We were originally going to skip over the topic of Silicon Valley Bank’s (SVB) collapse. The story has been blanket covered across the Internet, and frankly the whole subject was just too depressing. However, over the weekend we were barraged with questions about this while we scrambled to move money, and some themes kept popping up. Since this is likely just the start of a long process, we wanted to put down our thoughts here if for no other reason than we know we will have many opportunities to point to this post again, and again, in the future.

SVB collapsed because it made a bad bet on interest rates and did not adequately asses the size of the risk that bet posed to its operations. The root of their problem stems from the fact that during 2021 and 2022 the size of their deposit base more than doubled. That much money sitting on the balance sheet risked lowering their overall returns. Rather than conservatively, slowly place that money they seemed to have made a small number of asset purchases to eke out a bit more yield. This benefited their shareholders’ in the short term, but was implemented so poorly that it wrecked the company. SVB did not fail because it made bad loans to dodgy borrowers, and it certainly did not fail because it loaned to much money to failing start-ups.

Rising interest rates were always going to wreak some form of havoc on the start-up ecosystem. We wrote about this ten years ago and we noted that often the most vulnerable link in the chain is often not the one we think of first. When the bet went wrong for SVB, they tried to raise cash by liquidating securities which spooked people, and that fear quickly became a panic.

As usual, Matt Levine said it best, at the heart of SVB’s troubles was the fact that it was too tightly coupled to a single sector, and when certain influential people in that sector start yelling Fire in a crowded theater, the herd mentality kicked in to overdrive. A small number of certain people started telling all their start-ups to flee SVB and those people had a lot of influence. To be clear, by certain people, we mean a small group of venture capitalists. It is not fair to lay the blame of SVB on Venture Capitalists, but a subset of VCs absolutely played on outsize role in converting a liquidity crunch into a full-blown panic. Arguably, they were just being rational economic actors, but the fact remains that this is still a small community built on personal relationships, and that had an outsize impact on the bank.

So then the FDIC stepped in, ultimately agreeing to fully back all SVB deposits. Everyone agrees that the FDIC had to do something, otherwise a few thousand companies with millions of employees would not have been able to make payroll this month leading to absolute mayhem. But many are unhappy about this nonetheless. The Valley prides itself on the myth of rugged individualism and the triumph of private enterprise over government direction. Set aside the fact that Valley’s roots and the Internet itself are offshoots of government policy. There are still a lot of people unhappy that the community needed to fall back on the government.

Ultimately, this a question of personal morals and Federal Banking Policy, neither of which we are experts. There is no Right answer here, just a series of bad choices.

That being said, we are seeing a refrain online that the government bailed out “Venture Capitalists” and we think that misses the mark. All these SVB depositors were going concerns, engaged in productive economic activity, some of the most productive in the US. Is it fair to say those companies were bailed out by merely being given access to the funds in their bank accounts? In a purely literal sense maybe that is a bail out, but by any reasonable standard it makes no sense that these companies should be penalized for their behavior.

Many people have pointed to the fact that start-ups should have done a better job of managing their treasury and not relying so heavily on a single bank. Again, this seems logical, but only if you have never tried to open a commercial bank account in this country. Over the past three years we have worked with client companies to open dozens of bank accounts. Viewed from that experience, there are some fairly solid reasons that we all bank with SVB. Put simply, the major US commercial banks have no interest in working with start-ups. The majority of this business is just basic banking, no fancy structured products or lucrative loans needed. So no fees, and so no interest from the big banks.

In 2021, we worked with one company to open a commercial bank account at a mid-sized commercial bank. They asked for documents, we sent them documents. They asked for forms to be filled out, we filled out out forms. Then they asked for more documents and more firms. Again and again. Six weeks of back and forth. Then they went silent for two months, not responding to emails. Then they asked for the same documents and forms again. We pointed out that we had sent them already, and they claimed they had lost them. So we went through a few more weeks of back and forth. Then they went silent again for a month. This time, when they came back they handed us off to a new New Account Team. The new team asked for some more documents and forms. Then they went silent. When they came back to us they turned us down, and not politely. Eight months of work thrown away. Another commercial bank insisted the company provide a fax number.We could go on. We all banked with SVB because they actually wanted start-ups as customers. No sweetheart deals. No personal loans to board members. No special treatment. They just wanted our business.

This, to us, is the worst part. Once the dust has settled, the Valley will likely be left without a reliable banking partner, and instead end up reliant on the big commercial banks who ignored us for years and will likely do their best to ignore us again.

So it makes sense to criticize the US’s approach to bank regulation. The SVB wind-up process is not perfect, full of moral hazard and inefficiency. But if we are going to have that conversation then we need to address the bigger question of small business commercial banking in this country.