After Silicon Valley Bank's flameout, what's next for entrepreneurs?

Silicon Valley Bank's failure in the face of rising interest rates shook founders and funders across the country. Julia Austin, Jeffrey Bussgang, and Rembrand Koning share key insights for rattled entrepreneurs trying to make sense of the financing landscape

By Avery Forman

Published: May 26, 2023 10:46:37 AM IST

Updated: May 26, 2023 11:22:51 AM IST

SANTA CLARA, CALIFORNIA - MARCH 13: People line up outside of a Silicon Valley Bank office on March 13, 2023 in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers are lining up to try and retrieve their funds from the failed bank. The Silicon Valley Bank failure is the second largest in U.S. history. Image: Justin Sullivan/Getty Images

The collapse of Silicon Valley Bank (SVB) in March left the startup world reeling.

The biggest lender to fail since the 2008 financial crisis, SVB had become the preferred funder of the startup, tech, and venture capital worlds. Its quick and sudden fall, as higher interest rates hit its investments and triggered a run on deposits, gave pause to startup investors and also holds lessons for founders going forward.

Harvard Business School faculty suggest some key takeaways for the startup ecosystem as the dust settles and as they look for future growth. Although the banking system has somewhat stabilized, First Republic’s weakness, which prompted a hasty sale to JPMorgan Chase, portends continued headwinds for startups seeking investors.

Julia Austin: Take stock on how to manage in times of crisis

When the SVB situation unfolded, many founders were unprepared when it came to managing in crisis. In addition to the operational learnings around banking and ensuring not all of their cash is in one vulnerable place, it was a big wake-up call for many founders in terms of how they do everything to keep their cool with employees, investors, customers, and partners to how they communicate status and manage tricky processes under pressure.

For example, how to get a timely board resolution to temporarily tap into personal funds to make payroll during the SVB situation could translate into how to fast-track a decision on how to deal with a security breach or a PR issue. Who, what, and when things are communicated are as important as the resolution itself.

Now that the dust has settled a bit, founders should take stock and evaluate how they’ll manage crises going forward. A “code red” crisis—one where the business is deemed at risk in a material way—can happen a few times in the life of an early-stage business. When a situation is declared code red, startups should know who’s on point for communication with each stakeholder, who’s leading a process and how each process will be led.

Also, plan for retrospectives after each situation to continue to improve the crisis management process. Today, it’s SVB, tomorrow it may be something else. While they can’t prepare for every possible scenario, founders should at least know what general processes are in place. Don’t wait for the inevitable.

Also read: India may not be immune to an SVB, Credit Suisse-induced recession

Jeffrey Bussgang: Expect R&D investment to be curtailed

The SVB collapse had a profound impact on the startup ecosystem. SVB has been a trusted and beloved partner to startup founders and VCs for 40 years. My firm, Flybridge, has been a loyal SVB customer for 20 years and roughly one third of our portfolio of over 200 companies had some relationship with the bank.

The startup ecosystem has benefited in recent years from a combination of low interest rates and expanded credit. The contraction of credit to startups and VCs mean that there will be less capital available in the ecosystem, which means investments in R&D and new product development will be curtailed.

The financial system is far stronger today than it was in the Great Financial Crisis, but the economy was already somewhat wobbly. On the heels of rising inflation, war in the Ukraine, and quantitative tightening, the collapse of SVB is yet another reason for investors to be cautious and risk averse. That orientation is a headwind for startupland.

Rembrand Koning: Women and minority founders might be affected disproportionately

It’s been roughly two months since a social media-enabled bank run took down Silicon Valley Bank. In the days after the failure, many worried about the “ripple effects” of SVB’s demise on everything startups focused on, from outer space to beauty. While I am sure we will continue to analyze the data to better understand the failure’s impact, my early read is that SVB’s failure—perhaps because the government so quickly stepped in—has not resulted in a startup apocalypse. AI startups are fundraising, B2B ventures are raising additional rounds, and venture investors are still betting on the next big thing.

While some startups are sure to fail—especially those reliant on venture debt—creative destruction will continue with employees from those firms launching new ideas, joining other firms, and experimenting with new ideas. The more muted-than-expected impact of SVB’s failure indicates that many startups might be less limited by financing frictions than we thought. This is a good thing! While there are many barriers to venture growth—from challenges in getting the right advice to challenges in testing venture ideas—perhaps a lack of capital is less important than we might have thought.

That said, there was genuine concern that SVB’s failure would disproportionately impact women and minority entrepreneurs, given the barriers these groups face when fundraising. If I was looking to trace where SVB’s negative impact might be greatest, I would start by looking here given how ventures founded by women and minorities—and ventures targeting women and minorities—struggle to raise the capital they need to succeed.

Julia Austin is a senior lecturer of business administration at the HBS Rock Center for Entrepreneurship

Rembrand Koning is an assistant professor in the Strategy Unit and studies startup growth and innovation.

This article was provided with permission from Harvard Business School Working Knowledge.