In case you have been on an exotic vacation in a remote location, Silicon Valley Bank (SVB) imploded last week in a “gradually, then suddenly” fashion. Regulators stepped in quickly and aggressively, promising to back up deposits at the bank of the VC world and stave off a contagion of fear at other banks. And while the body was still warm, politicians stepped in and dusted off their 2008 talking point notes.
You’ve likely read more about this California bank than you cared to over the last few days, so this post from Family Business Director aims to highlight three relevant family business lessons we can take from this: diversification, succession planning, and keeping a long-term focus.
As most observers pointed out, SVB’s deposit and loan base laid heavily in the venture capital, start-up, and biotech space. Much has been made of this concentration, as well as the bank’s decision to yield chase into long-term treasures at sub 2% interest rates. But when rates began to rise, the bleeding wouldn’t stop. What does that mean for diversification/concentration within your family business?
There is a saying that concentration creates wealth, and diversification preserves wealth. Your diversification/concentration decision is likely impacted by both what your family business means to you as well as what season your business is in. The important thing to keep in mind is to have a framework and model for thinking about diversification rather than explicit asset allocation.
Next Man Up
A surprising revelation that emerged from the fallout of SVB’s failure was the eight-month absence of an official chief risk officer. We won’t opine on if that would have prevented the bank’s failure, but the lack of leadership in a key position provides an extreme version of a leadership succession issue. Many family businesses struggle with passing leadership to the next generation, and the baton pass is often a stumbling point in the family business race. Whether you are molding the next generation to take the reins or contemplating new leadership outside the family, what you can’t afford to do is not have a plan to get the right people to the finish line.
Next Quarter or Next Generation
Part of what contributed to SVB’s downfall came at the hands of yield chasing into low-yield treasuries. What happened? It started with management’s desire to grab yield in a low-rate environment—likely pushed by Wall Street’s pressure on the bank. An as the saying goes, pigs get fat, but hogs get slaughtered.
So what? For family businesses, we’d advise thinking longer term than next quarter and thinking more generationally. While yields were at record lows for an extended time, the Fed’s push to battle inflation quickly changed the rate environment to a ‘normalized’ level. The sober family business board is better served to not think ‘this time is different’ too often. A level of conservatism may not make you the next Warren Buffet, but it may prevent catastrophe.
These types of epic business failures often bring rise to analogies like “100-year floods” or “ten sigma events”. My only editorial comment is that every company is a few unknown unknowns away from insolvency.
The best you can do as a family business is to focus on preserving generational wealth and limiting short-termism in decision-making—because the family depends on it.
Having processes and plans for how to tackle issues such as management succession, diversification, and investment decisions will not prevent all possible problems, but they can help you navigate difficult and uncertain times. Call us to discuss these events as they relate to your family business in confidence.
Zachary Barber, CPA/ABV contributed to this post.