Letter From the Partners: The Real Lesson of Silicon Valley Bank

Sil­i­con Val­ley Bank failed, and now everyone’s an expert in the nuances of macro­eco­nom­ics,  reg­u­la­to­ry pol­i­cy and bank man­age­ment. Truth is, we didn’t see this com­ing and few peo­ple did. We banked with SVB as a firm, some of our port­fo­lio com­pa­nies work with them and we both banked with them per­son­al­ly. These were already com­pli­cat­ed times for start-up and growth com­pa­nies still work­ing through the COVID hang­over, record high inter­est rates, infla­tion, Rus­sia and Ukraine. Now, what recent­ly appeared to be rock sol­id mid-tier and region­al banks are on the brink of fail­ure? What’s next? 

Mar­kets move fast and cap­i­tal moves faster. Maybe what hap­pened with SVB is the canary in the coal mine. Or maybe it’s just a one-off, iso­lat­ed event. We don’t know yet, and it may be years before we do.

What is clear, how­ev­er, is that if mar­ket forces can take down a $200B bank like SVB just imag­ine what they could do to a growth- or ear­ly-stage com­pa­ny. In advis­ing our port­fo­lio com­pa­nies over the last cou­ple of weeks, our rec­om­men­da­tions have been pret­ty stan­dard: Spread your cap­i­tal across mul­ti­ple banks when pos­si­ble, shore up the bal­ance sheet, push even hard­er toward prof­itabil­i­ty, and run tests of your bank­ing pro­to­cols, approval require­ments, etc. 

What’s not so obvi­ous is the steps they and we took over years to pre­pare for a cri­sis like this, based on what we both learned in the 2008 finan­cial cri­sis, 

Mark was run­ning ZICO, with a small team, small board of direc­tors, no ven­ture or pri­vate equi­ty back­ers and (at the time) a lim­it­ed net­work of indus­try con­nec­tions or oth­er founders with whom to share ideas and best prac­tices. This cri­sis almost killed ZICO and was extreme­ly stress­ful. In con­trast Dan was run­ning a nine-fig­ure port­fo­lio for a hedge fund and was able to lever­age insights, learn­ings, best (and worse) prac­tices across oth­er port­fo­lio man­agers, banks, part­ners and more to not only sur­vive but cap­i­tal­ize on the sit­u­a­tion. 

There were three key lessons we both took away from the 2008 cri­sis that helped us and our com­pa­nies pre­pare for the inevitable cri­sis which this time just hap­pened to be SVB.

First, is cre­at­ing a cul­ture of rad­i­cal trans­paren­cy, can­dor and trust. The best exam­ple we know of this, and what we use as a guide, is Con­scious Lead­er­ship. Rad­i­cal trans­paren­cy means shar­ing it all: the good, the bad and the ugly. As GE chief Jack Welch once said: “The team that sees real­i­ty the best wins.” 

Trans­paren­cy and part­ner­ship are para­mount in volatile times, but you can’t start build­ing them once the cri­sis begins. It takes time, often years, to devel­op the right lev­el of trust and can­dor. We see too often CEOs with­hold­ing infor­ma­tion, and boards not shar­ing what they real­ly think with exec­u­tives. They aren’t cre­at­ing con­nec­tions with man­age­ment teams under the CEO. Every invest­ment we make, even more so today, is based on a deep lev­el of trust and can­dor. 

Sec­ond, the net­work effect mat­ters. A lot. SVB’s “net­work” of cus­tomers took it down when they all decid­ed to pull their mon­ey from the bank. At Pow­er­Plant, we’ve been work­ing across the com­pa­nies in our port­fo­lio for years to help them devel­op a ‘pos­i­tive net­work effect’ where they can lever­age each oth­er and each oth­er’s net­works to gain a mul­ti­pli­er effect. Access­ing tal­ent, man­age­ment best prac­tices, bankers, lenders and more, all based on direct rela­tion­ships between port­fo­lio com­pa­nies. Suc­cess vs. fail­ure, par­tic­u­lar­ly in a cri­sis, often depends on the pow­er of your net­work.

Final­ly, con­tin­gency plans. With­in 100 days of mak­ing a new invest­ment we build con­tin­gency plans around all key func­tions with­in the com­pa­ny. We look at their banks, yes, but also their sup­ply chain, qual­i­ty, safe­ty, reg­u­la­to­ry con­cerns and more. It’s about build­ing resilien­cy out of redun­dan­cy. Rarely can you antic­i­pate a cri­sis but you can pre­pare by hav­ing the team, part­ners, board, oper­at­ing advi­sors, ven­dors, and oth­er rela­tion­ships in line to respond to and nav­i­gate almost any sit­u­a­tion.

It’s nev­er too late (or ear­ly) to look hon­est­ly at your­self, your team, your board and your rela­tion­ships. Are you prac­tic­ing can­dor? Are you build­ing and main­tain­ing your net­work? Do you have con­tin­gency plans in place across crit­i­cal func­tions and process­es? 

There are lessons here from the ranks of major cor­po­ra­tions: spend the mon­ey and resources to devel­op and run plans like these on an ongo­ing basis to iden­ti­fy and pro­tect key points of fail­ure. You don’t have to be at enter­prise scale to do the same, and it’s almost more impor­tant for ear­ly-stage com­pa­nies to know their risks and the live-or-die con­se­quences that come with them.

Build your net­work, give your time and ener­gy to it, and the net­work will pay you back in time.

It won’t be easy, but those that sur­vive now will even­tu­al­ly be in posi­tion to thrive. Stay in the game, and live to fight anoth­er day.