I think there are many factors at play here. I’m going to approach it from a people perspective (why do smart people not see things like this coming?) rather than a business or financial perspective given that’s where you started, and I’ll focus on founders, because that’s the world I know.

I suppose my starting point would be - anything in startups is inherently a risky play, so while you know that putting your money in a “bank for startups” is higher risk than putting it in something more traditional, you’re probably making a trade off against the benefits of banking with a specialised bank (venture debt available without traditional levels of collateral, they understand your biz model, they will give you a bank manager who you can call even with relatively small amounts deposited, etc etc etc).

Secondly, systemic risk can be really really hard to see in the abstract. VCs will have been recommending SVB for the entire modern history of Sillicon Valley, and the actual risk in this case seems to have been created mostly in 2021. “Too big to fail” probably doesn’t apply here from a whole economy POV, but I suppose if you’re a founder without the time to think too deeply about whether SVBs balance sheet has changed from being relatively safe to incredibly risky and exposed to interest rate risk, it’s easy to think “I will bank with the startup default choice that has been doing this for 40 years.” What could go wrong now, given the startup industry is so much more established than then? I’d call this an example of outsourced thinking, and we do it every day in so many places. When we get on the bus, we don’t check whether the bus driver knows the route and will drive to X. It’s the bus! It just goes to X, every day!

Then I guess there’s actual unavoidable commitment. I know there are terms sheets that require SVB, and certainly I know from personal experience the venture debt (one form of the loans they provide) has lock in to their platform. Basically if you bank with them, you can access potentially huge personal and business benefits that can’t be accessed elsewhere, and then you are locked in to banking with them lest you lose these.

Lastly I think there’s just an interesting point around time since economies have been in high-interest states. In 2008 VC existed, but that was 15 years ago! If you are a 35 year old founder now, you were just 20 then. Your adult life has never seen a high-interest economy. People can be smart, but it takes exposure to a set of problems to form principles about what the risks are, and not everyone has an economics background. Plus, they would have needed to know:
- interest rates going up means bonds that were bought at previous rates are underwater and can’t be sold at HTM prices (I’m sure they could intuit this, but is it something they need to think about day-to-day to run a small healthtech firm???)
- SVB has a shit ton of these in its portfolio because they wanted to make returns and couldn’t find them elsewhere
- That SVB was unstable enough otherwise in terms of capital requirements to be at risk even with minor market movement
- How bank runs work, and that VCs would fuel a bank run rather than stick by the bank they’d been working with so closely for 40 years

That’s a lot of things to know! And a lot of things to tie together! I just don’t think your typical person in the startup industry has exposure to all of them, or the time to think about them.