March 21, 2023

Silicon Crater Bank

Witnessing the collapse of Silicon Valley Bank was like watching a movie on fast forward: It revealed story patterns that are otherwise obscured. The implosion illustrates several universal communications lessons for startups—relevant even if your startup operates far from banking, and, God willing, is never affected by a bank collapse.

A bank run contagion, like a bomb cyclone, requires special conditions to gather destructive strength, but at its root is simple choice vortexed by a recursive prisoner’s dilemma: everyone rushing to save themselves ensures a universally suboptimal outcome. The chain reaction was exponential; Silicon Valley was transformed into Silicon Crater in less than two days.

As there always are in complex situations, there were numerous causes of the SVB collapse. The fundamental one was that SVB had been flirting with insolvency for months. To oversimplify, banks borrow short and lend long; SVB became trapped between long positions that were expensive to unwind, and growing withdrawal volume.

But the failures in communications by senior SVB leadership helped create the disastrous atmospheric conditions that turned storm to cyclone. On Wednesday, March 8, the bank issued a dense press release detailing a stock sale to raise capital, without providing any context or reassurance. It’s not that the company didn’t know how to spin their dire need for cash—on the same day, they filed an 8-K report with the Securities and Exchange Commission that provided both context and reassurance. But who reads 8-Ks? Certainly not the bank’s startup customers or VCs with twitchy Twitter thumbs. With the collapse of Silvergate Bank still fresh on everyone’s minds, SVB put out a press release that allowed everyone to paint their own worst-case scenario.

Realizing the growing disquiet, the SVB CEO, Greg Becker, got on a conference call the next day to reassure the investment community that all is well, and ended the call by saying that the one thing that would kill his bank was if everyone pulled their money out. Mass simultaneous withdrawals will kill pretty much any bank, at any time, which is why it’s pretty much true for any bank, at any time, that a bank CEO should never plant this idea in the public’s mind.

I watched the gathering storm in startup chatrooms and my email inbox beginning the morning of that conference call. Most comments were practical: was anyone able to log in to their online SVB account? What was the wire cutoff time to get money out that day? But there were also the “is this really happening?” messages, with other founders recommending that nobody panic and instead leave their money where it was. But the runaway chain reaction proved overwhelming. I watched the swirl of competing narratives that immediately blossomed, auditioning for history: blame the greedy bank management, blame the somnambulant regulators, blame the bank’s DEI policy, blame the VCs who were funding competing banks.

Quickly, the narratives became more pragmatic, like the VCs who wanted to make sure we bailed out the startups they had invested in:

Or the founders who found a way to use the disaster to talk about their startup:

The only proven antidote to the narrative contagion of a bank run is the counter-narrative of “The big boys from the government are here; everyone gets their money back.” The government rolled this out over the weekend, and the cure has substantially worked. (The support provided to First Republic Bank by private-market peers was an anomaly, and to a substantial degree, still provided with government coordination and support.)

A bank run is primarily a story issue—ie driven by human psychology—and has nothing to do with the type of money involved. Almost by definition, crypto built on decentralized finance principles has no counter-narrative it can offer about central authorities stepping in—there are no central authorities. It’s unclear to me how the crypto/DeFi enthusiasts square their vision with the psychology of panic, and its only known cure.

This didn’t stop crypto folks from pouncing on the turmoil:

It might not seem surprising to see people using the SVB debacle to promote pre-conceived beliefs—or their own projects. But that’s what I mean how the hyper speed of the bank collapse highlights patterns.

I once spoke with a senior executive at IDEO, a legendary customer-centric design firm, and he said that you often learn the most about the middle of the market by interviewing those at the far ends of the bell curve. Want to sell shoes? Talk to the people with a thousand pairs, and those who typically go barefoot. The same patterns and habits are guide everyone, but they tend to be on more vivid display at the extremes.

Most news stories come on slower and last longer than the SVB conflagration. In fact, often the more gradual trends can yield more potent and longer-lasting story lines that you can use to promote a future in which your startup plays a starring role. Use the dramatic example of SVB to train yourself to identify other stories.

So let’s summarize 3 takeaways.

  1. Provide your preferred narrative to each audience. SEC K-8 documents are read by stock analysts, but SVB also needed to reach their customer base of startups and VCs directly with the most positive spin possible about their emergency stock sale. The messaging in the K-8 may have assuaged a few stock analysts, which is great, but the press release did nothing to calm the company’s customers. Never put out communications that doesn’t reinforce the messaging that you would like your target audience to absorb.
  2. Never repeat a storyline that goes against your company interests. Your result might not be as catastrophic as poor Greg Becker, that star-crossed CEO of SVB, but even without the danger of a bank run, don’t remind your customers of your company’s Achilles heel. Every inconsistency, bad messaging, missing context, poor customer support, or poor word selection will cause damage, whether it is lost customers, suddenly cold-footed investors, or potential employees who have second thoughts. Make sure your social media, articles, website, and public statements are carefully considered and vetted.
  3. The narratives that spilled into the news from all sides during the bank run were more than posturing for the social media spotlight. Many of them illustrate a key power I encourage all startups to leverage, which is use awareness and interest in current events to promote your own startup. Just as Jiu-Jitsu and other martial arts teach you to turn the power of your enemy against them, nudge the spotlight on current events towards what you’re working on.

The SVB story is far from over, and there is a tangle of storylines that will emanate from the wreckage for months, if not years. Work them. Just as the forest is nourished by the decaying remains of yesterday’s soaring giants, business disasters like the SVB collapse provide endless opportunity to advance tomorrow’s success—ideally, your success.