Banking Crisis
Don’t Blame Venture Capitalists For SVB's Collapse
Better decision-making processes, not railing against venture capitalists, are some of the lessons that should come out of the Silicon Valley Bank's collapse, argues the author of this article.
(An earlier version of this article appeared in Family Wealth Report, sister news service to this one.)
The following article comes from a regular contributor to this news service, Matthew Erskine, who runs a law firm, Erskine & Erskine. He delves into some of the lessons that he thinks should arise from the Silicon Valley Bank collapse. Many more arguments will come out of the SVB saga – and, of course, the other problems in the banking system, such as at Credit Suisse. As always, the editors don’t necessarily endorse all the views of outside contributors. Please jump into the conversation! Email tom.burroughes@wealthbriefing.com
On Thursday, 16 March 2023, The New York Times
published "I Was an SVB Client. I Blame the Venture
Capitalists," by Elizabeth Spiers, a depositor at Silicon Valley
Bank. In this article she states: “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 startups 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 rumours of trouble – and
advised their portfolio companies to flee, initiating the bank
run that brought the whole thing tumbling down.”
From an estate planning perspective, the issue is not so much
what the venture capitalists did, as much as how they came to the
decision they did to advise their portfolio companies to withdraw
funds from the bank. This is most likely because most venture
capitalists who are controlling the funds are, at
their core, entrepreneurs and use an action-based
decision-making process.
Entrepreneurs often find making decisions difficult. They make
impulsive, sub-optimal decisions, often choosing options which
bring a prompt but smaller reward, instead of making a choice
that yields a greater reward later down the line. This difficulty
in decision-making extends into planning, organisation,
self-regulation and prioritising – the key factors
needed to decide on the course of action. Estate planners who
have clients who have experienced the consequences of impulsive
decision-making know that, in making the estate plan, the clients
often end up with “analysis paralysis.” This is avoiding deciding
on a long-term strategy because the client is too worried about
making similar wrong decisions as they experienced in the past,
avoiding a decision until another person makes the decision for
you.
I want to differentiate between risky and sub-optimal
decision-making. Sub-optimal decision-making is limited to taking
the riskier option. Entrepreneurs are as risk adverse (if not
more so) than most people, but they are better at making snap
decisions in the heat of the moment. What they often lack is the
discipline to stop and use a more managerial, prediction-based
decision process, when the situation is more predictable
even when the situation overall is not. This requires knowing how
to be “bilingual” in both processes.
Here is an outline the action-based decision
process:
1. Determine what is it that you want;
2. Determine what are you willing and able to put at risk;
and
3. Act quickly and quietly.
a. With the resources and information at hand
b. Bring along those people you know; and,
c. With the least amount of risk possible.
4. Determine if the results are what you want;
a. If yes, then repeat
b. If no, then review what you want.
Here is a prediction-based decision
process:
1. What is it that you need to achieve your goal?
2. What are your objectives that move you towards you
goal?
3. Which objective are you most likely to miss
achieving?
4. Consider alternative strategies that achieve your lagging
objective and ask for each strategy:
a. Is the strategy sufficient to achieve your objective?
b. Is the strategy necessary to achieve your objective?
c. Is the strategy even possible under the current
circumstances? and
d. Is there an action plan for implementing the
strategy?
5. Determine the risks and trade-offs that your selected
strategy entails; and
6. Select and implement an action plan based on your
selected strategy.
Here is how you put them together:
1. Determine both what you want and what you
need;
2. Recognise where the results of your actions
are predictable or unpredictable;
3. For those situations where the results are
unpredictable, use the action-based decision process;
4. For those situations where the results are
predictable, use the prediction-based decision process;
and
5. Combine the results of the action-based
planning and the action plan of the prediction-based
planning.
How could the run on the Silicon Valley Bank have been different
if the venture capitalists came to a different decision? Perhaps
history has a lesson in the combined action-and-prediction-based
decision process. In 1907 there was a run on banks that
threatened to collapse the US financial system. JP Morgan
and a group of other wealthy individuals formed a committee and
essentially stopped the run, backing certain banks critical to
the financial sector.
Indeed, JP Morgan chief executive Jamie Diamond is putting
together a group of banks to do exactly the same thing that his
firm’s founder did in 1907. Although many found fault with the
resulting consolidation, the fact remains that if they allowed
the withdrawal of funds from the banks to continue, there would
be a collapse, but if they backed the threatened banks, it would
prevent financial collapse. The outcome in either case was
predictable.
Railing against the venture capitalist in hindsight is
satisfying, but to avoid this situation in the future, there
needs to be a better decision-making process.