How bad communication brought down Silicon Valley Bank
On the limits of a great brand, and why messaging matters
I first read about bank runs as an economics student, in historian Niall Ferguson’s book The Ascent of Money. It seemed an archaic concept, something that used to happen long ago.
But then Silicon Valley Bank collapsed.
I was stunned, as was most of the technology crowd in India. Silicon Valley Bank is an institution we know intimately. I knew Freshworks banked there, I know a bunch of Accel startups banked there, Atomicwork’s accounts were there too. It was the bank for startups. This wasn’t just because it was, literally, a bank from Silicon Valley. This was because the bank understood what startups needed, and had made a highly successful business out of doing things for them. This innovation was the reason for their tremendous success.
Until they had a bank run.
But what is a bank run, really? Stratechery’s Ben Thompson has one of the better explanations:
Banks are, at their core, facilitators: depositors lend their money to a bank, for which they are paid interest, and banks lend that money out, again for interest. A bank is profitable if the interest rate they charge for loans is greater than the interest rate they pay to depositors. The reason this works is because a bank ideally has a diverse set of depositors, whose funds come and go on an individual account basis, but on an aggregate basis are steady; this provides the stability for those long-term loans.
A common failure mode for banks is a bank run: a bank does not have sufficient assets to pay back all of its depositors at once, because those assets have been distributed elsewhere as loans. Unfortunately a bank run can become a self-fulfilling prophecy: if depositors fear that a bank is running out of liquid assets, then the rational response is to quickly pull their funds, which makes the problem worse.
This is what happened to SVB. All its customers, a large number of which were startups concentrated in Silicon Valley, suddenly decided they wanted their money back. But the money wasn’t there, it had been lent out or invested. Unable to pay, the bank failed.
That’s the main story here. And it’s true enough.
But there’s also another story here.
Silicon Valley Bank wasn’t really insolvent. The bank had made a couple of bad long-term investments, but they had money. They had realised they needed some liquidity for their customers, and to make sure, they had sold $21 billion worth of long-term bonds at a $1.8 billion loss. That would still leave them with a lot of money, you’d think, especially as this was just a part of their balance sheet. You’d be right. SVB had money.
What happened then? How did SVB fail if they had money? Let’s go back to the second part of Ben Thompson’s defining of a bank run:
Unfortunately a bank run can become a self-fulfilling prophecy: if depositors fear that a bank is running out of liquid assets, then the rational response is to quickly pull their funds, which makes the problem worse.
Do you see it? Fear is the most important word in that sentence. SVB had money, but everyone was afraid of what would happen to their money if, for some reason, the bank disappeared. And so everyone tried to pull their money out at once. Hence the collapse. If a significant section of its customers had not panicked, there is a chance SVB might still be here.
What went wrong, then?
Communication, that’s what went wrong.
I’ll explain.
On March 8, crypto bank Silvergate announced that it was winding down its operations. Now this wasn’t big news for anyone. The bank had been struggling, and the bigger crypto companies like Coinbase had already moved away from the bank. It was significant for the crypto world, but the rest of the world didn’t really notice. Except Wall Street did. Naturally, that’s their job. There was immediate unease in the markets about the contagion that could arise from such a collapse.
The same day, as I pointed out earlier, SVB announced that it had sold about $21 billion of long-term bonds from its portfolio, resulting in an after-tax loss of $1.8 billion. Again, remember that they didn’t need the money then. They were just being careful that they shouldn’t have liquidity concerns. They had lost money, sure, but they were by no means insolvent. They were good for their deposits, just not if everyone wanted them at once. But the signal had been sent.
The markets, already jittery, noticed. This was not a cat among pigeons, this was a komodo dragon.
That they announced this just as Silverbank collapsed was their first comms mistake. To be fair, though, we can’t lay this at SVB’s door. It could be just plain bad luck.
But the second mistake was egregious, and it was the one I couldn’t get my head around. On March 9, SVB’s CEO Greg Becker, who had been silent until then, got on a conference call.
This is what TechCrunch made of it:
It was not an assuring performance. "My ask is just to stay calm, because that’s what’s important," Becker said to an untold number of viewers who were not given the opportunity to ask questions. Silicon Valley Bank has been a "longtime supporter of you, the venture capital community companies, and so the last thing we need you to do is panic," he added, saying what no one ever wants to hear from the head of their bank.
One of those customers, who asked not to be named, said to us afterward: "It’s like the end of ‘Animal House.’ Don’t panic? Now, I am panicking, watching your broadcast."
Every startup founder or VC firm listening or watching the conference had drawn the same conclusion: I don’t trust this message. The CEO is not taking questions, they are not telling us everything. He had essentially torpedoed his own firm.
CNBC reported later on how the muddled communication led founders like Varun Badhwar (CEO of startup Endor Labs) to immediately want to withdraw money:
SVB’s continued poor communication over the following day is what finally convinced Badhwar to withdraw Endor Labs’ money, he says: "When there is a PR and communications failure ... followed by misinformation spreading quickly on social media [that causes] a run on the bank, you just don’t want to be the last one there."
This was it. This was the death knell.
Silicon Valley Bank was a powerful brand. It had earned the goodwill of the entire startup world by helping the community with products and services tailored for them. Even now, any founder you meet will talk about them fondly.
But SVB was also a bank. Banks run on trust. And they had lost their core audience’s trust by not communicating properly. They had chances to sort this out, too. When they sold their bonds, they could easily have been clearer that this was just to have some liquidity and not because they had to. When the CEO spoke, he could have done better, assuaged fears by being direct and open. Instead SVB looked like they had skeletons in their closet. And that was enough. They were done for.
But how did an organisation of smart people, serving some of the smartest people in the world, communicate this badly, especially in a situation of such volatility?
Axios tells us how:
SVB did not have a communications professional on their leadership team, and it showed. There was no emergency PR plan to stem a bank run, which is comms practice at a bank. While effective communications can't make up for the bank's poor financial planning, they can help instill confidence among investors and customers.
Silicon Valley Bank did not understand the power of messaging, communicated badly, and paid a heavy, heavy price.
My interest in this story stemmed from my time at Accel India, where I essentially ran comms for a year. It was this experience that helped me understand immediately what had gone wrong at SVB.
Lulu Cheng Meservey, Comms Chief at Activision Blizzard, and formerly of Substack, had a much more detailed Twitter thread on this, which I recommend.
If you want to understand how to do comms better as a founder or operator, I recommend this episode of First Round’s podcast, with Aaron Zamost, former head of comms at Square.
The next essay in the newsletter is about writing and why it’s so important to brand marketing. If you haven’t subscribed yet, please do so here.
Note to regular readers
I’ve made a few changes to the look and feel of the newsletter, as well as its brand colours and logo. This is a work-in-progress, so feedback and mails about bugs are welcome. Thanks to Swetha Kanithi, for pointing me towards where I should be going, and to Aarthi Vasudevan, for her help with the design.