She Watched the Run on the Bank From Her Front Door

After a scary week, the startup culture in Silicon Valley struggles to survive.

On Thursday, March 9th, Laura Moreno Lucas started seeing tweets from VC firms about problems at Silicon Valley Bank. Laura is a partner at L’ATTITUDE Ventures, a $100 million fund investing in Latino startups. Some of the founders of her early-stage companies began sending messages: “Is there anything we should be concerned about?”

She wasn’t sure. She was trying to get more information.

By Friday, Laura looked outside her house, which is just down the street from SVB’s main office. “I started to see lines out the door,” she tells me. She went back inside. “I was on the phone with one of our investors… next thing you know, I looked at the TV, and they said, ‘Oh well, Silicon Valley has now been taken over by the government.’”

What did that mean, exactly? No one knew. “It’s been scary,” she says.

L’ATTITUDE has deployed $34 million to nearly three dozen young companies. “Some of our assets were in Silicon Valley [Bank]. Some of our portfolio companies had their money in Silicon Valley [Bank],” Laura says. Fortunately, the total amount of money wasn’t a lot. “It was less about our exposure, and more about the overall feeling of what was happening.”

During the chaotic hours of last weekend, her firm set up a communications channel to discuss alternatives. “We talked to our specific investors. We helped them understand what was going on in terms of our position,” Laura explains. “And then we also communicated to our founders to make sure that they felt supported and not so alarmed… because it was alarming.”

Who or What Caused the Bank’s Failure?

There’s been plenty of finger-pointing about SVB’s collapse. Billionaire investor Peter Thiel has been accused of causing the bank run when his Founders Fund told clients to pull money from SVB out of concerns the bank had liquidity problems. (Thiel himself claims he kept $50 million in the bank.) When word got out about Founders’ withdrawals, other VCs did the same. “It just goes to show you how tightly knit this ecosystem is in VC and startups,” Laura says.

But SVB was in trouble, and barring Thiel and Founders having illegal inside information, one could argue they were being smart, even if their decision led everyone else to follow suit, causing their unrealized concerns to come true.

Others claim the bank failed because management supported too many “woke” enterprises. “I don’t even know where they can start to support that data,” Laura says. She was particularly taken aback by an opinion piece in the Wall Street Journal that pointed out the bank’s board diversity. Writer Andy Kessler said, “I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands.” (Um, the bank’s CEO, CFO and President were — checks notes — white men.)

Then there’s the lack of oversight by the Federal Reserve Bank of San Francisco, which was supposed to be regulating Silicon Valley Bank. SVB’s CEO was on the San Francisco Fed’s board, creating a potential conflict. “It was like everybody was asleep at the wheel,” says Laura, shaking her head.

More than all of that, though, she blames SVB’s demise on “horrible oversight” and bad governance. The bank didn’t shift strategy as the tech sector cratered and interest rates rose. “I mean, they didn’t have a chief risk officer for several months.” The bank was forced to sell long-term Treasuries at a loss to cover customer withdrawals.

The Startup Culture is Now at Risk

Laura’s greatest concern is that the bank’s failure will have a devastating effect beyond banking. It could harm innovation for years to come. SVB has fed the Valley for 40 years, helping launch everything from Facebook to Airbnb. “They are a lifeline to a lot of the growth in the U.S.” She doesn’t see many customers coming back to SVB under its new management, and she wonders if the future of startup funding will even be in Silicon Valley.

So here’s the problem, at least in the short-term.

Many startups have gone to banks like SVB (and Signature and First Republic) for lines of credit or to take on debt. Now these early-stage companies will have to go to the capital markets to raise cash (good luck with that!). They’ll be pitching investors from a diminished position. “Maybe, at one point, they would have valued their company at $20 million,” Laura says. “Now they’re raising money at $10 million.”

These are called “down rounds,” and they’re not a good place to be in an environment of tech layoffs and high interest rates. Laura believes many startups will have to reduce staff, they’ll have less time and money to grow, and eventually they’ll have to come back to the capital markets again, hat in hand. “If there’s no money available, they’re going to fail.”

Meantime…

Laura finds it ironic that venture capitalists created the hysteria which started a run on the very bank that serves them. She hopes one lesson from SVB’s failure is that leaders in the Valley become more thoughtful about what they say. “Our words really impact a lot of the things that we support.”

The other lesson, she says, is to have multiple bank accounts.

She’s actually relieved that SVB failed on a Friday, “because it gave everybody time to breathe.” If the bank had been taken over on any other business day, “it would have just drained everything… it would have caused hysteria.”

The weekend allowed the Treasury Department, the FDIC, and the Federal Reserve to move to cover all deposits in an effort to restore calm. (Jane: I covered the collapse of Indymac in July 2008, which also closed down on a Friday, but by Monday depositors were still panicking. Ten years later, I reported on whether a bank collapse could happen again. Apparently it could!)

Bottom line: It’s difficult to be a successful startup in any environment, but with the collapse of Silicon Valley Bank, some promising young companies will also disappear. Laura spoke to one of her founders this week who told her, “There’s so many things I plan for in my career.” Like, is my product right for the market? Do I need to raise capital? “Never in my life did I think that the bank was going to collapse.”

Why do you think the bank failed, and what will the fallout be? Leave a comment, and maybe move some of your money around to other banks…