Silicon Valley Lemmings
We love The Oregon Trail in our office and often compare the travails of our businesses to challenges in that classic video game, but gun to my head, Lemmings is a better game.
If you don’t know Lemmings, it’s a classic puzzle game where you have to devise a strategy to save a column of unceasing marchers from certain doom by changing something about the make-up of the level. If you don’t, they all march off a cliff together and game over.
I hadn’t played Lemmings in a while but it came top of mind after I read this quote from a now former executive at Silicon Valley Bank: “It turned out that one of the biggest risks to our business model was catering to a very tightly knit group of investors who exhibit herd-like mentalities.” So that’s who my kids have to thank for their new screen time jam.
If you don’t know Silicon Valley Bank, it’s the bank that collapsed not long ago in the second-largest bank failure in history when venture capitalists and their portfolio companies started withdrawing deposits en masse alarmed by mark-to-market losses on the asset side of the bank’s balance sheet. Not many people with bank accounts internalize the fact that we (yes, anyone with a bank account) are lenders to banks, but we are and when we take money out of our accounts, we are effectively calling in debt the bank owes to us.
I don’t know if you have debt yourself, but if you do, it would probably be hugely unnerving if the thing you owed money to might ask you to repay it at any time. Rather, you’d want to know when you have to pay them so you could plan. When it comes to checking accounts, banks don’t do this, which to paraphrase Sun Tzu is both their greatest strength and greatest weakness. Which brings us back to Lemmings…
What in the world was Silicon Valley Bank doing focusing on one very specific type of customer all of whom would panic on social media and react the same way when the asset side of the bank’s balance sheet started looking shaky? (David, Nikki, and I talked a little bit about this and what small businesses can do to protect themselves against bank runs on a recent podcast.)
The thing about video game lemmings is that they all behave the same. And even if you change something about their environment, they all respond to that change the same. This creates an inherently fragile environment (which is why it’s a fun game!) But fragile environments where everyone can unpredictably act the same all at the same time are not fun in business or in life (as Silicon Valley Bank discovered when their depositors became real world lemmings).
What’s weird is that it’s often easiest to do the same thing over and over, especially when it’s working. The catch-22 is that when that one thing stops working, there is no thing to fall back on.
So when things are working, make life more difficult for yourself by going out of your way to cultivate difference. It won’t be as easy or as fun or as profitable, but it could come in handy down the line. For Silicon Valley Bank perhaps that could have taken the form of making and taking more loans and deposits to and from real world businesses in small-town America that were cash flow positive. Alas, we’ll never know.
– By Tim Hanson