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.