Discover more from The Digital Leader Newsletter -- By John Rossman
Under the Waterline -- Lessons from SVB for Every Leader & Business
Strategies and Techniques for Change Agents, Strategists, and Innovators
You only find out who is swimming naked when the tide goes out. — Warren Buffett
I’m not a banking or finance expert, but I do understand and help manage certain types of risk for my clients. Like many of you, I have been fascinated with the rapidly developing story of Silicon Valley Bank (SVB).
But how does that story apply to everyone? How does that story relate to growing a thriving business? What are the generalized principles we can take from SVB to apply to business in general? What are the lessons below the waterline?
This week The Digital Leader Newsletter outlines five core lessons to learn from SVB.
I’ll assume you are current to the situation and some of the non-arguable facts of the situation. This was a wicked problem & situation and a difficult-to-predict set of circumstances. Here’s some of the key components as I understand them:
SVB invested deposits in long-term US T-bills. A seemingly low risk investment. But…
The only problem is that these are long-term bonds. As the Fed increased interest rates, the value of the these low interest bonds decreased (if you needed to sell them before maturity). The basics of lending is matching loan duration to investment duration.
The accounting on the balance sheet was not mark-to-market, but held-to-maturity. This led to an inaccurate assessment of the strength of SVBs balance sheet and liquidity.
With the density of their customer-base being in technology and life-science small start-ups, these customers needed more funds than forecasted because of the general sector situation.
Communication by the SVB CEO didn’t instill confidence; in fact it likely contributed to the run on the bank. As Jeff Sonnenfeld, CEO of the Yale School of Management’s Chief Executive Leadership Institute (CELI), told CNN “Someone lit a match and the bank yelled, ‘Fire!’”.
Depositors have had their funds guaranteed by the FDIC. The investors and bondholders of SVB are wiped out. This makes the “bail out” significantly different from bank bailouts done in 2008.
Lessons to Apply
What are the universal business practices and lessons we can learn from this situation? Here’s five that I take from this unfortunate situation:
Own both the ups and downs of the market profile you choose.
SVB chose a market differentiation strategy that exposed it to sector-level risk tied to the early-stage tech sector. In doing so, they carved out a large niche based on a reputation for best serving the needs of their client base.
That's fine. It's arguably even a great strategy for creating differentiation in the competitive financial services space. However, if you choose a strategy that eschews diversification in favor of specialization, you need to be prepared to ride both the ups and downs of the sector to which you've hitched your horses.
For SVB, that means accepting that their company's boom and bust cycles will roughly track that of the early-stage tech sector and that when the going gets rough for early-stage tech, SVB needs to prepare to weather the storm.
Yet that's not what they did, at all. SVB shifted their investment philosophy away from liquid assets with 1-yr maturities to illiquid assets with 10-yr maturities, setting them up for the painful liquidity crisis leading to their collapse.
When they should have been focused on mitigating the sector-level risks to which they were exposed, they instead looked to (marginally) boost their in-year returns. As one hedge fund short seller put it to the Financial Times, “They went for an extra [0.4 percentage points] of yield and blew up the bank.”
Executives can get addicted to a string of "wins," blinding them to the moves they need to make to ensure they effectively weather the downturns in their environments. A healthy risk management function and attitude provides the fact base and questioning to avoid this blindness.
Redundancy is the best hedge — in ALL key matters.
It appears that SVBs customers will all of their money back. However, that wasn't guaranteed and SVBs collapse could have been devastating for a number of their clients. For SVB investors and employees, it is an unfortunate disaster. Even without losing depositor money, this episode has undoubtedly been a highly distracting operational challenge for SVBs customers and a headache to navigate.
Whether it is having multiple banking relationships, or having a diverse set of suppliers for a key material or service, if something is vital to your business, the most basic risk management is to identify the risk and create a hedge — often that hedge is either redundancy or insurance.
Both come at a price, but it's worth it.
When placing a Big Bet, systems thinking is key.
SVB executives were forced to place a Big Bet - quickly selling assets and equity to raise capital to save the bank. They had little choice in the matter, but by most accounts, their execution was terrible. Specifically, they failed to accurately play through the ecosystem effects of their actions, resulting in a good old fashioned bank run.
The collapse of SVB could go down as one of the biggest unforced errors in modern corporate history. While mismanagement seems to be at the root of the issue, it is hard to make great decisions in the face of a crisis and you do not always have the time to fully play out all of the possible system impacts of the decisions you make.
That's why it's important that you spend time really understanding the system dynamics of your business before there is a crisis, so that you'll be better equipped to make good decisions quickly when one arrives.
Innovation plays a key role to address many of these risks.
When you have an over saturation to one customer, one product, or one category, diversity by innovating and creating new customers, new revenue streams and new customer categories to balance out that risk. Risk management is an often missed argument for innovation and the investment required.
Pressure-test Your Big Bets and Key Assumptions. Find your blind spots. As I wrote in “Your BIG BET is going great. Until suddenly, it’s not”:
The best business leaders have a keen sense for risk and disconnects, take early action on that sense, and use a wide range of tools and techniques to pressure test BIG BET initiatives.
The successful change agent systematically and continually probes in a myriad of manners. This is “pressure testing” — pushing, testing and confirming to make sure nothing starts leaking under pressure.
Through this pressure testing, leaders set a tone of “management by walking around,” not relying on just reports and proxies. Where facts on the ground don’t match the reports, they trust the ground facts and use this truth to strengthen the reporting system.
Build a Boston Whaler
A Boston Whaler boat is an expensive boat option. A Boston Whaler boat has a unique hull design and has an incredible value proposition:
AN UNSINKABLE HULL PLUS BRILLIANT DESIGN AND ADVANCED TECHNOLOGY EQUALS THE MOST TRUSTED BOAT ON THE WATER.
This is an anti-fragile design. Not optimized by for lowest costs. Not optimized for simplicity. Optimized, and priced, for risk.
Build an anti-fragile, durable business.
Here is a summary of the best book on this concept Antifragile: Things That Gain from Disorder.
Taleb argues that we are overly focused on creating systems and institutions that are efficient and streamlined, but that this often comes at the expense of resilience and adaptability. He suggests the idea of antifragility, which involves building systems that can withstand and even thrive in the face of unpredictable events and disruptions.
(a special thanks to Kevin McCaffrey to contributing to this newsletter)
About The Digital Leader Newsletter
This is a newsletter for change agents, strategists, and innovators. The Digital Leader Newsletter is a weekly coaching session focusing on customer-centricity, innovation, and strategy. We deliver practical theory, examples, tools, and techniques to help you build better strategies, better plans, and better solutions — but most of all, to think and communicate better.
John Rossman is a keynote speaker and advisor on leadership and innovation.
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