Lessons learned from the SVB crisis

It is hard to imagine I’ve now lived through multiple financial crises in my career.

The collapse of Silicon Valley Bank (SVB) sent shockwaves through the tech startup world and beyond. But, I’ll admit, it felt a bit like déjavu. Every financial crisis I have experienced inevitably led to a liquidity crisis that we experienced with SVB.  And, if you study why companies fail, it is usually the inability to finance their operations. When determining next steps after SVB collapsed, I could draw on my past experiences to guide my train of thought.

Despite the doom and gloom associated with these often unpredictable events, there are always lessons to be learned, specifically concerning risk management, treasury management, and business continuity planning.

Not my first rodeo

Looking back on my career, I’ve been around the ‘economic crisis block.’ I’ve seen businesses destroyed by catastrophic financial events while others flourished. 

Shortly after graduating from NYU, I began my 20+ year-long tenure at Citibank. While working there, I experienced the Savings & Loans (S&L) Crisis. The S&L Crisis was a long time coming, starting in 1986 and lasting approximately nine years. During that time, over 30% of savings and loans in the US failed. The fallout of this crisis was the collapse of hundreds of institutions and the insolvency of the Federal Savings and Loan Insurance Corporation, contributing to the recession of the early 90s. 

The SVB crisis is eerily similar to the S&L crisis, an asset and liability mismatch that led to a liquidity crisis. The S&Ls took in deposits (most S&Ls were local banks, so it was not a diversified deposit base  – a la SVB) and made 30-year fixed mortgages.

Then, there was the Dot-Com Bubble Burst of the early 2000s. Rising interest rates combined with fears of a looming recession led to the bursting of the overinflated tech bubble. Over 50% of tech companies didn’t survive the Dot-Com Bubble Burst, and those that did lost a large chunk of their value. However, many companies that survived went on to experience great success, such as eBay and Amazon.

Things seemed to calm down after that until 2008. I was a Managing Director in the Institutional Clients Group at Citigroup and experienced Citi’s stock declined from $57 per share to under $1— fast (and it never fully recovered from this to this day since the stock price is effectively at $4.00 given Citigroup did a reverse 10:1 stock split) The Global Financial Crisis began as a subprime mortgage crisis that went global. As subprime loans defaulted, investment giants like the Lehman Brothers and 85-year-old investment bank Bear Stearns collapsed (later bought by J.P. Morgan.)  The bank was put under conservatorship, where the regulators kept it afloat and ran it until it was liquid. Not very fun times for those in the financial sector. As in most crises, their collapse was due to a liquidity crunch – the inability to secure funding to finance their operations.

Applying past experiences to future business decisions

Transparency is a core value here at Thoropass (formerly Laika). And in the spirit of transparency, I’d like to share some of the most valuable insights I’ve gleaned from my career, specifically as a tech founder, and how we are navigating the situation at Thoropass.

Risk management: Never underestimate the risk assessment 

My career in finance taught me the importance of financial risk assessment processes and scenario planning. Most people don’t like to think about—let alone plan for worst-case scenarios—but the reality is that this can help you avoid a disaster.   

Most companies have risk assessment processes associated with their information security programs but don’t often implement formal processes to identify and mitigate financial risks. These processes are essential for large complex organizations just as they are for small, nimble startups that have limited resources. It is important to document, run scenario analyses, and better plan for worst-case scenarios, and this should be done regularly, not annually, especially in fast-changing environments. 

I’ve learned the importance of planning for worst-case scenarios. Having the right leaders at the helm, ensuring your board is informed and involved, and understanding market dynamics is critical.

Treasury management: Establish and regularly review a cash management policy

Having a cash management policy and regularly reviewing it is crucial for any organization’s financial stability and success. A cash management policy outlines how an organization manages its cash flow, including budgeting, collecting payments, making payments, and investing surplus cash. 

A well-designed policy can help an organization optimize its cash resources, minimize financial risk, and improve its financial performance. Regular reviews of the cash management policy are essential since business needs and market conditions can change rapidly. 

The policy should be updated periodically to ensure it remains relevant and effective. By regularly reviewing and updating the cash management policy, an organization can better manage its cash flow and ensure that it has the necessary resources to meet its financial obligations, pursue growth opportunities, and mitigate the impact of potential economic downturns.

Business continuity planning: Document, document, document!

I can’t stress the importance of having documented plans that include critical roles and responsibilities, ensuring there are no single points of failure. Your documentation should include all operational systems, including key cutoff dates, times for money movement, and access documentation—down to the individual level. They should also encompass bank accounts and limits on specific privileges on money movement (ex., who can wire up to what amount, have they logged in recently, etc. )

Applying your risk management approach to business continuity is also important. Business continuity tests assess those processes for various scenarios and document what would happen in various events. This documentation would include a breakdown of steps to take, for example:

• Who would set up a “war room,” and where
• A list of task forces and the individuals that would be involved
• Specific areas of responsibility for various activities
• Communication plans for stakeholders such as shareholders, customers, employees, and regulators

Once this document is complete and approved, the last step is to circulate it so each individual knows and understands if they play a critical role and where to access the documentation.

How the collapse of SVB affected Thoropass

The majority of our cash was protected and managed by 3rd parties but through SVB.  It was more of a short-term liquidity concern—not just for Thoropass but the entire tech startup ecosystem comprising our customer base. Like everyone in the community, we were feeling uncertainty and stress as the regulators worked through the solution, as nobody knew what the short and long-term impact of the SVB collapse would mean for the greater tech industry.

How we handled the crisis at Thoropass

We reacted and acted quickly to the SVB news at Thoropass. Despite knowing we were relatively safe from mass impact, we wanted to put as many safety measures in place as possible. Our CFO, Dicken Chaplin, the whole finance team, and our board of directors were absolutely incredible and worked around the clock over the weekend to ensure our good standing.  

Communication and transparency were critical for us—we wanted to ensure that our employees knew we were dealing with the situation, so we sent two company-wide emails on Friday before we headed into the weekend. We then set up an all-hands on Monday morning to explain our actions over the weekend and open the floor for questions. We received some great feedback from our employees, who appreciated our communication. My co-founders and I wanted to make it crystal clear how hard we were working to protect our employees. 

Looking ahead: lessons learned 

As a result of this event, we plan on putting a few extra measures in place to ensure we’re in a good place at Thoropass should another global financial crisis arise in the future (and we all know it’s a matter of when, not if.)

We worked to establish a more robust cash management policy to diversify our bank accounts and implement a treasury bill ladder (buying treasury bills directly with maturities matching our projected cash flow needs but with a maturity of no longer than a year.) US treasury securities are considered risk-free investments from a credit perspective, so they are relatively safe with a competitive yield.  It’s important to understand SVB had a large portion of longer-dated US treasury securities in their portfolio but had to liquidate the securities at a loss (due to rising interest rates) to meet deposit withdrawals, taking a material hit to their equity.   

And to any of my fellow founders and tech leaders: If you would like to learn more about the measures we have taken, please don’t hesitate to reach out at [email protected].