3 Lessons from Silicon Valley Bank

What The Rest of Us Can Learn from the Failure of SVB

It’s hard to tell tragedy from farce any more.

So unless you’ve been hiding in a secluded ski lodge, removed from all access to information (which sounds like a genius idea), then you’ve been hearing non-stop about Silicon Valley Bank (SVB) failing recently in a classic bank run.

There wasn’t anything particularly novel about what happened to SVB. In classic bank fashion, it took in short-term deposits, primarily from start-ups and silicon valley companies. It then invested those deposits in longer-term assets to make money. Then money stopped flowing in, its asset values declined, customers started to withdraw money fast, and contagion took over, causing a panic and a run on the bank.

It’s a tale as old as time.

But we’re not here to rehash what happened to SVB. We’re here to learn some lessons from it.

Lessons from SVB

No one knows what they are doing

First and foremost, no one knows what they are doing.

Write that down, carry it in your pocket, don’t ever forget it.

It’s easy to underestimate the role of luck in success and failure. When you’re in the tech world, all it takes is one big hit and you’ve got it made forever, regardless of whether you really know what you’re doing.

If you get in early with the right company, you can simply ride that for the rest of your career. If you were an early product manager at a company that made it big, you can probably ride that for a few years (whether you were driving and contributing, or simply on the rocket ship), then start a newsletter or go on the speaking circuit and bask in the paychecks without really having put in a career’s worth of work.

The same goes for venture capitalists (VCs) who invest in lots of startups. They will have hundreds of failures. But it just takes one big one to make it. Then you can start a podcast and give advice to everyone on what they’re doing wrong and how you would do it better.

The CEOs, CFOs, and executives of companies, from large ones to startups, don’t really know what they’re doing. We rarely get to see the fact that those in important positions are just as clueless as the rest of us, but they are. I’ve been on those executive teams and in those boardrooms, and can tell you that the leadership teams know little more than the average employees. But through twists of circumstances and luck, they have different, higher paying jobs. But they screw things up just the same.

The CEO of Y-Combinator, an incubator for startups, called the failure of SVB an “extinction level event” because so many startups had all their cash deposited at SVB—at the recommendation of Y-Combinator! So both the founders of these startups failed to see the risk, and one of the most successful incubators for startups failed to see the risk and pushed all of their graduates into this bank, which then left them flailing for a few days until their deposits were rescued.

Even the executive team of SVB seemingly had little grasp of history or hedging. They were investing in record low-interest rate bonds and didn’t buy any interest rate swaps? They didn’t hedge their risk?

And then they tried to raise $500 million dollars while selling assets at a loss? While messaging that everything was okay and not to panic? If that doesn’t sound like a repeat of Lehman (an investment bank failure during the 2008 crisis in case you missed it), I’m not sure what does. It’s been a while since I’ve been in finance, but even I can sense the vibes there.

It is baffling to think that people in such important positions could make such serious mistakes, but when we remember that no one knows what they’re doing, it makes sense. Everybody is faking to some degree.

So when you feel you don’t know what you’re doing, take courage! Because neither did the risk management team at the 16th largest bank in America.

Diversification is critical.

If you get anything away from this article, a good takeaway is to diversify. Just diversify everything.