Over the last 10 days, the financial headlines have been full of stories about Silicon Valley Bank (SVB). This is the second-largest bank failure in U.S. history. No doubt, economists will be picking over the wreckage to examine the lessons learned for years to come. Though there are many mistakes that led to this disaster, there is one key lesson that is already apparent: concentration risk.
SVB was built on catering to venture-backed tech startups. Given the bank's location, how could it not? As a result, it had a highly concentrated customer base. These customers were riding high on a business model that used cheap capital to fund rapid growth and user acquisition.
What is apparent now is that several thousand of the bank's customers were funded by the same 30 to 40 high- end venture capitalists. This turned out to be a layer of concentration risk that was not immediately apparent. Last week, when rumors of trouble at SVB started to swirl, these few VC firms were able to call their several thousand investment companies and instruct them to pull their money out. It was a bank run on steroids that ultimately collapsed in hours.
You are probably thinking, “My family business is not in high tech or VC-backed. How does this apply to me?” Well, you too are likely subject to very high concentration risk. The most valuable asset in the portfolio of wealthy families is typically the business that built their wealth in the first place. Too many of your eggs are in one basket, if you will.
Concentrated investments can be a great way to build wealth but are also a great way to destroy it. Find ways to diversify your customer base, income stream and investments such that any one small failure doesn't turn into a headline grabbing collapse.
Chris Yount is a consultant and family board expert. He is a regular columnist for Family Business magazine.