Lessons Learned from Silicon Valley Bank’s Downfall

Greetings, fellow entrepreneurs and business owners!

As you may have heard, Silicon Valley Bank (SVB) recently suffered a significant downfall that has raised questions about the bank’s management and the regulatory systems in place. In this blog post, we’ll take a closer look at what happened and why it matters to us as entrepreneurial professionals.

What happened to Silicon Valley Bank?

First, let’s start with some background information. SVB was a popular bank for the tech sector, with over $200 billion in and $175 billion of deposits, SVB was the 16th largest bank in America. The bank was the preferred option for both VC funds and startups, with many using SVB to hold cash for payroll and other business expenses. The bank also invested in dozens of VC funds across the US and Europe, as well as providing venture debt to many startups and scale-ups.

Unfortunately, the bank’s downfall began when it invested heavily in mortgage-backed securities (MBS) and long-term US government bonds at 1.6%. At the time, this was considered a safe investment, but as interest rates rose to combat inflation, the prices of bonds dropped, causing SVB’s bond portfolio to lose a significant amount of value.

As tech companies, who were customers of SVB, started withdrawing their deposits, the bank found itself without enough cash on hand to cover the rush of demand. In an effort to meet these demands, SVB started selling its bonds at steep losses, which spooked investors and customers. This caused a panic rush to withdraw deposits, ultimately leading to the bank’s collapse – also known as ‘a run on the bank’.

What happened to the deposits held by Silicon Valley Bank?

On Monday 13th March, The Government and the Bank of England facilitated a private sale of SVB UK to HSBC. Which means deposits were protected with no taxpayer’s support. The US Government guaranteed that deposits would be protected and customers could make withdrawals again from SVB US. As of publishing this, there has been no acquirer confirmed for the US arm of SVB. The speed of the Government’s intervention in the US and UK was impressive and perhaps a lesson learned from the 2008 financial crash.

Why does Silicon Valley Bank’s downfall matter?

So, why does this matter to us as entrepreneurial professionals and business owners? The answer lies in the importance of wise financial decisions and diversifying our investments. As we build and grow our businesses, it’s crucial that we stay informed and make informed decisions to safeguard our wealth and businesses. One action we can all take when running our businesses is to ensure we have 2-3 bank accounts as a safety precaution.

Moreover, this incident highlights the importance of regulatory systems in place. Regulators are being questioned about missed warning signs at Silicon Valley Bank, and it’s important that we demand accountability from those who are responsible for ensuring the safety and stability of our financial institutions.

It also stresses the importance of understanding what institutions like banks are doing with your money. Those who withdrew their money earliest knew that when interest rates go up the inverse happens to bonds and they fall. They also know that SVB had long-term bonds and therefore would have lost a significant amount of value and therefore took out their cash before the panic began.

What is next?

SVB was an investor in several VC funds, will HSBC continue that activity in the UK? SVB also sponsored dozens of ecosystem events, especially the diversity-focused events, will this continue? I have more questions than answers right now.

It could be argued that the top banks have a concentration in power which could have long-term impacts on businesses. Monopolies often lead to higher fees and prices with less choice of products. For HSBC in the UK this takeover provides them with a strategic foothold with European tech companies. Some could become big corporate clients for the bank, health management clients and utilise its lending products.

However, tech as an industry has had a turbulent 12 months from the FTX scandal to Twitters surprise takeover. Are we losing trust in the tech ecosystem? Is there a need for further regulation? Is this the last big issue we are going to face this year? doubt it.

In conclusion, the downfall of Silicon Valley Bank serves as a stark reminder of the importance of making informed financial decisions and diversifying our investments. As entrepreneurial professionals, we must stay informed and demand accountability from our regulatory systems to ensure the safety and stability of our financial institutions.

Stay tuned for more updates on wealth creation, economical empowerment, and entrepreneurship. Until then, keep working hard and investing smartly!