Venture capitalists scripted SVB’s fall

In 2016, I started a New York-based creative agency that specialized in branded content. Among creative agencies, the trend at the time was for names that sounded like punk bands and I unfortunately chose The Insurrection. As of last week the only thing that aged worse than the name was my choice of bank: Silicon Valley Bank, which has now become the most spectacular example of a bank failure since the 2008 financial crisis. (I briefly lost access to our company’s funds, but I’m fine; my deposits were low enough to be covered by F.D.I.C. guarantees.)

There’s plenty to say about how the bank brought this about — making risky investments, issuing communications that did more to alarm than explain. But as I hit refresh on my account balance Monday morning, I was thinking of the high-prestige venture capitalists who herded start-ups like mine to SVB. They’re the reason the bank was so overloaded with risky clients, and they’re also the ones who panicked at the first rumors of trouble — and advised their portfolio companies to flee, initiating the bank run that brought the whole thing tumbling down.

On Saturday, an entrepreneur named Alexander Torrenegra, who was an SVB depositor for two companies as well as his own personal accounts, explained what happened on Twitter. “Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area), questions about SVB start to show up.” he wrote. “10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.”

It’s easy to see how a whisper network of a few hundred C.E.O.s — all convinced they have exceptional vision, all working themselves into a panic — could spiral out of control. But what happened in that chat is an extension of the fundamental way that these venture capitalists operate, which is groupthink on a staggeringly consequential scale.

Top tier firms like Andreessen Horowitz, Sequoia Capital and Kleiner Perkins subject candidates to a rigorous screening process that ensures that only the strongest founders leading the most promising businesses proceed to the next level. Or that’s what I once believed, anyway. But the screening process places significant emphasis on “culture fit,” which is industry speak for whether a founder fits into the venture capital firm’s full portfolio of companies and conforms to their ideas about how a founder is supposed to look and behave. A founder’s ability to navigate this process is considered a good indicator of the company’s success. Unfortunately for women and people of color, culture fit often boils down to being a white male engineer with a degree from an elite university.

Some screening mechanisms are more subtle, like whether the V.C.s are already in your professional network, or one or two degrees removed. The industry line is that relationships will help founders attract capital, talent, and business partners. True, but the result is a largely homogeneous and even self-reinforcing community that’s difficult for outsiders to crack.

It’s this sort of insularity, emphasis on existing relationships, and reliance on intangible measures of competency that fueled last week’s bank run. The V.C.s expect the companies in their portfolio to use approved vendors. When it comes to legal counsel, that generally means tech-friendly law firms like Morrison & Foerster or Wilson Sonsini. When it comes to banks, it has meant SVB.

SVB, in turn, assessed its clients’ creditworthiness in part by who their funders were. As my colleagues and I saw, an investment from a top tier V.C. could be the ticket to a package of favored services, including things like home mortgages for the founders of these start-ups.

I opened my account at SVB in 2017, when I had meetings lined up with some top tier V.C.s to raise money for a digital media company. Like everyone else who heads to Buck’s of Woodside (a favored venue for early-stage deal making) with a deck and a dream, I tried to anticipate the screening mechanisms and make sure I passed. And despite the fact that I was not a first-time founder, and having worked in tech and tech adjacent companies, was decently well networked, I suspected they might regard a 40-year-old woman without an engineering degree as not quite the culture fit of their dreams. I wasn’t contractually obligated to bank with SVB, but as with so many other unspoken norms, I was aware that I would be evaluated by my choices.

Disaster has now struck, but I don’t see any public introspection from the investment community participants who both helped create the dangerous conditions and triggered the avalanche by directing portfolio companies to withdraw en masse.

The biggest supposed geniuses of Silicon Valley could have chosen to remain calm and used their influence to work with the bank and help maintain stability in the market. When SVB disclosed its losses last week, it was in the process of restructuring its portfolio to include treasuries with shorter-term maturities, which would have helped. It had a commitment from General Atlantic — a top tier firm itself — to help shore up its balance sheet. The bank was doing exactly what it should have done under the circumstances, and had the depositors kept their money there, it could have stabilized as the restructured portfolio became more profitable.

Instead, people panicked. The venture capitalists chose a path that would be disastrous for their industry, freezing up capital, spooking investors and reducing the favored financial institution to rubble. Then they had the temerity to go on social media and congratulate one another for their quick thinking. Upfront Ventures’ Mark Suster, one of the few V.C.s who saw the potential damage of a bank run and publicly urged his colleagues to stay calm, told TechCrunch on Friday, “I’m seeing emails from VCs” to their limited partners “and they are forwarding these things like, ‘Aren’t I super smart?’”

The hubris of high-profile libertarians who howl for regulatory intervention (“Where is Powell? Where is Yellen? Stop this crisis NOW,” Tweeted Craft Ventures’ David Sacks) after previously coming out against it is all the more galling. I expect that as soon as the system stabilizes, they’ll all develop amnesia and return to insisting that government intervention destroys innovation.

They are not the only people to blame of course, but no bank is built to withstand simultaneous withdrawals from all its depositors. One SVB executive told the Financial Times their biggest risk was “a very tightly knit group of investors who exhibit herd-like mentalities.” The executive continued, “doesn’t that sound like a bank run waiting to happen?”

I’ll keep my SVB debit card as a souvenir, partly because the giant arrow logo points in the opposite direction that it’s supposed to go into a card reader — an example of a design that obviously went through no user testing. It’s also a reminder that successful people aren’t always the best decision makers.