As a five-time biotech CEO, I’ve guided my companies through recessions, supply chain disruptions, Wall Street volatility, even a global pandemic.
Yet nothing quite prepared me for the news on Thursday, March 9, that my cell therapy company’s ability to make payroll could be jeopardized by the mother of all bank runs unfolding at Silicon Valley Bank. More than $42 billion was withdrawn in a single day after venture capitalist Peter Thiel and others yelled “fire” in a crowded chat room and told their portfolio companies to divest.
This, I confess, was uncharted territory for me. Fortunately, leaders at the Federal Deposit Insurance Corp. reached out to investor advisers and acted in swift, coordinated fashion to declare a systemic risk to the banking system, invoke the government’s emergency powers, and establish a bridge bank to right the ship.
A day after the bank run, our company’s largest investor, RA Capital, was a buoy of reason in the storm, sending out cogent, calming messages to its large life sciences network:
“Though panic has taken SVB as its first victim, it needn’t get worse. Don’t participate in the contagion. When we fail to see how much our success depends on behaving as members of a community, we all lose. Leadership means seeing the bigger picture and finding a way to collaborate that results in a better outcome for everyone.”
I know CEOs of smaller companies who fronted money from personal accounts to pay their employees on time. Others took out bridge loans from their VC investors. Every biotech company that used SVB for operating expenses has its own story of frantic phone calls and late-night problem-solving in the scramble to make payroll.
At my company, Nkarta, our CFO and his finance team obtained a list from SVB of every contact they had at our custodian bank, U.S. Bank, and put them all on blast. We have 155 employees; paying them on time was urgent business. Over the weekend team members were troubleshooting at 3 a.m. with colleagues across the country on spring break with their kids.
By Monday, March 13, I received a call from U.S. Bank saying the funds were being wired into our payroll account. By Wednesday, March 15, thanks to decisive actions by federal regulators, Nkarta and other SVB depositors made payroll on time, and a crisis of confidence in the U.S. banking system had been largely averted.
The government response protected SVB’s customers as well as our employees with mortgages and bills to pay. Uncle Sam pointedly did not bail out the bank or its executives, whose overinvestment in “safe” long-term treasuries proved fatally dangerous after the Fed aggressively tapered bonds to ward off inflation.
That’s the story of how the nation’s 16th largest bank — and the No. 1 bank of the biotechnology sector — was laid to rest. Cause of death: poor risk management and panic.
Two weeks later, depositors are being made whole. But the long-term impacts of SVB’s failure on early-stage innovation will take longer to discern. SVB was a critical player in the drug development ecosystem, helping to finance nearly half of our nation’s biotech companies and many of the venture capitalists who fund our lifesaving work.
For young, cash-starved life sciences companies struggling through a bear market, the timing of the collapse is particularly inopportune. SVB helped biotech entrepreneurs cross the “Valley of Death” — the financing chasm from academic to commercial labs. One of the busiest bridges over that gulf has been detonated and may take time to rebuild. This is no small matter.
Biotechnology, after all, is the sector that created mRNA vaccines in record time to contain a global pandemic. With advances in cell and gene therapy, we’re now on the precipice of delivering a new generation of curative breakthroughs. For decades, SVB played an outsized role in helping biotech startups get off the blocks and emerging companies scale up to human trials. We will need new financiers to step forward.
Encouragingly, nearly 700 venture capitalists signed a joint statement saying they would strongly support and encourage their portfolio companies to resume a banking relationship with an SVB successor if the bank were purchased and appropriately capitalized.
Rather than help broker this discussion during the media maelstrom, right-wing politicians and pundits instead took to the airwaves to conduct a public autopsy striking in its factual and moral bankruptcy. The right-wing media echo chamber’s reflex to blame socially responsible leadership and diversity programs evidently borders on Pavlovian.
Leading the charge was erstwhile biotech CEO Vivek Ramaswamy, who took to the Wall Street Journal to rail against a “special bailout” for his former industry’s leading bank. He also floated the preposterous talking point that SVB’s $5 billion commitment to “sustainable finance and carbon neutral operations to support a healthier planet” distracted the bank’s leadership — the implication being that responsible investing and environmental stewardship are mutually exclusive. At any rate, a New York Times fact check found that SVB ranked either average or below average on environmental, social, and governance metrics. Its ESG score from Morningstar was among the worst of 30 banks analyzed.
Yet Ramaswamy wasn’t alone. Wall Street Journal columnist Andy Kessler wrote: “In its proxy statement, SVB notes that besides 91% of their board being independent and 45% women, they also have ‘1 Black,’ ‘1 LGBTQ+’ and ‘2 Veterans.’ I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands.”
Florida Gov. Ron DeSantis soon joined the chorus. “I mean, this bank, they’re so concerned with DEI and politics and all kinds of stuff, I think that really diverted them from focusing on their core mission,” he nonsensically posited. Soon, Elon Musk’s Twitter lit up with nostalgia for a time when bank boards were even more male and white.
Tempting as it may be to ignore such inane attacks as contemptible and divorced from reality, it’s important to expose this misinformation as a tactic to divert attention from the de-regulatory actions that might have contributed to this outcome.
In 2018, the Trump administration loosened Dodd-Frank regulatory protections for midsize banks. It removed SVB’s requirement to periodically conduct a stress test specifically designed to ensure its asset mix didn’t put the bank at risk of failure. Many experts believe that such a test could have mitigated the investment decisions that led to the bank’s demise. Unsurprisingly, most pols and pundits fingering “anti-woke” policies as the culprit in SVB’s failure enthusiastically backed the de-regulatory bill. Oops.
Laid to rest alongside SVB was the notion that only banks too big to fail can pose a systemic risk to our markets. Banks can fail, but they don’t have to trigger contagion if safety features of the banking system kick in to protect depositors. Ultimately, a larger crisis was averted — a testament to what works about the current framework.
Still, it would be helpful if those dancing on SVB’s grave woke up to the task of refining our regulatory framework to better safeguard our world-leading biotechnology sector.
Paul Hastings is CEO of Nkarta Therapeutics in South San Francisco.