Silicon Valley Bank’s (SVB) collapse is still reverberating around global markets, causing investors to scrutinize the institutions at the heart of the startup ecosystem and prompting plunges in some banks’ stock prices despite the rapid response of banking regulators worldwide. In the US, regulators guaranteed all SVB’s and Signature’s deposits beyond the standard FDIC $250,000 protection limit. In the UK, the government engineered a fire sale, with HSBC picking up SVB UK for £1. This decisive action will ensure that startups won’t be starved of cash — securing the near-term while the uncertainty plays out. However, despite the government action averting immediate crisis, SVB’s remaining assets will be restructured or sold off. With the long-term implications still to unfold, tech leaders and digital business leaders should heed the signals.
Double-Click On Risk To Increase Resilience
This is less about the failure of a handful of financial institutions with an overwhelming share of the startup community and more about market psychology and hard lessons in risk management and resilience. SVB has been at the center of the tech community for 40 years. According to SVB’s data, it banked venture-backed tech and health care IPOs, including 55% of those that occurred in the US in 2021. This crisis won’t change how enterprises innovate with early-stage companies, but it should propel leaders across all industries to look at every partnership more carefully:
- Stop ignoring third party risk. According to our data, only 20% of enterprise risk management decision-makers report that third-party risk is a top concern at their organization. Assess the potential reputational, regulatory, financial, and operational risk each partnership poses to you, and you pose to them. Tech leaders should have formal programs for third party risk management (TPRM) managed with software, not spreadsheets. That includes a dedicated governance, risk, and compliance (GRC) or TPRM platform to assess risk and gauge the level of compliance of third parties. It’s worth noting that SVB itself was without a Chief Risk Officer for much of 2022.
- Increase due diligence and identify the startup alternatives in your tech stack. IT organizations across the Fortune 500 should continue to test promising products and startups to drive innovation. But startups introduce additional risk, and thus you’ll need to: 1) scrutinize them closely to ensure that they’re financially stable enough to fit your risk profile; and 2) identify alternative suppliers with similar or comparable offerings in case you need to switch in a hurry.
- Be ready for opportunistic buyouts of the innovators you rely on. When a startup suddenly finds itself with no viable financing and your tech stack has come to rely on that company, be ready to buy it. Capital One acquired Critical Stack in 2016 as an alternative to early Kubernetes. Intuit made a similar move a couple of years later when it acquired Applatix, the group that developed the Argo open-source IT automation project for GitOps. Tech leaders should identify post-SVB opportunities for acquisition, as M&A is no longer just for high tech vendors and cloud hyperscalers.
- Apply lessons learned from this example of concentration risk. The banks, the VCs, and the startups in this crisis mismanaged concentration risk. The Canadian ad-tech firm AcuityAds had over 90% of its cash (65% of its total market value) held at SVB. In today’s digitally connected and globally interdependent business environment, concentration risk isn’t limited to just financial investments, chips, and supply chain components. Concentration risk occurs whenever there is overreliance in one area, interconnectedness with other enterprise risks, and potential for a devastating cascade effect. Assess concentration risk in five areas: skills, technology, AI decision-making, data sources, and the emergence of oligopolies in several industries.
Invest In Trust And Innovation To Fill The Void Left By SVB
The future of banking is built on trust. In 2022, consumer trust in banks in Australia, Canada, Germany, and the US fell for the first time in several years, leading to our 2023 banking prediction that this trend will continue this year. Expect that fall in trust to be even more dramatic now — how much exactly can be determined in our Financial Services Customer Trust Index. But tech and business leaders in the banking industry can stop the slide:
- Prioritize competence as it becomes a more important trust lever. US consumer banking customers rank competence fourth out of the seven layers of trust, and as low as sixth in Italy. And for individual customers, this makes sense, because US and EU governments guarantee deposits and very few individuals’ deposits exceed the insured thresholds. Given the crisis, however, we predict consumers will (at least temporarily) elevate competence in their trust hierarchy. And some cautious consumers will move to larger banks which are subject to stricter regulations. To boost the competence lever, learn from US investment firms (whose customers rank competence second in overall trust impact) and communicate your investments in risk management to customers.
- Boost CX and digital efforts to seize the chance to serve startups. The digital transformation of corporate banking has lagged that of retail banking. Complex products, limited credible challengers, and strong barriers to switching are to blame. The temptingly safe choice for incumbent banks is to emphasize their financial strength and simply pick up their share of deposits from non-startup businesses as they “flee to quality.” No innovation required. However, there’s also a bigger opportunity, because SVB’s failure will leave a void in the startup community. A bank willing to invest in better CX, technology, and startup-aware risk management could grab that business and benefit as the successful startups scale and grow into tomorrow’s behemoths (who will need more and more sophisticated banking services).
The following analysts contributed to this research: Oliwia Berdak, Alyson Clarke, Christopher Gilchrist, Jost Hoppermann, Jake Morgan, Lee Sustar, and Peter Wannemacher.