The Rise and Fall of Silicon Valley Bank: A Conversation With Xuan-Thao Nguyen

Elizabeth Rowe and Xuan-Thao Nguyen
March 12, 2024

University of Washington law professor Xuan-Thao Nguyen discussed her new book, “Silicon Valley Bank: The Rise and Fall of a Community Bank for Tech,” with UVA Law professor Elizabeth A. Rowe. Nguyen’s book provides a first-hand account of the founding, ascent and dissolution of Silicon Valley Bank, a tech community bank founded in 1982 with $5 million that became the nation’s 13th-largest bank and the tech industry’s lender and bank.


ELIZABETH A. ROWE: Thank you all for joining us. I appreciate it. I know you just came back from spring break, and you're still getting into the swing of things. So this is a treat for us all to get to talk with Professor Nguyen today.

I have to say she is one of these people who makes me feel like such a slacker because many academics say that they work at the intersection of this thing and the other thing. But you will see and you will understand and I hope-- feel free when we open up for Q&A to ask her about herself and her work.

But she does such an interesting combination of areas-- started out-- like me, she practiced at a big firm. She was in New York. I was in Boston. And she has a wonderful mix of not only domestic but an international focus as well. She has expertise in section of commercial law, financing, intellectual property, bankruptcy, and IP, and taxation.

So I came to her through our IP world. But really she has sort of, I think, epitomizes the innovation ecosystem, and all that it takes with IP and sort of all the transactional aspects.

And the many-- she's written, I think, over a dozen books on security transactions, international intellectual property, intellectual property taxation, transnational intellectual property, licensing, and about a million articles on everything else in between. And besides that and numerous awards, she is also a senior consultant for the World Bank.

And so she does really interesting projects in China, Vietnam, and other countries, and consulting for various governmental agencies and is really quite instrumental in helping with advising on financing and other kinds of transactions, which, of course, you can also ask her about, for those of you who are interested.

So this brings us to why you will see that she has come to write this really important work about disruption, a word we hear a lot about, and in particular the theme of disruption, which we will talk about, not only reflected in her work on Silicon Valley Bank, but also some articles on blockchain, and all that stuff as well that I know nothing about.

But we will talk about that. And you can-- as I said, feel free to we'll try to keep this as informal as possible. Pitch a few questions about the book to get us started. But really, I want you to have a conversation and be part of the conversation with her.

So whatever questions occur to you, whatever your backgrounds are that bring you here, for the hour that we're here, please feel free to chime in and participate. And also at the end, for those of you who have books, she will be happy to autograph those as well.

So welcome. Welcome to UVA. This is our first time here in Charlottesville, and we ordered beautiful weather to go with it. So welcome, Professor Nguyen.

XUAN-THAO NGUYEN: Well, thank you so much. Thank you so much to all of you for attending this event. And I want to say thank you to you, Professor Rowe. Professor Rowe and I we have known each other for almost 20 years. And she is absolutely-- she's a first-rate scholar and also a very, very dear friend. We met each other at the People of Color Scholarship Conference back then.

And many of you do not Professor Rowe, before she enters legal academy, she was a partner at the Big Law. Very few law professors in the entire United States partner at the Big Law firm, to leave practice, and become a full-time law professor. What does that mean? She brought with her a wealth of experience, knowledge. And that's why her scholarship and her teaching at UVA-- I many of you in this room here.

You are her students. You are so fortunate. And I am fortunate to be her colleague and her friend. And so with that, Professor Rowe, Elizabeth, thank you so much for having me here. Thank you.

ELIZABETH A. ROWE: You're welcome. You're very kind, very kind. So thank you, all. And so let's start by telling us what inspired you to want to take on this project? What was it about this bank that made you think, oh, I don't have enough to do. Let me go write a whole book about it?

XUAN-THAO NGUYEN: Thank you. That's a great, great question. So many of you probably that patents, copyrights, trademarks. So when you have a small company and it has intellectual property, the small company will need a loan. And they need to get lending from some sources.

So if you go to a bank, any bank in the United States, or outside the United States as well, no bank in this country will give you a loan based on intellectual property. And why is that? And so I had this question with me for a long, long time. And so I spent some time to look into it. Why banks in the United States do not make loans, do not give loans to young startup companies?

And so that was the impetus reasoning who among the banks are the disruptor, to disrupt this kind of antiquated thinking that intellectual property, yes, it's valuable, but we're not going to accept them for any loans at all.

So that was the driving-- that was the driving force for me to find out among the thousands and thousands of banks and the whole history of banking in the United States, and to find who's the outliers, who the disruptors here.

And because without banks-- which mean no loans and no staff will be able to make that particular move at the very, very beginning itself. So that's some of the impetus in the background, why that led me to finding, trying to search for the disruptor, if you will. And in fact, back at Fried Frank, where I practiced law in New York City, so Fried, Frank, Harris, Shriver, & Jacobson. It's in New York City.

And at that law firm, when I was a young-- some associates at the law firm itself, and I had an assignment. And the assignment was that look into taking the intellectual property as collateral for loans. And back then, as any 2L, what? Intellectual property is already new. And then taking that as collateral for a loan, that is such a new idea.

And then the assignment from the partner-- well, the partner didn't know the answer, so they gave to you the youngest person. And so I did the research. And then that's when I discovered that, wow, the use of intellectual property in financing-- as collateral in financing-- for those of you who have taken or going to tech secure transaction log UCC Article 9.

And you will find out that you can use many property as collateral for financing. But using intellectual property as collateral for financing, how do you do that? How do you do that? And so that was the reason behind my research when I was a 2L to do research and to understand what's the history of using intellectual property for financing in the United States itself.

So that's just some broad background leading to the book. But it took more than 20-some years to finally to come to this book. So it took two-odd years to come to this book.

ELIZABETH A. ROWE: Oh, better late than never, for sure.

XUAN-THAO NGUYEN: Exactly, exactly.

ELIZABETH A. ROWE: So what did you find about Silicon Valley Bank? I often find that as many of us who followed anything Silicon Valley-- if you watch the Uber documentary or any of those that we can find usually, they become stories of things gone bad. It's about the people.

So tell us a little bit about who the people were here who had this innovative idea in and of itself to decide, hey, there's this area of tech that maybe we can service?

XUAN-THAO NGUYEN: And so thank you for that question relating to who were essentially the brain, who has the idea behind establishing a bank itself. So back then, when you look at the 1970s, Silicon Valley Bank was so new. I mean, Silicon Valley itself was new. And so if you look at Santa Clara, at that time, Santa Clara did not produce tech companies.

They were producing apricots, plums. That was Santa Clara Valley was for. It was for a lot of plums. And at that moment, Stanford University, right, and so Stanford University beginning-- particularly after World War II. And the US Defense industry was blooming in Southern California.

So Stanford University, at that moment, attracting lots of students from outside the United States and also domestically. And among the students who came to Stanford, they asked their professor, by the name of Robert Medearis. He taught construction engineering. But in his construction engineering, there was financing component.

And at that time, construction was the interface of technology, engineering, technology, and also financing. And so the student at Stanford, they asked the professor, when we have ideas, why banks do not provide us loans for our ideas? And the professor did not have the answer. And so he kept asking around why banks did not provide loans to his brilliant student from Stanford.

And so finally, he decided that he's going to teach himself everything about banking sectors itself. And then he spoke to experts. And so among the experts he spoke to, there was Bill Biggerstaff who was a banker at that time. And so Bill Biggerstaff and he gave consultant services to Medearis.

And then the two men was introduced to the third person by the name of Roger Smith. Roger Smith was a president of a bank. And Roger Smith, he himself-- at that moment, he was president of a bank, but it was a branch of a small bank. OK. Roger Smith wanted to do something about providing loans to new tech companies in the late '70s or so.

So here the confluence of three men who want to come together and serve a new community that's so new and so young. And that, in fact, when they decided that to form a bank the name "Silicon Valley" was available. The name "Silicon Valley" was available, and so that's why they named their bank Silicon Valley Bank. Nobody wants to touch the name Silicon Valley because, like I told you, apricots and plums.

And in fact, some people back then told them, don't select the name "Silicon Valley Bank" because it's so provincial. It's so provincial. Nobody will us. Why don't you select a name like at least "California Bank," or "American Bank," or "US Bank," something that-- bigger.

So the three of them got together. But here, in order to provide financing to tech companies, the bank must have money, number one. So where's the money coming from? And number two, to disrupt that, quote unquote, "disrupt." Back then, we did not use that verb at all. There's no such thing as disruption. But they know one thing that the community is going to be small.

But we need everybody in the community to gather to nurture tech companies. And so therefore, they decide that instead of asking one or two people to be investors in the bank, they decide from the very beginning, from the very beginning, that to invite 100 investors, and 100 investors of who and who at that moment, including last name like Sonsini, Larry Sonsini.

And that's one of the top banks nowadays, Wilson Sonsini. But Wilson Sonsini were just a tiny, tiny law firm at that time. But Larry Sonsini was an important person in the community. And so the three gentlemen, particularly Roger Smith-- he was so convinced that because any young companies will need a network of supporters.

And so therefore, they get 100 leaders in the community, who and who, politician, check, accountants, check, law firm partners, checks, any new financial institution at that moment, i.e. VC. The term "VC" was not in vogue at that time. But they also invited anybody who's VC as well. So they create a network of one hundred supporters.

And each person was asked please to invest in this new bank $10,000 per person. Many of them, that told me that was the best investment in their life.

ELIZABETH A. ROWE: I will say. Yeah.

XUAN-THAO NGUYEN: Years later on. And so the ingredients for the bank with the three personalities that the three personalities of Roger, Smith, Robert Medearis, and Bill Biggerstaff, they themselves decide that to form this bank.

But the brainchild was with Medearis, the person who executed is Roger Smith to bring together 100 investors, $10,000 per person, to pull in and provide the network of support to tech companies itself. And then finally, before they can open the bank, they got in Toro, in Toro. They got money from a bigger investor. And so they opened the bank with $5 million.

And it has one office only, one office, in the middle of nowhere, in the middle of nowhere. Here's the best part of disruption. Instead of open the bank near Stanford, they say we don't have the money to do that, so let's open it far away in an industrial park, isolated from everybody, which means that they have to work harder, which means whoever, they're going to have to work harder.

And they also decided they're not going to spend any money for advertisement because why? Because they didn't have the money. But what did they do before they opened, before the October days opening, the personality came out, the three personality came out. They decided that to invite one of the investors. You remember the one hundred investors.

So one of the investors was a Congressman, and then to have him to put-- they make sure at the opening of the bank, the Congressman put on a bunny suit, the clean suit. Back then in the computer age, when you're talking about computer chips and talking about the clean room. Sp you have to put on this spacesuit or the bunny suit.

And so one of the photographers was there, took the picture of the Congressman, had been helped by a bank, by one of the banker, to put on the suit. And that picture was sent, was viral. But back then, we did not have the term "viral." And so the picture was picked up by local media. And that's how they get their promotion, the introverted free marketing.

And again, the personalities of these three men, they was remarkable, that they was functioning just like they themselves, founders of a startup. Startup means lean, has no money, no resources, need the network of people, and need to begin that way even.

So it's in the DNA from the very beginning, from the inception, that they need to function and behave just like their future clients startup. And they have to figure out a way to disrupt what the system at that time as well.

ELIZABETH A. ROWE: And this part of the system was sort of dealing with the network of regulations that governed regular banks, and some of those hurdles that were involved. Can you tell us more about that? How was this going to be different?

XUAN-THAO NGUYEN: Yes. And so thank you for that question. Any of us, if you're in the banking sector-- the banking sector is one of the most, I would say, highly regulated sector in the United States. Why? Because bank does not-- banks don't have money. Bank money come from you. Bank's money come from depositors. And so which means we the public demand that the banks heavily regulated.

And so therefore, because when the bank is so heavily regulated, we have regulation that determine what will be calculated or acceptable as collateral. This chair here might be deemed as collateral, but intellectual property is not included in the definition of collateral because the regulations say that only things, certain items, certain kind of property will be accepted as collateral.

So which means the majority of banks, if not-- I use the number, 99.9% of banks in the United States will not, at this moment, will not count intellectual property in the definition of collateral when they do valuations, when they do the calculation to give you a loan. And so let's say a loan is $5 million, or a loan is $10 million.

But if the intellectual property has nice value, the bank will say, sorry, we don't dare to violate the regulations, so therefore we cannot accept intellectual property in the calculation for the borrowing base. And so because of that-- because functioning in that particular space, how could then-- that was a big question. How could banks-- Silicon Valley Bank able to persuade the regulators?

How did they do it? To write this book, I interviewed many different banks, and also because of my roles as a senior consultant for the World Bank. So I spoke to many banks in these countries and also to banks outside the United States, bank in Canada as well. So same practice, same practice, whether you in Canada, in China, in the United States, the banks are so conservative.

They will not do it because the regulation, the law. And so when I interviewed the founders for Silicon Valley Bank, the original founder-- I flew down to Davis. One of them was in the nursing home because we talk about the bank that was founded 40 years ago.

And then the original founder, and also the first banker, who I said I want to know, how did each one of them able to persuade the regulators to allow them to provide services to the tech industry, to make loans to startup? So what they did was fascinating. They themselves, the bankers, they-- first of all, they persuaded the VC, the who and who VC.

If you're in this room, you know Sequoia. Sequoia VC is large national global VC. Kleiner Perkins, giant, giant. So all the top VC in the world is. So they asked each of those VC to help them, to help them, to have face-to-face meeting with the regulators, and to explain to the regulator what exactly the VC ecosystem is about because the regulators-- even though they think they are smart, but they don't know.

Even-- they think they're so smart, but they don't know what's exactly and how the VC ecosystem works at all. And so that is why it took actually months, if not years, sitting down to explain to the regulators about the VC ecosystem, which means the money coming from the funds, investors, and investors put their money in funds, and then the VC going to invest in portfolio companies.

By the way, only, what, about 1% of all startups will be able to get VC money. And so new startup-- if you talk about 100 new startups today, new companies today, then somewhere between one-- when I talk about most will be like five companies will be able to get VC funding. And so then they go from funds to the new portfolio companies here.

So the portfolio companies will be able to get, let's say, the first Series A funding. So the Series A funding, let's say, the check is $10 million, and the company is able to survive for 18 months to go to the next Series B. But in between the series, go to A to B, more than half of companies will die. So less than 5%, 1% to 5% will be selected for VC financing.

But to go from A to B Series, half of them, or more, will survive, will die, and will survive here. And so to go from A to B, many times companies will need a loans, will need a loan to bridge them, to bring them over. And so bank has a role to play right here. And because VC, providing the funding for the company, VC really want the company to survive to Series B.

So it's in the VC best interest that the VC is willing, too, quote unquote, "guarantee the loans" without signing any contracts. So the VC like Sequoia will say that I am so glad Silicon Valley Bank, you're going to provide loan to my portfolio company so that they can survive from A to B. Please give them a loan. We use our reputation, back in this company here.

But we are not going to sign the guarantee for the loan, but we're using our reputation as Sequoia to backing the company. And so Sequoia and all explained it to the regulators that the VC themselves-- before they select-- before they make selection among the thousands of new companies, they conduct due diligence.

And those due diligence are more than typical bank's due diligence. They do much more work. So therefore, they essentially persuade the regulators to relax a little bit here. We, VC, do conduct the due diligence. The bank is not conducting due diligence. We are standing behind these portfolio companies here. And so therefore, the loans are safe here, at least safer here.

So these persuasions, that they was able to convince the regulators to let Silicon Valley Bank to have a business model devoted literally over time 100% to serving tech companies itself. And that was one ingredients.

And the second ingredients was that there was so much money coming from the VC, and so typically, only about 40% to 50% of the deposit will leave the bank as loans. So the ratio is really low. So there's a lot of money still sitting as deposit, and only half of it will go out as loans, versus a traditional bank, you can have up to 85% of the deposit money going to loans itself.

So therefore, the regulator saw that, so give them some comfort. And also in the early days as well, that the bankers, they have to sit down with the regulators and to show to the regulators every single loan, and how each of the loan by each of the new young tech companies will be repaid by account receivables, by the products coming in. So let's say Fitbits. Are you wearing? What kind of--

ELIZABETH A. ROWE: I have an Apple Watch.

XUAN-THAO NGUYEN: You have an Apple Watch. So any of you have Fitbits. And so imagine that making a loan to Fitbit, and Fitbit was indeed Silicon Valley Bank client. So Silicon Valley Bank will have to convince the regulator, look, this young company here has products, and it makes-- it have cash flow. And so you have to demonstrate it every single time.

And so they used to complain to me that the regulator would just camp out at the headquarter for weeks, weeks to look at every single law itself.

ELIZABETH A. ROWE: So once they were up and running and-- looking at the clock, because I want to be sure I allow enough time for questions. Sorry. All right. So once they were up and running, what were they able to achieve?

So given that sort part of the reason for starting part of the motivation for starting was the kind of change tech lending and all of that. What would you say were some of the successes? Were they able to achieve that before we get to obviously down the other side?

XUAN-THAO NGUYEN: First of all that they won the key achievements, I believe, that they were able to prove everybody in the United States and the world wrong that tech lending-- that they were able to prove. Tech lending is very profitable, and they did that. They did it successfully to show that. And one of the key products was venture debt.

Any of you in business schools, have the background relating to venture debt. A venture debt was the kind of loans the Silicon Valley Bank established. And so you look at BlackRock today, BlackRock has a huge, huge devotions in venture debt itself. So it came from Silicon Valley Bank.

And venture debt mean that you are giving loans to VC-backed company so they can go to the next round of funding itself, so venture debt. So that's key. That's one. So they proved that. They also proved number two that actually is very safe. It's very safe in the tech lending space. That's contrary to everybody's out there thinking about that. So that is key.

And also number three that they able to prove that in this ecosystem itself, that you do need to have a bank, a bank that serves everyone in the ecosystem from the founder, the executive team, the investor who are VC, the fund themselves. And also when the founders need the loans, they go to the bank.

When the investor needs-- when the capital call for the next loans, they also need a bank. So you need a bank that who serves everybody in the ecosystem and understand how the ecosystem itself work. So they are able to prove those ingredients. Before them, nobody figured that out at all. So that's to me, the remarkable achievements that they did.

And they went from being a community bank, one office, one office in the middle of nowhere, northern part of San Jose, to become the 13th largest bank in the United States before the collapse itself. That's quite, I say, a story of from rags to riches. So that's quite remarkable that they became the top 15 bank in the country before the collapse itself.

ELIZABETH A. ROWE: So let's get to the collapse. Of course. What's juicy about the collapse? What do we need to know? What happened? In short. I'm sure it's a long, complicated story.

XUAN-THAO NGUYEN: Sure, sure. So first of all, the collapse. I still remember the moment when I heard about the collapse. I was just so sad. And for the first time in my life-- in my professional career writing law review articles and books, first time in my life that I was so stunned to the point that I was numb. I did not what to do.

The first hour, I did not know how to respond to it because I knew the innovators so well, and I knew what they have done to achieve, where they were. And the collapse, I would say that its own Shakespearean tragedy. I use the term "Shakespearean," and I meant it because right before that, the year before the-- two years before that when I conducted the interviews, I mean, a year and a half, and they were just a very vibrant bank, successful bank.

And yet, what happened here. So the juicy part of the collapse itself, so the juicy part-- put aside my personal feeling about it. And that's-- I think that the tech world of Silicon Valley is responsible for killing their own bank. I say that emphatically. The tech bros of Silicon Valley are responsible for killing their own bank.


XUAN-THAO NGUYEN: Because first of all, the tech bros think that they are so smart. They think that they're so smart. They think that they understand how banks work. They don't. They don't understand how banks work. And that's one of the key problems. They don't understand how banks work. Banks-- they do not understand that banks are in the business of taking deposits and give out loans.

And banks are heavily regulated. And that's in the regulated industry, the banks must invest the deposits in very safe, very safe, very boring investments, i.e. US treasuries. And so Silicon Valley Bank did just that. But because the central bank increased rates very rapidly in such a short time, that caused the investment that Silicon Valley Bank did, in very safe, in the treasury itself-- that have this on paper that there's a loss. But that loss is small, and it can be easily cured.

But tech bro didn't understand that. Tech bro did not understand that at all. And so-- because tech bro didn't understand that. And what the tech bro did-- what tech bro did is that, let me have-- any cell phone here? I didn't have the cell phone with me. So I may have the cell phone. So what the tech bro did is that they use the cell phone here.

They amplify their messages to their bubbles, to the people in their bubbles. So they send out messages and communicated to their portfolio companies who are in their bubbles. And then they are telling all the portfolio companies, take your money out. And when they did that, they killed the bank household.

You and I, if you want to go to Chase Bank, any of you in this room, if you go to Chase Bank today or tomorrow and say that you want to take out $20,000, Chase Bank will not allow you. But Silicon Valley Bank, because they serve the tech communities, any tech companies, you can take out millions and millions, millions with the click on your cell phone.

And because tech bro told the portfolio of companies, take your money out, they started a bank run. Chase Bank will not allow you to start a bank run because they don't allow you to take the money out. Silicon Valley Bank allows you to take your money out. And when the tech bro down the portfolio companies, you have to understand the-- thank you, Professor Rowe.

So in the VC ecosystem, you have-- the VC's up here commanding heights, I say. And when they tell you, run, you run. That's how it works. And so therefore these companies, the portfolio companies, they have herd mentality. I call them sheeps. Herd mentality, and they follow, and that's what they did.

And so in total Professor Rowe, $142 billion to leave the bank in less than 48 hours, the shortest bank run in the history. OK. And so you can see then-- you can see then that the tech bro not understanding how banking works, not understanding other factors.

OK, that why Silicon Valley Bank on paper was suffering a loss on paper, but not understanding all the so-called losses, all those so-called losses on paper caused by the interest hikes, the rapid interest high, and that all the money, the deposit money, was so safe in treasuries itself here, not understanding. And they use social media in their own bubble to tell the portfolio companies to take the money out.

ELIZABETH A. ROWE: So where does that leave us with lessons learned other than--

XUAN-THAO NGUYEN: So that's-- yeah, yeah. So there's several lessons, very valuable lessons here, definitely, for the banking sectors, the controlled social media itself, to understand that social media is a risk to banking. Before this, we never imagined the social media is a risk. We think of all not having collateral, so the loan's the risk. But social media is a risk that they can see that.

So you can see that how rumors, when it's so isolated or insulated at the same time in bubbles, that it can cause-- the bank's reputation can be tanked very quickly. In this case here, can create its own bank run. So that's one. And then also that for banks to have very, very strong policy relating to withdrawals.

You serve in tech company, the lesson learned here is that that's going to be tighter control by banks, not allowing tech companies to withdraw so easily when you serve them, when you serve tech companies. Just by the phone, they can move $100 million here, $100 million there. Regular banks, they don't allow that.

But any bank going to step in this void, going to have tighter control relating to how much they're going to allow tech companies to withdraw their money. So that's another lesson to us as well. And I think that the third lesson here is that it's going to be quite painful for the VC-- and they have experienced the pain already.

The lesson they learned that they don't how banks operate, and to avoid killing the next bank, that they need to be a little bit more humble. That's the lesson that they learned. They need to be a bit more humble here. Just because you VC, you back some incredible tech companies from the early days of Apples, to Uber, to everybody else-- you think that, because you think that you VC on top of the world.

And we have seen that. We have seen that, the behaviors of the VC themselves. They think that they dominate. And I think it's backfire. So the lesson learned from that-- lesson learned from that one is that whichever bank going to operate in this void here, that they need to be able to work with VC in such a way, quote unquote, "to educate the VC."

But the VC need to be humble, to willing to learn, that look this is how banking system works here. And for any bank to willing to step in this void, then the VC needs that bank, but the VC also needs to work with that bank, but not to essentially exile the kind of insulars, the control that they did and create such a rumor mills itself to do that.

So that's some of the key big lesson for the banking sectors. But for the regulators-- the really funny part is that when the bank collapse in DC, the key regulator does not even know, did not even the name Silicon Valley Bank, and admitted that the regulator did not even know the Silicon Valley Bank existed.

Wow, the whole Silicon Valley ecosystem without Silicon Valley Bank, there would be none of them. And yet, our regulator in DC did not even know. I'm sure the regulators in San Francisco knew. But there's no communications.

So the lesson also for the regulator in DC to learn is that different sectors of the economy needs certain banks that serve them. But the regulator needs to keep an eye on sector-specific, when we talk about banking services.

On the one hand, understand the business and allow them to provide loans. On the other hand, understand that when the government hiking rates so quickly, how it's going to impact specific industry much more than the overall industries out there itself. So that's the kind of lesson for the regulator to keep in mind to do that. So that's pretty much-- there's more, but I'm going to stop here.

ELIZABETH A. ROWE: Thank you so much for attending.