The Fall of SVB
It is early March in New England and the winter has been so mild that the native plants and animals are all confused. Thinking its Spring, they are completely unprepared for another polar blast which is a distinct possibility. On the west coast the winter storms keep coming, bring high surf, wind, rain and snow levels unseen in years. Speaking of unexpected events, I’d be remiss if I didn’t weigh in with a few comments on the collapse of Silicon Valley Bank (SVB).
The past year had already been quite challenging for many early stage life science companies. Interest rates rose and public company valuations dropped. For those raising funds, investors started to take longer to get diligence done, and dropped their valuations on new investments. Companies started tightening their belts in preparation for a tough period, planning to reduce spending, laying off staff and terminating projects. Anyone paying attention was trying to reduce their burn and shore up their financial reserves, or get to an exit, in anticipation of a difficult financing environment to come.
In spite of all this, nobody expected Silicon Valley Bank to go under in a matter of days this past week. This event most directly impacts those companies who had assets deposited at SVB, or loans from them, but the indirect impacts could be much more extensive. Given that such a large percentage of venture investors and venture backed companies utilized their services, the ripple effect across the industry in terms of potential bankruptcies, disrupted corporate partnerships, job losses, inability of certain investors to continue financing, and likely drop in valuations could be enormous.
At this writing it’s still premature to predict the impact, as that largely depends on whether or not one of the “big banks” comes to the rescue, acquires SVB, and makes the uninsured assets available to those companies who trusted in SVB to keep their deposits safe. In the absence of a buyout, or some form of government support, many companies could be facing ruin. At a minimum they will likely encounter near term challenges paying employees or vendors.
How can a company be prepared for such an unexpected event? The exact nature and timing of an event such as a bank failure could not possibly have been predicted. The likelihood that something unexpected would happen, however, was (and always is) extremely high. There are a variety of skills, values and approaches which if practiced regularly and well may better position a company to navigate past unexpected events. Some of these include:
Focus - there’s no need to panic. Anyone in a leadership position should remain calm yet quickly recognize how important this event may be to their company’s future viability, and begin preparing for the possible impacts. Rapidly focus your management, board, and advisors on the issue. Communicate to investors, employees, partners and vendors to give them the relevant facts, prevent rumors and disinformation, comfort them, and seek their patience and assistance if you are likely to experience significant impacts.
Determination and Resilience - ensure you and your team have the right mindset for addressing the challenges and opportunities that lie ahead. This may require dramatic near term changes to operating plans. If at all possible, defer activities that are unrelated to addressing the issue at hand.
Creativity and open-mindedness - During the coming days your team may need to develop contingency plans they had not previously considered. Hope for the best but plan for the worst, and be willing to consider any legal and ethical solution. Draw upon all of the resources at your disposal for brainstorming, and reach out to all of those in your extended network for help.
Relationships - leverage existing relationships with board members and financial institutions (and always be creating new ones). Seek assistance from those who have experienced similar crises before, those who have the foresight to consider what might be possible and suggest actions to prepare, and those who may have creative ideas for protecting the company, or access to resources to help weather the near term storm.
Create Options - funds should be spread across multiple banks and investment vehicles rather than concentrated in one. Always have back up option(s) for access to financing lined up (e.g., existing strategic investors with deep pockets, even if you have to sell equity or secure a loan on unfavorable terms). If there is any chance you will need to access new funds to keep the company afloat, consider what you can sell (IP, distribution rights, equipment, new services, etc.) or borrow, as well as unconventional sources of near term financing that you may not have considered previously.
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Short term inability to access funds is an annoyance, but if it persists long term, or if the funds are lost forever, then management may need to take drastic action to keep the company afloat - or in the worst case, decide to close up shop entirely. Bear in mind your fiduciary responsibility to your shareholders.
Any specific solution will depend on the idiosyncrasies of a given business, but the general approaches employed when responding to unexpected events remain essentially the same. It’s been 15 years since a bank larger than SVB has failed, and never before has one failed that is so intimately tied to the venture capital financed ecosystem. Nonetheless, unexpected events in one form or another occur regularly, and being prepared for the unexpected comes with the territory. How top management responds in these situations often determines whether or not a company will survive and thrive or fall by the wayside.