10 years after the GFC, we’re still learning the wrong lessons from the Silicon Valley Bank collapse

Startups across the US, UK and Australia have had their fears confirmed that banking will feel much more ‘traditional’ in the wake of the Silicon Valley Bank collapse, potentially stifling innovation and ambition.

The collapse and aftermath serves as a reminder that we need greater global banking competition, particularly in the technology industry, to serve the needs of a modern startup. Without it, founders will find themselves on the receiving end of an unempathetic financial services provider that fails to capture the value of their ideas or work at the speed they need.

For our industry, SVB wasn’t a lender you could work with. It was the lender you would work with. The gulf between the experiences of founders that went with SVB as opposed to your more traditional financial services company was consistently wide.

While the bank was as American as a corn field, startups from across the world found themselves concentrated on the bank in a way that other industries might find unusual, because of a lack of compelling alternatives in their own markets and the primacy of US tech.

In the US last week, the Federal Reserve’s vice chair for supervision Michael Barr set the tone for what’s to come when he laid the blame of SVB’s demise on poor internal management and excessive risk-taking. Barr also acknowledged in his written testimony that bank supervision and regulation might need to change in the wake of the collapse.

We’ll put aside the fact that the point of ultra low interest rates and quantitative easing, which the Fed is responsible for, was to increase risk taking in the economy and tech is where risk-taking happens.

Meanwhile, in Australia, the prudential regulator APRA has reportedly started asking Australia’s banks to provide it with their exposures to startups and crypto-focused ventures, sometimes on a daily basis.

This came on the back of a statement from the Council of Financial Regulators, the coordinating body for Australia’s main financial regulators that includes APRA, that they would be closely monitoring the situation.

Traditional banking returns

While the specifics of how regulators will apply this increased scrutiny to the sector remains to be seen, in short the SVB model of combining banking with equity stakes and other technology consultancy services is over. A return to a more traditional banking model that seldom understands how startups work is more or less guaranteed.

As a law firm that operates more like a startup than a traditional firm, we know first hand technology companies are different. They work at a different pace, they’re building the plane as they fly and your typical consultant of any stripe just won’t do.

On the ground, we’re already seeing the effects. Some providers in the marketplace are offering new sweep network accounts that essentially spread a single depositor’s balance across multiple banks to both take advantage of the ‘per bank’ element of FDIC insurance and to generally lower bank concentration risk; but it remains to be seen how long this practice continues for.

We can imagine that in the short term, “bank concentration risk” may be added to a few due diligence memos along with customer concentration risk and ‘single point of failure’ supplier risks for startups looking to make a transaction. 

More broadly, startups are nervous on what the systemic knock-on effects might be from one or more additional failures happening. For startups, many or most really aren’t mature and stable enough business models that would have redundancies for every critical vendor or functionality.

The SVB collapse made plain that even without direct exposure, and even without any actual losses of deposits occurring, there could have been plenty of disruption across the startup ecosystem from one or a few service providers to the community experiencing a disruption that cascades across all of the companies that they touch.

The reality was that everyone thought that it was a reasonable and prudent business decision to bank with SVB, until it wasn’t. SVB was founded in the 1980s, which means it not only survived the global financial crisis, but also the dot-com crash of the early 2000s.

It’s also worth noting, while we’re on this subject, that the most egregious mistake of the global policy and regulatory response to the GFC was there was no mandated increase to banking competition. In fact, the sector consolidated further.

The fundamental hole

It’s not difficult to imagine that SVB didn’t have to be a single bank and that its collapse could have been followed by a more natural home.

First Citizens Bank, its new owner, promised to embrace the technology industry relationships SVB has created, but has little track record of its own to point to.

It would be a shame if SVB’s legacy boils down to excessive risk-taking and mismanagement and not filling a fundamental hole in the global banking landscape that served technology industry customers well through the dot-com bust and the global financial crisis.

Startups that have been busy cutting costs and extending their runways will be eager to secure a banking partner that can move as quickly as they can when the economic recovery begins.

Here’s hoping someone can deliver for them.

• Anthony Bekker is Founder and Managing Director, APAC, of Australian-US technology legal advisory firm BizTech Lawyers
• Chris Spillman is Managing Director, Americas, at BizTech Lawyers