, NY PR-021-2023
March 12, 2023 $110 Million
Silicon Valley Bank, Santa Clara, CA PR-023-2023
March 10, 2023 $209 Million

To put that in context, of the ten largest banks that failed between 2001 and 2023, the second, third, and fourth largest to fail did so in 2023. Their total assets (548,500 millions) exceeded the combined assets of all the banks that failed in 2008 and 2009 (545,498 million). If you adjust for inflation (see Wikipedia list of worst bank failures) you would add 30% to the 2008-2009 losses, putting 2023 at the same magnitude but not larger. I don’t think the current environment is nearly as bad as the 2008-2001 recession but 2008 points to one possible near term future.

Ten Largest Bank Failures 2001-2023
Bank Name, City, State Closing Date Approx. Asset (Millions)
Washington Mutual Bank, Henderson, NV 25-Sep-08 $307,000.00
First Republic Bank, San Francisco, CA 1-May-23 $229,100.00
Silicon Valley Bank, Santa Clara, CA 10-Mar-23 $209,000.00
Signature Bank, New York, NY 12-Mar-23 $110,400.00
IndyMac Bank, F.S.B., Pasadena, CA 11-Jul-08 $32,010.00
Colonial Bank, Montgomery, AL 14-Aug-09 $25,000.00
Guaranty Bank, Austin, TX 21-Aug-09 $13,000.00
Downey Savings and Loan, Newport Beach, CA 21-Nov-08 $12,800.00
BankUnited, FSB, Coral Gables, FL 21-May-09 $12,800.00
AmTrust Bank, Cleveland, OH 4-Dec-09 $12,000.00

Here is a list of number of bank failures and total assets held by year they failed.

Year Failures Assets Millions
2001 4 $2,359
2002 11 $2,705
2003 3 $1,045
2004 4 $163
2005 None $0
2006 None $0
2007 3 $2,603
2008 25 $373,589
2009 140 $170,909
2010 157 $96,514
2011 92 $36,012
2012 51 $12,056
2013 24 $6,102
2014 18 $3,027
2015 8 $6,728
2016 5 $279
2017 8 $6,531
2018 None $0
2019 4 $214
2020 4 $458
2021 None $0
2022 None $0
2023 3 $548,500

The second and third table in this section were derived from

Net net: there is a reasonable risk that we will see many more bank failures in the next 18 months if 2008-12  is a harbinger. The FDIC publication “An Examination of the Banking Crises of the 1980s and Early 1990” offers the following details in “Chapter 1:  Summary and Implications

  1. In 1980 there were 4,039 savings institutions; approximately 1,300 savings institutions failed during the 1988-94 period. This high proportion of failures led to the demise of the fund that insured savings institution deposits, and imposed heavy costs on surviving institutions and on taxpayers.
  2. 1,617 banks failed, representing a little more than 9% of the total. The failed banks had $206 billion in assets (not adjusted for inflation) representing about 8.9% of the assets held by all banks in the US.

Bare Trees of Winter as a metaphor for SVB shutdown2. Gradually and Then Suddenly

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
Ernest Hemingway in “The Sun Also Rises

The seeds of failure were planted at SVB in the decision to seek a higher return to boost stock valuation by loading up on longer-term securities. This was exacerbated by interest rate increases the Fed was using to fight inflation. One new factor compared to 2008 is the ability for depositors to pull money out in less than a minute via APIs and web forms that triggered wire transfers. Compared to phone calls, faxing,  or visiting the branch, online requests are 10-100X faster. The common image of a bank run is depositors lined up outside the bank. This never happened at SVB but $42 Billion flowed out on one day, Thursday March 9, catching the bank and regulators by surprise.

3. Live Within Your FDIC insurance limits

There is a distinct possibility–perhaps between 1/10 and 1/4–that many more banks will fail in the next 18 months. Non-performing commercial real estate loans are one risk factor. There are others. The FDIC has gotten very good at supporting accounts that are under the deposit insurance limits.

4. Securing Investment Funds Will Be Much More Challenging

The cost of capital, and the ability for startups to raise capital, will be much more problematic in 2023-25 (and perhaps beyond) than in 2017-2021. Valuations have dropped across all rounds, leading to an expectation for investors that their money will go even farther in the future, which encourages them to stay on the sidelines. Venture Ecosystem funding had a rapid rise in 2017-2021, followed by a significant drop. See Clear in Hindsight: April 2022 ended a Minsky boom for startups. The full effects have yet to be felt and will echo into at least 2024.

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Image Credit “Bare Trees” (c) Sven Birkerts (@SvenBirkerts) used with permission

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