Saturday, March 18, 2023

Anosognosia: The Biggest Risk Is Not Knowing What You're Doing

NYTimes  |  On Saturday, an entrepreneur named Alexander Torrenegra, who was an S.B.V. depositor for two companies as well as his own personal accounts, explained what happened on Twitter. “Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area), questions about SVB start to show up.” he wrote. “10 AM: some suggest getting the money out of SVB for safety. Only upside. No downside.”

It’s easy to see how a whisper network of a few hundred C.E.O.s — all convinced they have exceptional vision, all working themselves into a panic — could spiral out of control. But what happened in that chat is an extension of the fundamental way that these venture capitalists operate, which is groupthink on a staggeringly consequential scale.

Top tier firms like Andreessen Horowitz, Sequoia Capital and Kleiner Perkins subject candidates to a rigorous screening process that ensures that only the strongest founders leading the most promising businesses proceed to the next level. Or that’s what I once believed, anyway. But the screening process places significant emphasis on “culture fit,” which is industry speak for whether a founder fits into the venture capital firm’s full portfolio of companies and conforms to their ideas about how a founder is supposed to look and behave. A founder’s ability to navigate this process is considered a good indicator of the company’s success. Unfortunately for women and people of color, culture fit often boils down to being a white male engineer with a degree from an elite university.

Some screening mechanisms are more subtle, like whether the V.C.s are already in your professional network, or one or two degrees removed. The industry line is that relationships will help founders attract capital, talent, and business partners. True, but the result is a largely homogeneous and even self-reinforcing community that’s difficult for outsiders to crack.

It’s this sort of insularity, emphasis on existing relationships, and reliance on intangible measures of competency that fueled last week’s bank run. The V.C.s expect the companies in their portfolio to use approved vendors. When it comes to legal counsel, that generally means tech-friendly law firms like Morrison & Foerster or Wilson Sonsini. When it comes to banks, it has meant S.V.B.

S.V.B., in turn, assessed its clients’ creditworthiness in part by who their funders were. As my colleagues and I saw, an investment from a top tier V.C. could be the ticket to a package of favored services, including things like home mortgages for the founders of these start-ups.

I opened my account at S.V.B. in 2017, when I had meetings lined up with some top tier V.C.s to raise money for a digital media company. Like everyone else who heads to Buck’s of Woodside (a favored venue for early-stage deal making) with a deck and a dream, I tried to anticipate the screening mechanisms and make sure I passed. And despite the fact that I was not a first-time founder, and having worked in tech and tech adjacent companies, was decently well networked, I suspected they might regard a 40-year-old woman without an engineering degree as not quite the culture fit of their dreams. I wasn’t contractually obligated to bank with S.V.B., but as with so many other unspoken norms, I was aware that I would be evaluated by my choices.

Disaster has now struck, but I don’t see any public introspection from the investment community participants who both helped create the dangerous conditions and triggered the avalanche by directing portfolio companies to withdraw en masse.

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