Latest Guides

Opinion & Columnists

Guest Commentary | Harrison Tang: How the VC Herd Mentality Triggered SVB’s Collapse

Published on Saturday, March 18, 2023 | 5:47 am

Editor’s Note: A week ago Friday, Silicon Valley Bank in Northern California collapsed and precipitated the worst banking crisis since the Great Recession in 2008. SVB was a favored bank with Pasadena’s flowering high-tech community, and the collapse could have destroyed a number of Pasadena-based startups and more mature tech companies had the Biden administration not arranged for funds to make depositors whole. Here’s an inside look at the crisis from the perspective of a mature local tech company. Harrison Tang is the CEO, Co-Founder and President of Spokeo, a people information service that helps you search, connect, and know who you are dealing with online. Spokeo was founded in 2006 by a group of four friends from Stanford University

During the last financial crisis in 2008, Spokeo was just a startup struggling to survive. We almost ran out of cash, and we couldn’t get any venture capitalist (VC) to help. At the eleventh hour, we pivoted our business model, and we’ve been growing profitably since then. Little did we know that a similar crisis would happen again with Silicon Valley Bank (SVB) in 2023, and it would be the government that saved the day. 

As everyone now knows, SVB, the 16th largest bank in the US with $209 Billion in assets at the end of 2022, collapsed in 24 hours due to a bank run on Friday (3/10). SVB was Spokeo’s primary bank with our operating checking account. We do hold the majority of our assets in other banks, but fortunately the government stepped in to backstop all depositors on Sunday (3/13). We will be able to meet all our commitments to our team members, our vendors and partners, and our growth plan without any interruption. 

While SVB will have to answer for its mismanagement, I think the herd mentality of VCs contributed to its sudden collapse. 

Below is a first-hand account of my experience: 

Thursday (3/9/23) 

At 12:52 p.m. on Thursday (3/9), someone from our Executive team shared a story by Reuters about SVB reassuring its clients of the 60% stock drop. Our first reaction was to stand by our bank, not overreact, and not feed into FUD (fear, uncertainty, and doubt). 

We believe that SVB is not a fraud like FTX, so the bank’s stock performance should not impact depositors’ rights. Even more importantly, we believe that people show their true colors during difficult times, so we wanted to be there for all our partners. 

At 2:11 p.m., we got the news that a prominent VC advised all his portfolio companies to withdraw money from SVB. After which, we got more and more reports that other VCs followed suit. 

This is an example of VC’s herd mentality. When someone invests in clean energy or AI, everyone else would pile on the proverbial bandwagon. VCs are like movie studios. If Universal Pictures produces a successful franchise like “Fast & Furious,” you can bet other movie studios will follow suit and bet on movies about street racing. Therefore, when a

prominent VC panicked and withdrew his money from SVB, everyone else withdrew $42B in 24 hours. 

At 3:20pm, other banks smelled blood in the water, and we started to receive offers from them to transfer our funds. Seeing the writing on the wall, we decided to withdraw our funds on SVB. We initiated the wire transfer at 4:20pm. 

I have a personal rule to not make any major decisions until the next fresh morning. I broke this rule for the first time in years. 

Friday (3/10/23) 

At 7:00 a.m. the next day on Friday (3/10), we checked our accounts. The wire did not go through, but the new deposits from our payment processors did. We ended up having more deposits stuck at SVB on Friday than Thursday. 

At 9:44 a.m., we learned that FDIC (Federal Deposit Insurance Corporation) had taken over SVB, which meant that SVB had effectively shut down. We spent the rest of the day changing our payment and business processes so that we can make payroll for our teammates and keep our commitments to partners on-time the following week. 

Sunday (3/12/23) 

At 3:44 p.m. on Sunday 3/12, Federal Reserve, FDIC, and US Treasury Department announced that they will fully protect all SVB depositors. Depositors like Spokeo and VCs will be fine, but SVB and its shareholders will be wiped out. 

SVB has helped VCs and entrepreneurs in the past 40 years to grow the tech ecosystem that we know today, but many did not help SVB in its times of need, which triggered a stampede as they withdrew their funds in a panic. While SVB’s management did a poor job managing the situation, SVB did not have to collapse in 24 hours like a crypto exchange and leave thousands of small businesses stranded. 

What I’ve learned: 

Every business leader likes to talk about staying calm under pressure and being there for their teams and partners. Unfortunately, some VCs and leaders failed to live up to their words last week, following the herd mentality that caused a 40-year-old bank to collapse in 24 hours. In difficult times, people show their true colors, and actions speak louder than words. We should choose our partners wisely

Get our daily Pasadena newspaper in your email box. Free.

Get all the latest Pasadena news, more than 10 fresh stories daily, 7 days a week at 7 a.m.

Make a comment

Your email address will not be published. Required fields are marked *




buy ivermectin online
buy modafinil online
buy clomid online
buy ivermectin online