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 email@example.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
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.