Try unlimited access
Try full digital access and see why over 1 million readers subscribe to the FT
Only
$1 for 4 weeks
Explore our subscriptions
Individual
Find the plan that suits you best.
Group
Premium access for businesses and educational institutions.
Read More
This week, the news broke that iconic Silicon Valley investment firm, Social Venture Capital (SVB) had declared bankruptcy. While analysts and commentators are quick to draw comparisons to the 2008 financial crisis, suggesting that this could be a harbinger of another challenging economic time, this is an inaccurate comparison.
The 2008 financial crisis escalated due to a wave of residential mortgage loan defaults and the inability of securitized assets to back those mortgage loans. SVB’s bankruptcy is, however, a by-product of over-exposure to the recent economic downturn to fund its venture capital investments. There are other elements of SVB’s failure, but it’s clear that this is an isolated case that is not analogous to the 2008 financial crisis.
Many industry experts have argued that SBV’s issues were caused by a lack of diversification and failure to expand their capital base to adequately fund their venture capital investments. This lack of diversification and lack of capital base was from an unbalanced risk-reward strategy.
Furthermore, it appears that SBV’s failure and the resulting bankruptcy were avoidable, if the company’s leaders had made the necessary changes when the warning signs appeared. SVB’s bankruptcy should be an important lesson for the industry about the need for diversification and for the importance of responding to potential threats quickly.
Ultimately, this situation does not predict or portend another financial crisis as with the 2008 situation. There are already regulations and checks in place in the US financial system that would make any further similar events nearly impossible. SVB’s downfall is an isolated case, not a sign of economic decay within the US financial system.
