It’s hard to know how this bank mess will shake out for the ad industry. But there are clues of a correction that was a long time coming.
What has transpired in the month after the collapse of Silicon Valley Bank has been a protracted reality check of sorts for entrepreneurs and CEOs in advertising.
The bank’s decline was a harsh reminder that in a fractional banking system, companies’ money is not really at the bank — and it never has been. Really, it’s being loaned out to others for various lengths of time and doesn’t have to be returned until that period is up. So when things go sideways and people rush to take all their money back from a bank, those same people are usually surprised to realize that it’s not actually there.
No prizes for guessing what happened when Silicon Valley Bank imploded.
“We initially had one publisher reach out to communicate their desire for us to hold any payments to their accounts at Silicon Valley Bank because they had a concern about it, but then very quickly there was a tsunami of publishers asking the same thing,” said Andrew Casale, CEO of Index Exchange.
Ad execs, like so many other customers of the bank, were dunked into disarray.
One of them told Digiday that they immediately started working with investors to thrash out a bridge loan. Another told Digiday that their ad tech business lost all of its funding because of the financial meltdown. AcuityAds, which had over 90% of cash in the bank, had to halt the trading of its stock. Others like Place Exchange asked all clients to pause any scheduled payments until further notice.
And all of that was just in the first few hours of the run on the bank.
Then the panic subsided. Silicon Valley Bank was backstopped by the Federal Deposit Insurance Corporation and the government. Ad execs, and the rest of the bank’s customers, were able to access their money.
Catastrophe averted? Not quite. The collapse of Silicon Valley Bank shook a lot of chaff loose. And ad execs are starting to see things they may not have anticipated: namely that confidence in banks is all relative.
Look at what happened to Credit Suisse, for instance. It didn’t get singed in the wake of Silicon Valley Bank’s implosion because there was something inherently unstable in it. It got burned because it was seen as the weakest link — just like Bear Stearns and Lehman Brothers before it. And once those narratives are up and running, they’re hard to stop. Banks are built on confidence.
“We had never considered the origin bank account of a customer or a partner to be a risk vector up until now,” said Casale. “That’s been the biggest takeaway for us from this tough period; we’ve been doing the homework on our side to understand the organization of our customers across the banking sector.”
It’s a tough lesson for anyone — let alone those in an industry like advertising where financial discipline hasn’t exactly been endemic. That’s changing now, of course. The mindset of these execs is definitely shifting. And that’s made them more concerned than ever about liquidity in the supply chain, said Nick Carrabbia, evp of Oarex — a platform for ads businesses to obtain fast funding. Now, they want quick access to cash.
“I was a bit worried because all our expenses and salaries are paid to our employees from SVB bank,” said Sameer Ahmed Khan, the CEO of martech firm Social Champ. “I also realized that I shouldn’t have put all my trust in one bank. This incident made me spread out our investments.”
From chaos comes order, to paraphrase Nietzsche.
“Going forward, I think for many future startups in this space it will mean being a lot more strict about who they are banking with and lead to a lot more diversification,” said the founder of a digital media business, who traded anonymity for candor to share their experience of the collapse of Silicon Valley Bank.
Call it a flight to quality. But it could come at a steep price. Big banks have been overflowing with cash in the wake of Silicon Valley Bank. The last thing those lenders will want to do is put that money to work and start lending it out. It could be drained from accounts just as fast as it flooded them.
Which is to say, banks are going to become more cautious about how much they lend and to whom.
When this happens, economies tend to get tighter. And this never bodes well for advertising. True, the fallout from Silicon Valley Bank is more of a headwind than a hurricane to ad spending, but marketers, publishers and ad tech execs remain wary nonetheless.
“My fear as one of the few minority-owned companies in the space is how many fledgling minority-led digital start-ups may NOT get the funding they once would have, given the banking climate and how VCs are approaching our digital communities of color,” said Rene Alegria, CEO of bilingual and bicultural media platform MundoNow.
There’s a fear now, and it’s rooted in sequential liability. Clauses written into ad contracts that stipulate if the company ahead of another in the flow of ad dollars doesn’t get paid, they don’t get paid. Normally, this isn’t a big problem. But it tends to become one when economies get knocked sideways.
The pandemic made that all too clear for ad-tech bosses. Silicon Valley Bank made it even clearer, with ad bosses reviewing their existing relationships and pausing any they think are a risk, or introducing tighter insurance provisions.
“Everyone we’re working with right now is concerned about where the risk — or rather the ad dollars — are coming from across the supply chain,” said Carrabbia. “Sequential liability is, for the most part, the concern here. It’s always been a concern. But in the aftermath of Silicon Valley Bank, people are seeing how that can play out.”
Often, it plays out with publishers holding the bag. The lessons drawn in hindsight are instructive as ever for them. They’ve been asking more questions about the financial health and integrity of their ad-tech partners since Silicon Valley Bank started wobbling. That’s bad news for any vendor that didn’t have strict credit policies — or those that were all in on growth, risks be damned. The weaker companies continue to be weeded out from the supply chain.
“We’ve seen a fair bit of this in recent weeks,” said Casale. “Publishers are doing even more due diligence on their vendors these days.”
Add the collapse of Silicon Valley Bank to the ever-growing list of events contributing to a more consolidated supply chain.
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Seb Joseph