By Brian Sathianathan, co-founder, chief digital officer and CTO with Iterate.ai
Silicon Valley Bank (SVB) has been a trusted name in the world of startups since its establishment in 1983. However, the bank's recent collapse has sent shockwaves through the startup community, leaving many entrepreneurs wondering what it means for the future of startup funding.
To understand the implications of SVB's collapse, it's important to examine what caused it in the first place. One of the main factors that contributed to the collapse of SVB was its heavy reliance on the tech sector. As the bank increasingly focused on tech startups, it became increasingly vulnerable to market volatility and the ups and downs of the industry. This was compounded by the fact that many of the startups SVB funded were highly vulnerable to economic downturns.
The second factor was the bank's aggressive lending practices. To compete with other lenders, SVB often offered loans with little collateral, making it easy for startups to secure funding. However, this also meant that the bank was taking on a significant amount of risk. When the market turned, many of these startups were unable to repay their loans, leaving SVB with a significant amount of bad debt.
The final factor was the bank's lack of transparency. Despite its reputation as a trusted lender, SVB was not always forthcoming about its lending practices or its financial health. This lack of transparency made it difficult for investors to assess the bank's risk profile, leading to a loss of confidence in the institution.
The collapse of SVB highlights the risks associated with taking on debt, which should serve as a stark reminder to bootstrap companies—those that rely on their own resources to get off the ground. Loans can be a valuable source of funding for startups, but they also come with significant risks. Companies that rely solely on their resources may have a slower growth trajectory, but they are also less vulnerable to market volatility that can sink heavily leveraged startups.
Transparency is also a critical issue in the startup ecosystem. Entrepreneurs should be wary of lenders that are not forthcoming about their lending practices or financial health. By conducting their due diligence, startups can better protect themselves from the risks of working with lenders that may not have their best interests at heart.
Resilience is another important factor for startups. Startups that can weather economic downturns are more likely to succeed in the long run. This means building a strong business model, diversifying revenue streams, and creating a culture of financial responsibility.
Despite the challenges posed by the collapse of SVB, there is still reason for optimism in the world of startups. While the collapse of a major lender may make it more difficult for some companies to secure funding, it also creates opportunities for new players to enter the market. Entrepreneurs should be on the lookout for lenders that are transparent, responsible and willing to work with them to build sustainable businesses.
We at Iterate.ai funded our development largely by selling innovation-consulting services, which reduced risks by decoupling business from a potential banking collapse or a pandemic. Our CEO and Co-Founder Jon Nordmark said, "Disciplined companies survive external disasters like bank collapses and come out the other side stronger. Startups should gate new hires to new revenues and be highly experimental."
I agree. So many startups struggle and even fail because they focus on getting funding and keeping investors happy, rather than sustainably growing their business and customer base. Customer-funded businesses can better weather economic storms and keep their employees for the long term.
The collapse of SVB should serve as a wakeup call for the startup community. By learning from the mistakes of the past, entrepreneurs can build a stronger and more resilient ecosystem for the future.
