In politics, they say, ‘never let a good crisis go to waste.' To be fair, Churchill originally said it regarding WWII; and while recent financial turbulence has been painful, even on the brink of a crisis, it is certainly far from a WW. Perhaps a better way to phrase it with a positive, more constructive spin, is to quote Ben Franklin, ‘out of adversity comes opportunity.'
Thus, let us explore the opportunity... a chance to think deeply about mistakes, history, and hindsight in an effort to simply get better, and, dare I say, LEARN. At our West Point CEO Summit in November, we learned how to apply proven military leadership methods to business challenges. One of those tools, which I’m sure many of you use in some way, shape, or form in your business, is an After Action Review, the ‘ole AAR.
With the unraveling of SVB, coupled with the craziness of a few fast-days, nights, Zooms, emails, and texts, we had an opportunity this week to pause and perform our own AAR alongside our portfolio companies. After 36 years in tech investing, we've seen quite our fair share of crises. Here, we will focus outward vs. inward, but I’m happy to transparently report (as we considered our internal AAR), there was more that went well than there were things to be improved. Our best-practice approach (upon ‘crisis’ trigger) includes:
- Defining a list of key internal stakeholders
- Situation analysis with stakeholders
- Establishing a ‘war room’ cadence (Churchill applicability here)
- Identifying the breadth of constituencies (internal, portcos, LPs), primary ownership and actions for each
- Pre-agreeing on communication cadence and approach
- Executing plan while erring on over-communication and information-sharing
With respect to our CFOs and portfolio companies as a whole, those who were most affected had the most to contribute to the AAR - so consider some beneficial selection bias for the following feedback. In addition, this was a point-in-time AAR (and hopefully, it will remain as such), which addressed the following general topics:
- What worked well in your response (focus on what you could control)
- What could’ve worked better (focus on what you could’ve controlled)
- What you’ll do differently moving forward
What worked well:
Internal Company Communication
Multiple CFOs said internal connectedness and communications were key. Executive teams maintained frequent contact with each other, often multiple times a day, from which other internal/external communications followed.
There was a common thread of being transparent with employees even if executives didn’t have all of the answers. Employees at all levels were concerned about how SVB would affect them, their customers, their business. Our CFOs said they may not have been able to calm all fears, but by simply being open and upfront, there was an exponential increase in the level of goodwill and trust among employees.
Empowering Frontline Decisions
Executives had to make frontline decisions quickly without getting mired in bureaucracy. This is where aligning the team upfront on how to make those decisions in times of crisis, and the nimbleness of the business paid off.
The SVB episode also created a teachable moment. It created unique opportunities to educate employees on banking, cashflow and financial processes. In turn, many employees responded with newfound respect for their CFO’s role.
Many CFOs were flooded with long, generic emails from other investors, board members and peers with names of alternative banking and funding options. What proved most helpful was the 1:1 direction provided by trusted, previously established counsel for CFOs, who were able to make very specific recommendations for vetted options (e.g., ‘go here, call this person, they’re expecting your call and will help in this way’). We can all appreciate this clarity of direction during times of crisis.
What Could Have Been Better / Doing Differently Now:
As many businesses around the world now realize, some companies were not diversified enough in their financial relationships. There was the observation that, while there's acute awareness of the risk of being overly customer or market concentrated, some took for granted putting money in a single bank and considering it safe. The experience provided an opportunity to optimize to avoid disruption in the future.
Most concentration of cash was primarily the result of SVB debt covenants requiring all deposits to be held at the bank. Of course, following the crash, the bank has become more flexible, alleviating restrictions. As companies moved their cash into new banks, they simultaneously set up the use of ICS (Insured Cash Sweep) accounts, which automatically manages and transfers funds on a nightly basis and mitigates the FDIC deposit cap of $250,000 risk.
In addition to the above awareness and actions, keeping other banking relationships ‘warm’ was important in hindsight because it expedited the process to set up new accounts in a pinch. Having pre-existing relationships to fall back on was extremely helpful in getting things done quickly.
For some, the SVB issue helped reprioritize back-burner issues, such as complicated legal and entity structures, that, if not for the crisis, would not have been a major friction point. This also tied into what changes need to be made moving forward, as these folks are now revisiting and setting up contingency planning for many of their legal structures.
CFOs need to monitor treasury management policies periodically to ensure best practices are being followed. Similar to how product and technical organizations have business continuity plans and security pressure-testing audits, finance departments should take this opportunity to establish policies that address specific needs for operating cash balances, volume and types of accounts (ICS sweeps, etc.), and the number of separate banking relationships.
One of the main tenets of AAR effectiveness is to incorporate the experience and learnings to new approaches, mindsets, and preparedness. Ultimately, this won’t be the last crisis we face as business leaders. As with the pandemic, this recent crisis presents opportunity to build greater resilience into our people, processes, and partnerships.