How The Failure Of Silicon Valley Bank Could Impact Colorado’s Startup Community
By Helen El Malakh
When Silicon Valley Bank (SVB) was suddenly taken over by federal regulators on March 10th, it seemed hard to fathom that a financial institution of this size could implode so quickly. This was the largest failure of a US bank since 2008 and is America’s second largest bank failure ever. SVB may not be a household name, but it was among the top 20 American commercial banks with $209 billion in total assets at the end of 2022. The rapid closure of SVB also triggered flashbacks to the 2007-2008 Global Financial Crisis and fears that, perhaps, we are on the precipice of watching history repeat itself. But, many analysts believe that the fallout from SVB may be short lived. And this could potentially be beneficial to Colorado’s startup and financial sectors over the long run.
Unfortunately, in the short run, Colorado’s tech startups are vulnerable to fallout from SVB’s collapse. From cleantech to biotech, SVB had a major reach as the banker of choice for our startup companies as the bank targeted tech clusters within Boulder and Denver for more than two decades. Despite the potential for liquidity and short-term disruptions, most analysts predict the Federal Reserve, in conjunction with the U.S. Treasury, and state and local governments, will effectively and quickly quell any type of domino effect or financial contagion. Local Colorado and regional banks will likely benefit from this situation as they follow a more traditional banking model than SVB, have stronger balance sheets, and greater liquidity. This could also open more doors to Colorado-based venture capitalists and funds.
Some analysts believe that the Colorado startup community will be better off over the longer term by being forced to diversify away from reliance on SVB. Breaking SVB’s near-complete control of key tech startup segments, while painful, is ultimately positive. The mere market dominance of SVB in the startup sector highlights the dangers when one financial entity controls critical industries. Additionally, realigning with local banks could be a win-win for the Front Range startup community with greater assets kept within the state. So why do some financial analysts suggest that we will not see a repeat of the 2007-2008 Global Financial Collapse? Could it be because SVB is an anomaly that was a victim of its own success and not part of a financial system meltdown?
The SVB failure has been described as a classic bank run, but the irony for SVB was that its past successes were rooted in following a nontraditional and risky business model. SVB was susceptible to rising interest rates that eroded the value of its long-term bonds. It also faced a challenge of dwindling venture capital and uncertainty in the tech startup sector. SVB was not effective at pivoting to changing economic circumstances, turning its strategic strengths into financial weaknesses. Those who have followed the entity throughout the years have seen a pattern emerging that is reminiscent of the downfall of other businesses run by successful and smart individuals. When business entities become successful, they can develop cognitive biases, which are systematic errors in thinking that occur when people are interpreting information that affects their decision-making abilities. Based upon SVB’s overall portfolio, we can see indications that this resulted in underestimating their risk exposure.
SVB had a strong track record in the tech startup world and access to top venture capital investors, which might have contributed to its demise. While recently trying to shore up additional funds, SVB failed to convince prospective investors and the market overall that its approach was even viable. SVB’s financially-savvy clients could see what the bank could not, that its business model was essentially too risky, and a major solvency problem was looming. SVB had succeeded at being an “untraditional” bank for so long, that it failed to estimate its own liquidity needs as a bank. Ultimately, in times of greater uncertainty, focusing on due diligence and improving decision-making processes as many banks do, may go a long way in stopping future implosions of once-great organizations. Luckily for the local startup community, Colorado is full of well-run financial institutions and successful venture capitalists that can weather this latest economic storm and emerge even stronger.
The International Business Circle will be hosting a private roundtable discussion for its members on this topic led by Helen El Mallakh on March 13 at 4 PM MDT. Click here for more details.
Helen El Mallakh
Director and Co-Chair
ICEED