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Four lessons for founders and companies

The Silicon Valley Bank has collapsed. It was considered an important starting point for many start-ups. In Germany, too, around 10 percent of the 3,600 European corporate customers have business relationships with the bank. But what can founders and companies learn from the Silicon Valley bank failure?

Silicon Valley Bank was considered to be the 16t largest bank in the US. It seems strange at first that such a large financial institution could collapse. But with this bank two factors came together.

On the one hand, the bank invested a large proportion of the money that flowed in in long-dated government bonds and mortgages at high prices. These bonds now had to be sold at unfavorable prices, resulting in billions in losses.

The other reason was the tense economic situation of many companies and start-ups in the digital economy, which as a result were no longer able to repay their loans on time and at the same time wanted their deposits.

Silicon Valley bank failure: The reasons

When the initial assessments said that the collapse of the bank would be a “Lehman moment for the start-up world”, this led to a bank run and the withdrawal of all funds by the companies, which ultimately made the whole situation even worse.

A small detail: In many cases, the funds were withdrawn on the advice of VC companies, which in turn had done business with Silicon Valley Bank for many years. The fact that this “recommendation” intensified the crisis at the bank is certainly a special point in the story surrounding this bank failure.

Now it has to be said that the situation, especially for German start-ups, is not dramatic according to initial assessments, which is mainly due to the deposit protection system.

In the USA, too, the security systems prevented the greatest damage, although the consequences cannot yet be conclusively assessed. But there are a few lessons to be learned from the Silicon Valley Bank cause.

1. Those who have money sleep better

Basically, one can say that a company should have certain financial reserves when it becomes entrepreneurial. That sounds like a truism, but especially in the digital and tech space, it’s not uncommon to see large financings.

This means that the proportion of debt in the company is high and the proportion of equity is low. If there is a problem with the financing bank, this can quickly lead to unpleasant and confusing situations.

In addition, it can make sense to have emergency lines of credit that can be called up if the worst comes to the worst. This short-term retrieval can then be made to a new bank account and thus provides new funds at a new financial institution with which the entrepreneurial activity can be continued.

2. Find and secure alternatives

The collapse of Silicon Valley Bank showed that having a “backup” to your main bank made sense. Because if the main bank of a company collapses and access to the account there is no longer possible, then payments can no longer be made, for example.

This is exactly the problem addressed by some founders who were at the SXSW Conference in Austin, Texas on March 11th and 12th and learned about the collapse there. They then lost account access from one minute to the next and of course this caused excessive nervousness.

A second bank, possibly with a limited range of functions, at least ensures that financial transactions can continue to be carried out.

This was exactly what many companies in the USA were no longer able to do in the first few days after the collapse and led to a panic about an increasing number of bankruptcies due to the lack of ability to pay bills.

3. Draw up an emergency plan and test the application

Many founders are not or only insufficiently prepared for banking problems. In particular, there are no emergency plans that ensure that there are instructions on how to behave in the event of a bank failure or any other emergency situation.

For example, such an emergency plan could regulate the stopping of payments, in connection with the contacting of money recipients, for example in order to agree on longer payment periods at short notice.

That’s still better than if funds flow away that are needed elsewhere to avert insolvency of your own company.

However, the existence of an emergency plan alone is not enough. Rather, it must also be clear under what circumstances this is used, who initiates the application (e.g. if the managing director is not available as the “natural initiator”) and who monitors the implementation.

4. Crisis communication is elementary

Finally, founders should deal with crisis communication. Because in the present case it has been shown again that unsuccessful communication can lead to the public drawing wrong or misguided conclusions. These in turn can burden the communicating companies and start-ups.

In the first few hours after the problems at Silicon Valley Bank became public, some founders in both the USA and Germany spoke of “one of the hardest hours for the start-up scene” and adopted the expression ” Lehmann moment”.

This meant that reporting was also done in the blackest colors, although the regulatory authorities in the USA probably got the situation under control relatively quickly and the effects in Germany were limited.

The news, however, was initially full of “black reports”. And that despite the fact that history should have taught us that the first order of the day would be to stay level-headed and keep a cool head.

Silicon Valley bank failure: Conclusion

It cannot be completely ruled out that a bank will collapse. In recent years there have been repeated cases of bank failure with Lehmann Brothers and Greensill Bank, to name just two prominent examples. It is therefore important for founders to take precautions.

Especially under the impression of the last few years, in which few risks were recognizable, many young companies have not carefully built up their risk provisions. The case of the Silicon Valley Bank should be used for a rethink. Because it’s better to be safe than sorry.

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