The Silicon Valley bank went bankrupt. Silicon Valley is broken

People look at signs posted at the entrance to a Silicon Valley bank in Santa Clara, California on Friday, March 10, 2023.  the height of the financial crisis in 2008.  The FDIC ordered the closure of Silicon Valley Bank and on Friday immediately forfeited positions in all deposits at the bank.  (AP Photo/Jeff Chiu)

If the Silicon Valley bank, which serves 65% of startups, can’t find a buyer for its assets, it will send a message about Silicon Valley’s priorities. (Jeff Chiu/Associated Press)

Silicon Valley has had a lot of reckoning lately – falls at the mercy of the once mighty founders, V the collapse of the crypto industry And mass layoffs in the technology sector, name a few. But the staggering collapse of Silicon Valley Bank, a common old bank in the region and one of the largest in the country, should finally force us to rethink — and reform — the way our tech industry operates.

There seem to be at least two good reasons why a “startup bank” unsuccessful. First, the huge deposits in his ledgers were tied in low interest securities and they came from venture capital-backed companies that burning cash faster than expected just as venture capital funding as a whole has slowed down. Second, he and so many of his startup clients were indebted to a relatively small group of VCs, and so SVB was uniquely vulnerable to a bank run if those VCs decided to withdraw their funds at the same time.

This which seems to have happened.

Rising interest rates wrecked the bank’s balance sheet, it didn’t have enough cash to warrant a withdrawal, and an attempt to raise capital failed – so prominent venture capitalists like Peter Thiel and his Founder’s Fund advised their companies to leave. Rumors spread and soon everyone else did the same to the tune $42 billion when trying to remove.

As many have pointed out, the bank probably should have seen problems brewing as the Fed raised interest rates, and has made clear its intention to continue doing so. And the bank had to communicate its strategy to account holders after a crisis seemed imminent, and so on. But even looking beyond the recent sequence of events, it should be obvious that The backbone of the Silicon Valley startup ecosystem has been broken for a long time.

If SVB was vulnerable to rapid interest rate hikes, it’s because it catered to an industry where showering untested companies with cash is the norm and venture capitalists compete among themselves to see who can make it rain harder. It is an inherently unsystematic system based on recklessness. It’s actually a little surprising that it took so long to break under the weight of all this hard-to-use capital.

“do first, ask questions later” philosophy, “move fast and break things” principle; a mandate to develop your platform at any cost then try to figure out how to deal with it long after the Nazis got inside; the unicorn or crash mentality that says it’s worthless if the market can’t scale to world domination; these are all by-products of a system that starts with a venture capital-based technology development model.

Venture capitalists make money by betting on many companies in the hope that one of them will achieve the next billion dollar success – with an investment of this magnitude, nothing else is worth their cost. So you have thousands of companies with young founders who suddenly have more money than the royal family, who are tasked with turning it into money bigger than God.

Most often they park their new catch in the SVB. Thus, the vast majority of funds held in SVB are not guaranteed by the FDIC because each deposit is insured for up to $250,000—by some estimates, only 3% to 6% of the bank’s deposits are that small. A typical startup has millions tied up there.

And it is unclear if they will see him again. SVB’s assets are being reviewed, and while some are optimistic that it will find a buyer and that its savers will be saved, this is far from certain. Failing that, it would make for a wonderful charge that Silicon Valley financiers really appreciate.

Remember, all it took for Elon Musk was to snap his fingers and call some VCs and JPMorgan, and he had a deal to buy Twitter at an inflated $44 billion. SVB is the economic backbone for countless start-ups and technology companies in the region. According to the New York Times, as of 2015, “it serves 65 percent of all startups in existence and many of the most prominent venture capital firms.” If it does not find a buyer, whether in a larger bank or regional investors, or their conglomerate, it will rather speak of priorities.

Because if SVB goes bust, it’s the fledgling founders and the rank-and-file tech workers who will suffer the most. Companies using SVB services, no payroll due to an accident. People who are not VCs don’t get paid for their work, and people who work around the clock on a dream they believe in (even if they also believe it could make them more money than God) are losing their companies. .

What about venture capitalists? Sorry, they’ll have to hurry – they’re in Aspen, almost to the top of the lift.

Now imagine a model where an investor who wanted to invest in a tech company actually assessed the risk involved, or where the founders were forced to prove that their technology could be sold before they received a $100 million Series A. dollars or whatever. Imagine a world where a handful of dudes No can decide among themselves whether the idea is suddenly worth the gross domestic product of a small nation-state, or to destroy an entire industry without a reliable replacement, or in a panic to force each other to overthrow a large financial institution. Utopia, I know!

It’s time to find ways to limit these incredible and reckless capital flows, or at least tax them proportionately, in order to bring the tech sector back to Earth.

Because the alternative is obvious—technology products are recklessly developed and released, with the constant risk of a full-blown crash that affects anyone whose address is not on Sand Hill Road.

This story originally appeared in the Los Angeles Times.

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