Silicon Valley Bank Fallout & the Shaky Foundation Our Industry Stands On
The Federal Reserve’s Sunday announcement that all depositors will have access to their funds following the chaos caused by Silicon Valley Bank was met with collective relief.
Great, everyone’s getting their money back, but what has the SVB fallout cost us?
Much of the conversation around SVB concerns the problems with taking shortcuts among business decisions in financial services, misinformation on social media, and herd mentality across venture capitalists’ inner circle that spiraled into a full-fledged bank run.
These concerns expose the shaky foundation on which our entire industry stands. We need proper representation and cognitive diversity to build resilient systems. Without diversity, we are doomed to repeat this cycle.
We’ve been pouring 1-ingredient concrete. And, as it turns out, that’s just sand.
As long as the same group of people continues to make decisions and online engagement exacerbates fear, uncertainty, and doubt, these occurrences will persist, disproportionately impacting women and other marginalized communities not part of the inner circle.
Who’s leading the herd?
From financial services to venture capital and fintech, our industry has always been fractured due to a need for more diverse representation in all forms. As a result, our industry has been particularly vulnerable to groupthink or herd mentality, a psychological phenomenon in which a larger group influences individuals.
As Bloomberg Opinion columnist Matt Levine wrote,
“Nobody on Earth is more of a herd animal than Silicon Valley venture capitalists. What you want, as a bank, is a certain amount of diversity among your depositors. But if all of your depositors are startups with the same handful of venture capitalists on their boards, and all those venture capitalists are competing with each other…”
This lack of representation at decision-making levels is deeply concerning, as it prevents individuals from diverse backgrounds from having a voice in business decisions.
But what about SVB itself, which a particularly incendiary WSJ op-ed notes is comprised of “45% women” on its board? Neither the countless industry analysts commenting on the lack of diversity in the sector nor am I suggesting as a blanket statement that “more women” could have avoided this clusterf*ck. There are layers to this.
First, if our industry more holistically met diversity demands, last week’s events could have been avoided, as my friend Liang Zhao shared.
To take that point further, America doesn’t have a problem with equality. It has a problem with equity.
Diversity is not just about having women or marginalized groups in the room (i.e., equality). To truly support diverse perspectives, we need a cognitive shift from giving historically underrepresented leaders a “seat at the table” to co-creation and full collaboration that ensures diverse voices are not only heard but valued, creating outcomes that are better for everyone and allowing for higher innovation.
That’s equity. Diversity means nothing without it.
As Lee Pham so eloquently clapped back to the WSJ article on LinkedIn:
“Accountable leaders should prepare for real systemic risk by “building teams that have the cognitive diversity necessary for resiliency by seriously incorporating cultural, ethnic, educational, experiential, and other forms of diversity into their people strategies.”
This particular situation called attention to an often-overlooked issue: When a group of similarly-minded and similarly-incentivized people is responsible for developing a product or strategy, significant blindspots can occur that are not immediately apparent to those within the team.
A system that rewards short-term thinking
As social media recirculates the popular movie about the early stages of the 2008 financial crisis, Margin Call, as a reference for what’s happening today, I recall the movie’s tagline:
“How do you succeed in this business?
Be faster. Be smarter. Or cheat.”
These short-term mentalities are summarized well by my friend Alex Johnson’s essay on SVB, where he shares the NGMI (Not Gonna Make It) meaning:
“To believe that only fools and losers don’t take shortcuts, even when those shortcuts are clearly risky and/or immoral – has permeated the entire fintech industry.”
In fundraising and fintech, we all walk the same tightrope between success and failure.
For a select few, the presence of a safety net, whether due to socioeconomic, gender, Ivy-league education, or racial privilege, has enabled them to take the riskier route in pursuit of success.
By doing so, these individuals have propagated the idea that taking risks and acting quickly is the most effective way to cross the chasm. Their success in doing so has solidified this method of short-term thinking in the minds of many.
This brings me to this question: How often do founders and investors from marginalized groups have to take the hit from actions taken by a small but influential subset of people who have so much more of a safety net?
A disproportionate impact on marginalized founders
Female founders are already underestimated, under-capitalized, and under-banked, making their companies even more vulnerable to market shifts.
This marginalization has real implications – not only for the female founders themselves but for the businesses they are trying to build, the communities they are trying to serve, and the economies they are trying to invigorate.
It also has implications for the banks perpetuating a cycle of sameness, as Matt Levine pointed out: Less diverse depositors = greater risk exposure.
It is paramount that we strive to identify the root causes of current challenges in our community. As Helen Min of Phenomenal Ventures said,
“A better (and easier) starting point might simply be investing in more underrepresented founders outside of SV and NYC. At the very least, we won’t have to all retweet the same female founder in Ohio next time.”
Tiffany Dufu, founder and CEO of the Cru, summed up the challenges for a Black female founder in a recent LinkedIn video:
“Of the billions of venture capital doled out to startups, less than 1% goes to Black women. It’s hard enough to execute and fund a vision you believe will change the world.”
In response to the SVB crisis, many female founders have taken to social media to ask for support. And I’ve seen female fintech founders step up to the challenge.
For example, Lara Hodgson of the fintech company Now extended her support. Stacey Abrams and Lara started Now 12 years ago to help small businesses and startups diversify their capital sources and separate their cash flow from their “financing” facilities.
While I have yet to see data around the number of SVB customers who are women or BIPOC, the ripple effects will continue to be felt. To help us gather said data, please consider filling out the form created by All Raise, which is available here. This data will help us better understand the SVB collapse’s effects.
Bookmark in case of turbulence
It has been truly inspiring to witness the kind of collective response demonstrated by the fintech community to help each other in these unprecedented times.
Leaders in fintech and VC who care about progress and sustainability have been at the forefront of this, providing invaluable resources and documents, such as loans, payroll, and bank details.
For more information, you can bookmark the detailed Tweet thread I created. However, if you require specific assistance, please do not hesitate to reach out.
Yes, this is a financial stability story…
But this is, most critically, a people story. It’s the story of when major financial institutions make significant changes whose impact is felt heaviest by the most vulnerable, underfunded, and underbanked communities.
This is the beginning of our journey, and unity is more important than ever. We must rally together and continue to support one another as we face what lies ahead.