The repercussions from Silicon Valley Bank’s collapse into receivership March 10 will be felt for a long time. The Santa Clara-based bank was a linchpin of startup funding well beyond the Bay Area entrepreneurship ecosystem: It banked, according to its own statements, around half of all U.S. venture-backed startups, counting among its clients 44% of the U.S. venture-backed technology and healthcare companies that went public in 2022.
Answers to the many questions about SVB’s risk management and other practices will come in the days and weeks ahead. In the meantime, fallout from its failure is a top concern in the startup world, even for those whose money was not imperiled. Many have speculated that SVB’s collapse — followed, in short order, by the failure of New York-based Signature Bank and the collapse of Swiss giant Credit Suisse — bears the ominous signs of an economy-crushing crash: According to a March 19 story in USA Today, 190 banks are now at risk of suffering the same fate.
Poets&Quants reports on the world’s most successful startups, most disruptive startups, top business schools for entrepreneurship, and much more that is relevant to the ongoing crisis and the startup world. We talked to Saikat Chaudhuri, the inaugural faculty director of the dual engineering-and-business Management, Entrepreneurship, & Technology program at the University of California-Berkeley and a professor of entrepreneurship and innovation at the Haas School of Business, about what it all means, and what he is telling skittish students and alumni of the school that is responsible for a large number of MBAs working today in VC finance and as founders of some of the world’s most exciting new ventures.
UNCERTAINTY? YES. PANIC — NOT YET
The bottom line: The collapse of SVB coupled with the ongoing wave of layoffs in the tech sector present an opportunity for a “reset” in the tech space, says Chaudhuri, an expert on corporate growth and innovation, mergers and acquisitions, strategic partnerships, outsourcing, and technological disruption.
In the short-term, he says, uncertainty reigns. Taking a longer view, opportunities will abound.
“Obviously, there is some uncertainty given the recent developments, especially because we’re not able to completely contain the problem,” Chaudhuri tells P&Q. “We had a protection for all depositors that didn’t seem to do the trick with Silicon Valley Bank. And then we have some potential suitors for First Republic, and that doesn’t seem to be containing anything. And then you’ve got Credit Suisse being bailed out through an acquisition as well. And so containing this thing is obviously high on everyone’s agenda so that we avoid contagion effect, and it hasn’t quite calmed the nerves of the markets. So I think that’s the situation we’re looking at.”
But there are two sides to uncertainty, Chaudhuri adds: the anxiety-inducing side, and the side where anxiety breeds innovation and opportunity.
“For me,” he says, “the enterprising MBA or undergrad B-school student will now say, ‘This is an opportunity for me to look at other sectors than I would have.’ There’s uncertainty for students, and undoubtedly for young alums as well — they’re concerned about what’s transpiring. But I have absolutely not seen panic set in — there is more anxiety, but panic hasn’t sent in.”
‘AN OPPORTUNITY FOR SOCIETY’
The reason panic hasn’t set in: jobs are still plentiful. Yes, even as tech companies lay off workers by the tens of thousands.
“On the ground in terms of jobs, it’s not like jobs are completely frozen and no one’s hiring anymore,” says Chaudhuri, who spent many years teaching at the Wharton School at the University of Pennsylvania before coming to Haas in 2021. “This feels very different from both the 2000-and-onwards tech bust, the dot-com-era bubble burst and the financial crisis, which was really intense, and which affected everyone. This does not feel the same, because you’ve got some of these counteracting effects: There are still jobs that are available. On the hiring front, especially within the pandemic, we’re down maybe 10% or so from peak levels, but the growth has been much more than that over the last five years.”
The number of jobs may have declined, he adds, and the companies that make the offers may be different, but there are jobs available for MBAs and other B-school graduates amid a still-robust economy.
“My message to these various constituents whom I’m meeting with is always, ‘Hey, chin up. This is a great opportunity for a reset. This is not a time to panic.'” And for those who are in the workforce or recently jettisoned out of it? “This is a good time to consider getting your MBA, right? Because we’re counter-cyclical in that sense. So every time there is something like this, the opportunity cost of leaving the workforce is actually lower.
“It’s just an opportunity for society, because the same companies won’t be taking up all the computer science graduates that we have — and now a United Healthcare, for instance, is going to be able to get some folks as well, which is a good thing because there are jobs available. It also means that if I am a startup entrepreneur, I can look at new areas in order to thrive and there might be opportunity.
“So I’m not that negative. That’s sort of how I think about the problem.”
POETS&QUANTS’ INTERVIEW WITH BERKELEY HAAS’ SAIKAT CHAUDHURI
P&Q: We’ve had a little over a week now since the collapse of Silicon Valley Bank and the perspective that comes with some time. What have you heard over the last week-plus as it pertains to how this is going to impact the startup ecosystem and the people coming out of schools like Haas, and what have you been telling people?
Saikat Chaudhuri: I think that’s a good question. Obviously, there is some uncertainty given the recent developments, especially because we’re not able to completely contain the problem. We had a protection for all depositors that didn’t seem to do the trick with Silicon Valley Bank. And then we have some potential suitors for First Republic, and that doesn’t seem to be containing anything. And then you’ve got Credit Suisse being bailed out through an acquisition as well. And so containing this thing is obviously high on everyone’s agenda so that we avoid contagion effect, and it hasn’t quite calmed the nerves of the markets. So I think that’s the situation we’re looking at.
But I want to look at the bigger picture. I’m not pessimistic. What I mean by that is, yes, there is an effect of macroeconomic shocks like Ukraine, like post-pandemic effects, and so forth. At the same time, what I’m trying to do is look at the tech sector somewhat independently and say that, look, clearly the sector’s not immune to everything that’s going on around the world. But at the same time, there are some unique effects. The reality is that we’ve had an over-decade-long phase of growth, and it’s been incredible growth. And the pandemic actually led to accelerated growth, particularly when it comes to hiring. And so from that perspective, we were due at some point in time, sooner or later, for some sort of correction, some sort of adjustment, whatever you want to call it, a cycle — it happens. And in tech, the cycle is always different because it’s more pronounced because you’ve got uncertainty. So the sky’s the limit when it comes to potential, let’s say, evaluations. And at the same time, you’ve got a situation where when things come crashing down, then they are a little bit more challenging.
And so from that perspective, I took a look at the indicators in terms of what the numbers are seeing. On the one hand, there are many parallels to the dot-com era. If you look at price-to-earnings ratios, if you compare the way it evolved, the amount of growth that we had in the NASDAQ and then how we came down, it all mirrors it. At the same time, I took a look at price-to-earnings ratios of the stocks which were the highest performing, especially Big Tech, say for example comparing a Cisco to what an Amazon or an Apple or Google was doing, and Oracle was another one that was in the mix. And if you look at it, the price to earnings ratios now are actually much lower by comparison to what they were back then. Even in the world of startups, if you look at Pitchbook’s data and you look at the comparison in terms of the median post-dollar valuation of startups, it’s about half.
So what that tells me is that yes, there was exuberance, undoubtedly, as reflected in the overall NASDAQ movement and the forward P-to-E ratios. At the same time, the pullback may be very appropriate. And so that’s one piece of it. For me, it suggests we’re on a better foundation and we’re reacting and adjusting sooner. On the hiring front, especially within the pandemic, we’re down maybe 10% or so from peak levels, but the growth has been much more than that over the last five years. So it’s been tremendous from that point of view, it’s been incredible.
So an adjustment was necessary, both because you couldn’t expect a pandemic growth in the tech sector to continue forever with digital transformations on everybody’s plate. But at the same time, we’ve got new tools like ChatGPT, and AI can do a lot of those software basic jobs. Those to me are the fundamentals. For me, that suggests, yes, we need an adjustment, but it also suggests this is a good opportunity for reset, to make us more sustainable in the tech sector in terms of its growth. I actually think this pullback, especially manifested in layoffs, is fine. I think it’s necessary.
And at the same time, if you look at open jobs, especially at the startups, on the unicorn side, we have seen positive developments on those trends. And of course led by AI, but even in areas like B2B SaaS, software as a service, and areas like that, infrastructure but also climate tech and health and life sciences — these are all very positive in terms of the number of jobs. So I’m not as pessimistic as some of the others, I think it looks good from the macro point of view. Now, of course, this whole Silicon Valley and related matter throws a little bit of a wrench in the works.
People get alarmed when banks fail.
People get alarmed. And in particular because of the financial system, when you’ve got something where money is involved, whether it’s consumers or startups and where they put their money or potential investments in startups, then you get a little bit nervous.
I mean, if you look at it from a macro point of view, again, it’s remarkable how Silicon Valley Bank has survived all these years and done so well, only from the point of view of, they’ve done a great service. But if you look at it, it’s certainly high risk to have a portfolio where you’re extending loans, for instance, against the pre-IPO expectations and valuations of a startup.
The reason I’m not as pessimistic is because there are many sectors that are growing. As long as we can re-fence this, contain this to some extent, find some solutions, it’ll be manageable. It’s in everyone’s interest right now — the financial system, governments, the startups themselves, all the big VCs and other investors — it’s in everyone’s interest to actually contain this and manage this issue right now. And so I think the incentives are very strongly aligned. Now, I’m not wading into the debate of whether we should allow for some consequences if the behavior on the risk management front was perhaps not as optimal. It’s easy to blame external conditions, but you also have to look at what risk management was like in these places before. So maybe there were a few cracks here and there, but all in all, I’m optimistic, because no one’s going to let massive failures occur. So that’s my view on it.
What does this mean for MBAs and B-schools?
From an MBA point of view, what it means is a great opportunity for a reset, right? I mean, if you look at it, startups that are in new spaces, like AI but also healthcare and life sciences and green tech and some of the B2B areas in software as well — they’re actually hiring. They’re doing reasonably well, right? Because they’re profitable, they’re making money or closer to it in many instances, or very popular at the moment.
VCs are putting money there. They don’t want to return the funds to the original investors, they’d like to put money in. So I think it’s a great time to reevaluate and say, “Well, do I want to go to the traditional players or do I want to go into something new?”
I always like to say that uncertainty has two sides. There’s the anxiety-inducing side, yes — but without uncertainty, we also don’t have innovation — and there’s opportunity that comes as a result of uncertainty.
For me, the enterprising MBA or undergrad B-school student will now say, “This is an opportunity for me to look at other sectors than I would have.” There’s uncertainty for students, and undoubtedly for young alums as well — they’re concerned about what’s transpiring. But I have absolutely not seen panic set in — there is more anxiety, but panic hasn’t sent in.
What do you make of the rhetoric around so-called “wokeness,” that diversity and ESG initiative are what doomed SVB?
Those theories and hypotheses, I don’t know where they’re coming from.
They are coming from Republican politicians.
It’s hard for me to see the logic. Obviously that’s politics, it’s ideological. But it’s very much a stretch to understand how that would ever have any kind of connection.
I think it’s a better question to ask about SVB’s risk management. Did SVB have good risk management practices or not? I think that’s a valid question to ask, and I’m sure if we poke around and we look into it, we will find that they could have perhaps done some things a little bit differently to protect them. I mean, I think that probably is true, not only for SVB but for a number of investors and banks and VCs and others who are in the sector. And so from that point of view, I think it’s tough.
We can say the whole business model was a little risky in the sense that it didn’t really account well for downturns in general in the sector. And it certainly didn’t account for what happens with the interest environment. Now here’s where I will be a little bit more critical. We have seen where interest rates are, we’ve seen the trends. So if I’m an executive, I need to also manage that process. I need to observe what’s happening, and then that becomes part of my portfolio management and risk management. So that’s another area where we can probably say, “All right, they needed to do a few things.”
At the same time, it’s a bit unfair. If you look at the bank run or if you look at the reasons why the bank run happened, actually it’s that the flight of depositors occurred. And the actions they were trying to take were entirely rational, which is if you sell a portfolio at a discount and thereby also free up some capital, perhaps even make investments, even in bonds that are better placed at different interest rates right now, that’s an entirely rational thing to do to potentially try and make it up, right? And then there’s the whole point about if you could hold it to maturity, then the issue is not so stark.
What I am a little bit more critical of is, on the one hand the same players who got nervous very quickly and panicked and led to the flight of deposits — whether it’s the venture capital firms who were encouraging their startups to withdraw money or the individual angel investors and the like who parked their money there — they were the same ones, of course, who would like the bank to survive in some form, or they wanted someone stepping in to protect their assets. And that’s understandable. It’s entirely rational. But what it suggests to me, again, is that we need to be reminded that there’s risk involved and we need to be careful about that. And we can’t have a situation always where you don’t really bear the risk because someone will manage the situation for you. You can’t really have it both ways. That’s why I can understand the criticism. There are other things: Were the sales of stock options appropriate by executives at these various banks who are now struggling? Were they aware what’s going on?
That’s all going to get hashed out over the next weeks and months.
Yeah, it’ll get hashed out. But honestly speaking, I think that what happened here was panic set in, and there were some things that were within the control of those who were involved, but in the era of social media, what can easily happen is news can spread and anxiety can set in, and that leads to something like a bank run.
This is a psychological phenomenon, as you know from all the research. And so it doesn’t necessarily have to do with the literal failing of a bank, but the actual loan portfolio, and they were trying to sell it at a discount. That happens. So that’s not usually the reason, or that shouldn’t really be a stark enough problem to cause a bank run. Same thing now if you look at First Republic, for instance. It’s suffering. Credit Suisse is also suffering, they already had problems earlier and because they were amidst structuring, it was very easy to simply look at those players who were more exposed as in the case of First Republic or a little bit weaker like Credit Suisse, and they’re the next targets, if you will. And so unfortunately they bear the consequence, even though Credit Suisse was working on restructuring, and First Republic really wasn’t in that bad a position.
This will probably all make its way into Haas classrooms in the form of case studies down the road, where students will be talking about this for years and years. But what do you hear from students now? Have you talked to a lot of students over the last week?
Yes, young entrepreneurs, even students who are looking to graduate, both undergraduate and MBA students who are looking to graduate and they’re in the job search process at the moment, and looking at sectors. There’s uncertainty. There are young alums as well who are concerned about what’s transpiring and all of that. So absolutely what I’m seeing from them is that panic has not set in, so I’m good. There is more anxiety, but panic hasn’t sent in.
On the ground in terms of jobs, it’s not like jobs are completely frozen and no one’s hiring anymore. This feels very different from both the 2000-and-onwards tech bust, the dot-com-era bubble burst and the financial crisis, which was really intense, and which affected everyone. This does not feel the same, because you’ve got some of these counteracting effects: There are still jobs that are available. On the hiring front, especially within the pandemic, we’re down maybe 10% or so from peak levels, but the growth has been much more than that over the last five years.
My message to these various constituents whom I’m meeting with is always, “Hey, chin up. This is a great opportunity for a reset. This is not a time to panic.” And maybe this is a good time to consider getting your MBA, right? Because we’re counter-cyclical in that sense. So every time there is something like this, the opportunity cost of leaving the workforce is actually lower.
It’s just an opportunity for society, because the same companies won’t be taking up all the computer science graduates that we have — and now a United Healthcare, for instance, is going to be able to get some folks as well, which is a good thing because there are jobs available. It also means that if I am a startup entrepreneur, I can look at new areas in order to thrive and there might be opportunity.
So I’m not that negative. That’s sort of how I think about the problem.
We’ve published many stories already about some of the top business schools making it easier for people to apply and go back to school.
That’s right, we are too. Haas has extended the application deadlines, waived the fees. This is a small gesture, but more than that, we’re trying to engage with students. And if you can spend a couple of years in school right now and weather this storm in that way, then that’s an opportunity, if you were going to do it anyway, right? It’s good timing from that point of view.
DON’T MISS WHERE TECH FINDS TALENT: THE TOP SCHOOLS THAT FEED THE BELEAGUERED INDUSTRY and B-SCHOOLS SEEK TO COUNTER FEARS AFTER THE COLLAPSE OF SILICON VALLEY BANK
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