How this tech pillar unraveled

Silicon Valley Bank has been a pillar in the venture and tech community for 40+ years. It’s building a reputation on an ability to work with startups and venture capital-backed companies, supporting startups and venture funds with creative debt, banking, and asset management solutions that most larger banks would not. It has been key to helping young and growing companies, in essence incubating innovation in the US and abroad.

However, even with all of the creative financing and lending products and services “right-sized” for the tech and venture community, SVB still had to operate using the traditional banking business model — they intake deposits and invest them in fixed assets (Treasury bonds and mortgage-backed securities) maintain short term assets (cash reserves) which they can lend and collect fees and interest revenue.

But in the current environment where interest rates are rising into an economic slowdown, the value of the fixed assets SVB held on its balance sheet decreased. The two options, are to sell the bonds and realize the loss, or hold them to maturity as unrealized losses that hopefully turn around.

And failing to proactively address the risk and the communication associated with the unrealized losses on their balance sheet is what led to Moody’s rating downgrade that became the catalyst for 40+ years of banking success evaporating in a matter of 48 hours.

Many, and rightfully so, will focus on the management decisions made by SVB, specifically the lack of risk management measurements and highly concentrated investment strategy. Those are all critical details. But on the surface, the catalyst that made this a crisis was a perceived lack of liquidity from the customer’s perspective:

When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses.

In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank,

“Timeline: The Shocking Collapse of Silicon Valley Bank,” Dorothy Neufeld. The Visual Capitalist

Customers and depositors feared the bank did not have the short-term assets on hand to cover all deposits and the money in their accounts. Those fears were compounded by the FDIC insurance limitations, which only insure up to $250,000 in each account. So customers with accounts over the $250,000 threshold were at risk of not being able to access funds that were uninsured, as a best-case scenario. Worst case, their uninsured funds might be gone.

The natural reaction was for customers to pull money from the bank. It triggered a “bank run” and $42B worth of customer withdrawal requests in one day leaving SVB gutted, and the rest of the US regional banking system in limbo.

Unpacking the lessons

There is no shortage of nuanced opinions and facts about how this happened and what will happen next. Every perspective has a different take ranging from startup entrepreneur, venture capitalist, financial analyst, SVB shareholder, etc.

But there are two universal insights that athlete investors can learn from the different perspectives in this situation and apply to their investment approach and strategy:

Lesson#1: Time is the biggest driver of your investment strategy

The typical time horizon of a startup investment is 7-10 years. What does that mean? Any money you invest into a startup may be locked up for 7-10 years. The hope is that it increases in value and eventually becomes the one in ten startups to “make it.” But on the flip side of optimism is the reality that there’s a 90% chance the value decreases, just like SVB’s unrealized gains, or goes completely to zero.

Regardless of the performance of your portfolio, the average NFL career is less than 4 years. That means your earning potential as an athlete will likely be over before a VC investment ever pays you back. And the chances of you matching your earnings in your next career are slim.

So, before you make the investment, ask yourself if there’s a chance you might need that capital in the next 7-10 years. If the answer is no you might be in a better financial situation to absorb it right now, but you’re still assuming a lot of risk no matter how good the deal looks. As we’ve seen in recent months, things in the economy can change quickly, and young companies are the most sensitive to challenging economic environments.

If the answer is yes you might need it, are you willing to risk the money you need for a 10% chance of winning 10 years from today?

Lesson #2: Understand your liquidity needs

Your earning window as an athlete is short. You’ll earn most of the revenue in your entire professional career over a few-year span. Much of your long-term success will be tied to investment decisions and spending habits you develop within this short span.

Your lifestyle as a current player will likely change when you’re done playing your sport. It is critical that you understand the cost to maintain your ideal lifestyle. It’s the only way to set up your financial portfolio so that you can comfortably allocate your resources to invest in early-stage VC companies.

The last thing you want to do is create a liquidity crisis within your own financial life. But that’s a risk you run if you invest in VC and you’re not mindful of your short-term and long-term liquidity needs. You don’t want to find yourself holding shares of companies and VC funds that are long-term illiquid assets if you’re in need of short-term cash. At that point, it doesn’t matter how valuable the shares might worth be in 5 years if you don’t have enough liquidity to cover your short-term lifestyle needs. Remember, the liquidity crunch was the major catalyst that caused SVB to fail. But unlike SVB, no entity is coming in as a backstop to bail you out of your liabilities.