In January, we introduced our 2023 Strategic Agenda based on in-depth conversations with top CSOs in our Outthinker Strategy Network. We will be expanding on one of these trends every week with the intention of supporting your organization’s strategy for the next year and beyond. This is our seventh installment.
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You’ve heard the story by now. On March 9, Silicon Valley Bank (SVB) collapsed after panicked clients tried to withdraw $42 billion over a 36-hour period. This recalled nightmares of 2008 when the previous largest bank run in modern U.S. history, totaling $16.7 billion, occurred at Washington Mutual Bank over the course of 10 days. The day after SVB collapsed, the FDIC took control to ensure depositors would have access to their money. A week later, SVB declared bankruptcy.
SVB should have seen the possibility of failure on the horizon—after many golden years of buying government bonds at low interest, its investments became reckless once the Fed started raising interest rates. But interest rate hikes started a year ago. Why was the bank so slow to respond? Perhaps it overestimated customer trust and loyalty.
SVB’s history of pleasing customers
Silicon Valley Bank has historically been known as an ally to startups. According to entrepreneurs, it offered the least-restrictive terms and competitive interest rates, and was more accepting if a borrower failed on a loan. It would often offer banking services to startups that weren’t yet profitable.
The bank also created a valuable ecosystem of venture capitalists (VCs) and founders by hosting dinners, mixers, and other social events. A month prior to the collapse, SVB was listed on Forbes’ list of Best Banks of 2023. Even amid the tumult, SVB’s new CEO Tim Mayopoulus asked VCs and startup founders to come back. Some VCs agreed and called supporting the bank an act of loyalty.
Thomas d’Halluin, managing partner at Airbus Ventures, tweeted: “In VC, it takes a village to transform innovation. @SVB_Financial has been instrumental in this process, standing by VCs and startups in all weather. This cyclone should not affect our business compass: SVB is a stalwart of the VC community.”
If loyalty prevailed, perhaps more VCs might have kept their money in the bank. The story shows, however, there is a limit to loyalty. And from that we can learn a lesson relevant to sustainability and any mission-driven strategy.
What can SVB’s crisis teach us about sustainability?
People trade up all the time. For example, imagine I’m a cashier making minimum wage. Society might expect me to save money and make drip coffee at home. But I’m a coffee lover, so every week I treat myself to a cappuccino at the local café for $3.50.
When a category is important to us, we trade up.
This happens with ESG (Environmental, Social, and Governance) companies—many of us will pay more for sustainable packaging or a company that’s known to be inclusive because those values are important to us. It’s possible that SVB expected its customers to “trade up”—keeping their money in the bank and accepting more risk because since 1983 the bank had served the VC and startup community so well. Unfortunately, customer loyalty has its limits and SVB crashed up against theirs.
According to pricing consultant Hermann Simon, sound strategy comes down to understanding that willingness to pay changes with your customers. For example, Apple has such strong brand loyalty that it can raise the price of an iPhone by 10% without losing too many customers. If Samsung did the same, it might lose 30% of its customers.
In a more certain environment, SVB customers were willing to accept more risk. But come 2023, with less funding available to startups and VCs becoming more discerning, startups are desperate for cash. When the external environment changes, your customers’ willingness to pay (or to accept risk) changes, too.
We can apply a similar mindset to sustainability goals. It’s utopian to imagine that companies and consumers will pay more for environmentally conscious products because it’s the right thing to do. Bruce Usher—Columbia Business School professor and investor and advisor to entrepreneurial ventures focused on climate change and clean energy—told us that’s unfortunately not going to be the case.
But hope is not lost—he says improvements will come instead from countries and companies competing their way out. Countries will want to take leadership because they want to be seen changing the world (Germany has decarbonized by 40% while its economy has grown). Companies will be driven by profits—when they bring the sustainability cost closer to zero, it will be the right and the popular choice.
The story of Silicon Valley Bank’s collapse provides a valuable lesson about the limits of customer loyalty and the importance of understanding customers’ willingness to pay. This is a relevant lesson for sustainability goals—it’s unrealistic to expect consumers and companies to pay significantly more simply because it’s the right thing to do. It’s more worthwhile to focus on bringing sustainability costs closer to zero.
Ultimately, SVB’s crisis serves as a reminder that even the most appreciative customers have limits, and sustainability goals must be strategic, realistic, and profitable to drive change.
Image courtesy of David Paul Morris/Bloomberg via Getty Images