Jay Haynes: 0:00

Hey, welcome back to how would you beat where we discuss how you can use jobs to be done innovation methods to beat your competition. Remember to subscribe and like this podcast. In this episode, we'll look at how you could beat banks, banks are in the news because of the collapse of Silicon Valley Bank and Signature Bank, Silicon Valley Bank had a $40 billion market cap that went to zero almost overnight. So what happened and can Jobs-to-be-Done, help us figure out how to both create better banks and lower the risk of bank collapses and runs on the bank that potentially become contagion and have a negative impact on the economy. So Jared, let's review what happened with Silicon Valley Bank.

Jared Ranere: 0:42

It's interesting, because out of the gate, I thought that Silicon Valley Bank was a great business, they had a growing target segment, they were laser focused on that segment and satisfied unmet needs. So they were focused on startups and the ecosystem around startups who were raising capital at a rapid pace. It was as a startup, it's hard to get banked because you don't have a lot of credit history, and you don't have revenue. So it's hard to get loans as well. And they serviced a bunch of unmet needs in startups, ability to finance their operations.

Jay Haynes: 1:18

Yeah, and so it's a it's a great Jobs-to-be-Done market, you know, to segment, they were very successful, obviously, for 40 years, they made just a an incredibly strange, short term risk problem into a devastating one, which is they saw a huge increase in liabilities in the foreign deposits during the pandemic, a lot of new venture funding went into startups, and they put all that cash in a Silicon Valley Bank, those are liabilities on the bank. And then they effectively invested those into long term assets in the form of treasury bonds. And of course, interest rates went up and the value of bonds goes down when interest rates go up. So they had losses, and they had to raise capital. And banks are highly regulated. So when their ratios change in other assets, liabilities, and all sorts of other metrics, they have to make sure they shore that up. And that set off a very small community of venture capitalists with outsized influence over hundreds and 1000s of companies, who, that small group collectively at the same time said all get out of Silicon Valley Bank. So then, because they had these long term assets, and $42 billion, was withdrawn, just in one day, last Thursday, that just meant the bank was insolvent. It could it couldn't keep sending that money out and stay solvent. So it's it's an interesting situation. And can Jobs-to-be-Done and Jobs Theory, help us figure out how to prevent that in the future. And as well, how to create the next Silicon Valley Bank, where you're serving customers and a different set of cu stomers in a different segment, in a different way, because there is still a lot of opportunity for innovation in banking, and just financial services. You know, in general, obviously, there's tons of jobs that are being banks are being hired to do by their customers. So what can Jobs-to-be-Done Theory, tell us about building the next great bank?

Jared Ranere: 3:20

Yeah, it's an interesting question. And I'm having a hard time with it, to be honest, which is unusual. On this podcast, usually, it's pretty straightforward, right. And in this case, what I've heard in the news is that Silicon Valley Banks focus on a target segment and serving their needs extremely well became a risk, because they didn't have a diversity of deposits. So when that ecosystem, ran into trouble and stopped raising money so fast, and ran into headwinds, it impacted them in an existential way, rather than just being a pocket of their business. So it seems like the way they could have one way to avoid this might have been to have a more diverse customer base, and gotten more jobs done for a wider group of people.

Jay Haynes: 4:12

Yeah, that's right. And I think there's a few things they did choose a customer base that has enormous concentration of influence and power. And that's just because a small number of VCs, the number of VCs relative, the number of companies that were the customers of Silicon Valley Bank is very large ratio. So you know, there were some famous VCs getting together, tweeting out and telling their companies, you know, get out of Silicon Valley Bank now and so that was a big risk for them. That that I think is that should be able to be mitigated. You know, the one I think the it was very bad communication on the part of Silicon Valley Bank not to get together with this small group who clearly has outside influence and say, not only are we He in good shape, so don't worry about it, we're going to actually we're going to raise capital to make you even more secure. And those, those venture investors have access to a lot of capital. So there were, you know, PE and venture investors who were willing to put that capital up, they're always looking for good returns on capital. And clearly, you know, Silicon Valley Bank had a hold on this segment. But they shot themselves in the foot, instead of getting together and saying, Hey, we need this institution, of course, a lot of them came in afterward like this institution served our needs, too. And we can talk about what the job is for those companies. And those investors, and they, they shot themselves in the foot by instead of getting together, you know, any bank could have a run on it, if everybody at the same time says, Let's all take our money out immediately, I mean, every bank will fail. And that brings up the regulatory solution to a lot of markets. And, you know, there's debates about regulation. But this is such a good example of where you're trying to get the job done, the actual customers in the business should be protected. So there's a lot of debate around obviously, around the moral hazard of saying, Well, everybody's account, their deposits are insured 100%. But that's effectively what just happened, the US government said, you can be assured that all of your deposits are safe. And the customers are not the ones who should be at risk, I do think that the calls for like, well, this is creating moral hazard, because you're gonna protect the cash, literally, the deposits of the customers, will create moral hazard on the part of the executives of the bank is, is is a very bizarre way to think about it. Because you you for precisely what happened was Silicon Valley Bank, it is going to spin out of control, and everybody is going to withdraw all their money that Monday morning without the backstop of the US government. So this is why the activities of the bank and what they do with the customers deposits, that job of mitigating banking risk is the one that that should be done by banks, but if anything in history tells us anything, is that they won't do a good job of it. Unless they're under regulations to do it. It is whatever human nature, this is just another example. This is there's so many examples of this, it's there's too many to go through in 2008 was an example of the entire system doing it simultaneously. And people forget that in 2008, banks wouldn't lend to other banks. That is what happened for the first time in our history. And it's because we said, okay, banks, you know, don't need regulation anymore, create, you know, crazy securities, that the government doesn't even know the value of those securities. And it it stopped the system. So this

Jared Ranere: 7:59

is a case where they, they created a great product and got their customers job done well. But they made a made some back office mistakes. Is that what's what's happening here?

Jay Haynes: 8:10

Yeah, a little bit of both. So let's talk about their success first, and then talk about their failure. So their success is that companies who are unprofitable you know, by definition startups starting out of the gate, you just someone wires, you $10 million in your bank account as a startup or sometimes 100 million or a billion and you're unprofitable. You know, banks will, a lot of banks will say no, we're not going to, you know, finance this, essentially take the risk on your deposits, because it is highly likely you're just going to draw down a lot of that capital pretty quickly, because it's known as the burn rate. Because you're literally burning through cash, your company's not yet generating cash. And

Jared Ranere: 8:49

that's bad for a bank because if the depositor just continuously withdraws, then the bank can't put that money to work in the same way as if it were sit there for a long time.

Jay Haynes: 8:59

That's right. That's right. So you, you have to have a broad set of customers who are getting cash in and then the other ones are burning it. And then there's always ones that are shutting down and venture, you know, the majority of companies actually just end up shutting down. So they burned through all that cash then at zero, and then you're no longer Silicon Valley Bank customers. So you can see why banks are hesitant. They want someone, a company or an individual who's got a huge amount of cash that they're putting in the bank account. They're just keeping it there. Right now companies ain't growing cash and adding and growing it right. That's right. So, so they are riskier customers, but they have needs, they have got to be able to access their cash. They've got to be able to make payroll, they've got optimizer cashflow. They've got to have visibility into their burn rate and they've got an accurate assessment of their working capital. There's there's a lot in in being a company but also a startup that's trying to get you visibility into like, are you going to be successful and those Just financial metrics, at the end of the day, every company has to become profitable, the capital markets will shut you off. I mean, we've been in these crazy capital markets that will fund losses forever and ever and ever seemingly. But at the end of the day, you have to become a profitable company. And so they were, if you looked at the job, it is finance my company's growth, you know, my company's unprofitable growth to profitability, you could say, in multiple ways. But that is a different job than, you know, Apple, which is managing, you know, hundreds of billions of dollars of cash, and it just keeps growing as a pile of cash, you know, that's just an entirely different job, then optimize my cash flow for to turn my unprofitability into profitability, right. That's the that's the underlying job, which is very complicated, you know, you could look at that job. It's got hundreds of needs, and you can see why it's underserved. Because it's, it's hard for the customers, the startups to execute it well, and then it's hard for a bank to judge whether or not the startup is executing. Well, right. So so it's a very specific segment that does need to be served. Now. That is also an opportunity for JPMorgan Chase wells, you know, first republic, these other midsize and big banks should be thinking, okay, what are the services and the solutions and the products that we need to build for this community? Because now, there's, you know, a couple 100 billion dollars in gold deposits that are availed, that's a lot for you know, any bank to be able to say, Okay, what do we do to serve this community? And, you know, hopefully, Silicon Valley Bank does get a new owner, because, in my view, also, this was not a bailout, the equity holders were wiped out, I think the bondholders are gonna be totally wiped out, which is, which is a

Jared Ranere: 11:59

thought there come up. And it's right. If you're an executive, like you're not walking away with a lot of money here, you're good. Yeah. You know, they're probably have their own personal wealth, but they're not making money off Silicon Valley Bank right now.

Jay Haynes: 12:09

Yeah. And there's potentially criminal charges. I mean, they should be investigating. The executives, definitely who sold shares and paid themselves bonuses with all this massive risk, you know, clearly there were, there were people inside the bank telling this CEO and the executives, we have to manage this risk, and they didn't have a chief risk officer for eight months. I mean, there's all sorts of red flags. So you know, you could have seen this coming a while ago, and some short sellers Did you know, they were very aware of the problem, they didn't know that, you know, the whole thing would collapse in 40 hours. But they were like this, this bank is in a very risky position. And that's where short sellers are, you know, that's the reason it's a function in the market is gates, those kinds of signals. Now, the regulator's missed it too. So there's a whole bunch of stuff the reguators should have been doing. But, but at the end of the day, the depositors are not looking to take this kind of risk. And as many people pointed out, you don't go to your bank and say, Excuse me, can you give me your risk analysis? Can I evaluate your short versus long term? Assets? Do My Own kind of calculation? I mean, the average company doesn't have time to do a little on the

Jared Ranere: 13:21

edge. It's like, they have a charter you assume your money safe there? Yeah, yeah, there's

Jay Haynes: 13:25

no benefit to telling depositors, you're going to be wiped out, if you're the CEO of your bank, make some really stupid moves, you know. That's not a world I want to live in. And that's the way the world used to work. Right. This is why we had the Great Depression. This is why we built Glass Steagall as a regulatory framework. And then we dismantled it, and then we had 2008 happen. And then we had to build Dodd Frank, and then they dismantled part of it in 2018. It's just it's repeating the same game. And it's so silly, because people, you know, short term bankers, when I say short term, even like a 10 years, bankers want to go in and make a ton of money, you know, have their stock go up, which is exactly what happened with Silicon Valley Bank, you know, they didn't want to have to pay to hedge all this risk. And, you know, hedging is a real job like hedging is to mitigate risk. The reason that is a viable financial market is precisely for this reason, you want insurance? You know, the whole different question about what happened in the CDO world in the unregulated insurance world, what you don't want, but this is it happens again, and again and again. So yes, we need to we need the regulatory framework to stop this from happening. We need to make sure depositors don't risk their cash, and we need to help banks get the job done better. They need to they need to do it. Now. They're under a lot of regulations, of course, but that doesn't mean there isn't opportunities for innovation, right. You know, they still have underserved customers.

Jared Ranere: 14:56

Yeah, so I mean, it sounds like one insight And here is if you are a large bank with a diversity of depositors already, there's an opportunity for you to now pick up Silicon Valley Banks depositors. And if you're going to do that, you need to deeply understand what the job is they're trying to get done, which is different from some of the other business depositors you have, because they're in a unique situation where they're going from unprofitable to profitable or attempting to. And if you understand those needs, you can offer the right services and pick up a pretty large market opportunity right now. It sounds like there's another insight to which is there's an internal operations job, a risk mitigation job that the banks need to do for themselves. And so in that way, the bank is the customer, they need to mitigate their own risk. And you can say, well, the regulatory agencies are play a role and as a solution for that the internal risk Department plays an important role in that solution. And I think there's another question of, could there be a third party that provides a solution to these banks. So if you are a mid sized bank, and you want to take the strategy that SBB took where we want to find a very targeted segment with specific needs, we want to serve those really well, we think there's a great opportunity there. But we want to cover ourselves and don't end up with the same situation. Could a third party provide a solution to a bank to satisfy their needs to mitigate their own risk?

Jay Haynes: 16:29

Yeah, that's great. And the answer to that is yes, absolutely. That is a market that will grow because the job, let's you can find that as mitad mitigate depository risk, right? Now, one solution to that is just have the US government insurance, which shouldn't be part of it, but the government should require. And clearly, after situations like this, regulations change, and the government realizes, okay, people got to play by some new rules they got they gotta have, we got to have regulators reviewing this stuff better. But of course, like every job, you know, mitigate deposit risk is, is a lot of information where that information has to be analyzed to make decisions. And this is where software and algorithms are just so incredibly powerful. It is why, you know, it's why the internet was just created so much equity value, and it's why AI is going to create an enormous amount of equity value. In markets, like banking, where you train a specific set of algorithms call it AI or algorithms, it doesn't really matter. It doesn't have to be, it doesn't have to be smart. It's not going to be a robot, you know, Butler talking to you. But it'll be a away Silicon Valley Bank clearly didn't have this, which is you need the people reviewing it. But the tools, the the application should just literally get their data and say, Nope, you're at, you're at enormous risk right now. And that's where it can even program, okay, here are the trades you need to make, you need to buy these options, you know, to hedge this interest rate risk, or whatever the type of risk it is. And, you know, the humans can still execute it. But that that should be automatic, that that shouldn't even be, there should be no bank that can take the option of going outside of those rules. And a great example of this is the airlines, the FAA, you know, people forget the early days of aviation, it was like 10% of flights had some sort of incident. I don't think they crashed and died. But I mean, we didn't really know how to fly safely for a long time. And the FAA came and said, Okay, this is you got to every single airplane. And I know this, I worked as a very low level aircraft mechanic. on very small planes, and every single screw, every single, you know, bolt, every single thing on an airplane has to adhere to regulations, because they don't want someone being like, Oh, I just didn't screw that thing. And right, you know, the torque amount is set. It's incredibly detailed. And that's what we want. Because you know, you find 60 miles an hour, 30,000 feet, you want to notice things not fine out of the sky. And you don't want your bank to fall out of the sky. So this and of course, even in aviation, they're now software tools that help with all this stuff. And they will be more advanced banking software tools to mitigate that deposit risk.

Jared Ranere: 19:37

Yeah. So it's interesting, because in this case, we're saying when SPV was considering selling the bonds at a loss, could there have been a platform to signal to them, Hey, there's there's an outsize risk here, that when people get wind of this asset sale, they're going to get very nervous about your bank and they're going to start pulling money out and It makes me wonder, did anybody inside see that coming? And there was an internal debate? And they decided to do it in spite of the risk? Or did they just miss the risk? No, they

Jay Haynes: 20:11

that that's where I think the investigations are going to be incredible. They're already they they're already stories, I'll try and find these links, but there were so many stories about them. But they're one, the internal employees were effectively screaming, that they needed to mitigate this risk, but it costs 10s of millions of dollars, to hedge that kind of risk. So they knew it before interest rates moved, like in certainly before they moved at the the amount that, you know, set off the bank run and right laughs the bank, so they should have mitigated that. And that's where the software would help because the job is to mitigate that risk. So that, you know, obviously, again, like all jobs very, very complicated, a lot of variables, you know, a lot of decisions and done by humans with like spreadsheets today, likely, you know, with some software, I'm sure is helping, but that's a that's a huge part of the market is that kind of early warning system, then you come out in the same way that you have software that monitors, you know, aircraft engines, you can't just like fire up an engine and be like, Oh, go fly across the country, right? I mean, it gets tested all the time, and they have metrics, and they're like, does this engine work and it fails, then you can't even fly that plane. And that should be the that's the exact, you know, analogy works really well. And to carry the aircraft, you know, metaphor. Also, people forget, like, we saved the passengers, right? The depositors are the passengers. And no one would argue, which is why I think it's very strange that people arguing like, we shouldn't let the depositors lose a ton of money. So if you're sitting there watching the airplane, you know, it's engines on fire, and it's headed right towards a major city with millions of people. And you're like, Oh, well, let's just make sure the passengers died to teach them a moral hazard lesson. It's an insane way to think about the world. And humans, because we always want to save the passengers, right? And then when that plane lands, and it turns out that the CEO forgot to like do the test on the engine. Yeah, the CEO should be fired, the company should lose all its equity. And that's what's happening here. There's should go to jail if they broke laws, right? I mean, yes, that's what's happening. But the idea that, like, we let the passengers die, right. Doesn't make any sense.

Jared Ranere: 22:29

Yeah, I agree. I agree. Yeah, I heard an interesting thing on the daily, The New York Times daily, where the reporter for the New York Times said that the FDIC, leaders were saying, gee, we wish SPV had come to us before they sold those bonds, because we might have given them some cash to prop them up and get them through this. And I think that's interesting, when you think about the psychology of going hand in hand to the regulatory agency, versus trying to take care of it yourself, and what that might mean for you, you know, they might have thought, gee, if we go to the FDIC now, early, they might take us over, and even though they protect our depositors, it's very interesting stuff.

Jay Haynes: 23:12

Yeah, well, I mean, hindsight, you know, is 20. What's the phrase concentrating on banks? It's, I think that's right. And even better, right to look at getting the job done faster and more accurately, is, is the solution, the software or the team of regulators, you know, whatever the solution is that that made that warning sign and forced them to hedge way earlier. If you're already at the point that you are going hand in hand and saying, Oh, we messed up, we got to have these losses, you gotta give us some money, like, Well, okay, that should be avoided, because you knew beforehand, and the software's, you know, flashing red light, like, automatically contacted the FDIC. And they told you, you have to have a different structure for your assets. Like, no, you can't do that. And, of course, that costs money. So the CEO is going to get a lower bonus, and the equity value is going to be lower, because it's cost, you know, people look at profitability. That's why they didn't want to do it. And that is the real danger. And it's like any job faster and more accurately, right. The risk mitigation is a job and it should have been done way way earlier.

Jared Ranere: 24:32

Yeah. Yeah. I think it's fascinating. It's it's a great product story. SVB you know, they they did have a great product, they satisfied unmet needs and an important underserved job where there was a lot of willingness to pay. And, you know, they just had another side that they didn't cover as well as they needed to.

Jay Haynes: 24:54

It really is it's it'd be incredible case study for years because it's it's Just banking failure 101 That's what's so interesting. They, they did the innovation part for customers extremely well. And hopefully what will happen now is that, you know, more banks will realize that they should innovate for their customers and their lots of different customer sets, you know, venture capital and startups is just, you know, one area, but just in all sorts of different markets, whether you're innovating for retirees, or families, or individuals, you know, single people, college people, you know, there's tons of ways to look at this, and figure out, okay, what of their financial needs, you know, beyond the checking account, a car loan, right, actually a home loan, you know, that finance is incredibly complex, and people are managing their lives. And, you know, frankly, banks have been kind of loan sharking, they get you to get a bunch of credit cards, they want to charge an enormous amount of interest rates, you know, people get into huge financial trouble in the US 50% of the population only has$400 to their name in their bank account. That's an enormous market, that's half the country that has an enormous set of financial jobs, that they need to have a solution that helps them do it better. Why not? Not does not mean you have to go get an MBA to figure this stuff out. As we always say the solutions the bank should get the jobs done for you. And that's what I don't think they focus enough because they do make a ton of money on loans and credit cards, you know, it's a very, very good business, if you don't, yeah,

Jared Ranere: 26:32

it's one of these markets where the product categories are extremely mature, and they do throw off a lot of money. And so the the innovation threats come up relatively rarely, but they're out there, right, you look at a firm and any of the other Buy now pay later products, right? Those are eating in two products that banks and credit card companies make a lot of money on, right, just credit, yes, you could, you could buy now and pay later. And so instead of using your credit card, use a firm and you get a lower interest rate. And it's a better product for a lot of people because it satisfies different needs. And, you know, when they think of themselves as a credit card company, or a company that sells checking accounts, they may not see these opportunities, and they find themselves behind the eight ball. So you have to extend beyond the product category, to identify the needs that your product category can not serve right now and figure out how to advance what you do and the solutions you offer your customers. And there are huge opportunities to do that. And both consumer and business banking.

Jay Haynes: 27:35

Yeah, and what's interesting is the banking piece is only part of the job domain. So banking is just a business model, you know, collect deposits, loan money, you know, make money on the spread. And that's fine. That'll always exist. But that should be a basically a boring commodity business, whereas it used to be, you know, when you had SNL is way back in the day in the 80s. And, and the interesting thing for the innovators is these financial jobs don't necessarily require you to be a bank. And they're the you can be a subscription service, which is obviously an incredibly good business model, which is why there's so many SaaS and subscription services, because you know, you get recurring revenue, but in this case, because you're always optimizing someone's finances as the job domain, right, there's opportunities to you're creating value to help capture some of that by through subscription services. So you don't have to be a bank. And there's a lot of this activity happening, obviously, like, you know, the the FinTech world is very active and innovative. And the leaders, you know, the people that will become the dominant players will help get these jobs done financial jobs for consumers and businesses, you know, faster, more accurately, with a lot less risk. Yeah. And I think that'll be, you know, kind of interesting next level of innovation over the next year.

Jared Ranere: 29:01

And you see a lot of banks who have innovation labs, because they have cash, and they know they're supposed to do something. But then you see, like, in some cases, you see them innovate around the consumption aspects of a product. Like I saw one example where they were giving clever designs to credit and debit cards, make them look more interesting. Okay, maybe that satisfies an emotional need for some customers, but there are much bigger opportunities out there, if you think beyond your current product and focus on what the customer is trying to do and where they're struggling.

Jay Haynes: 29:32

Yeah, yeah. And, you know, one of the examples that I love to think about and you know, we've been looking at companies in this space, and we should continue to to find one to really help grow, which is the payday lending, which is just an incredibly horrible business and keeps people you know, effectively under the thumb of a loan shark because they can't get out of this financial trap. So the way to look at that is to say, okay, these customers You can just extract as much cash as you can for them from them. Or you can take a holistic approach and say, Look, we can help them make more money. And then we don't have to be in the loan sharking, business and the value of those, the increase in those customers getting better jobs, higher paying jobs, you know, etc. is far outweighs you know the amount that you can just charge them in the short term until they go bankrupt from you know, living off payday loans. Yeah, yeah. Yeah. Cool. Interesting topic. Yeah.

Jared Ranere: 30:36

Yeah, hopefully lots of opportunities in this market.

Jay Haynes: 30:39

Huge opportunities, and hopefully the end of this potential banking contagion. Hopefully, by tomorrow, this week, we'll just have everything settled down. And I think the role of the government they're getting the job done right now, which is insure against, you know, financial contagion. So, lots of opportunities, very interesting markets to use for Jobs-to-be-Done. So thanks for listening. Remember to subscribe and like this podcast and if you want to learn more about Jobs-to-be-done innovation methods visit us at thrv.com That's thrv.com