Tech banking: Running scared in Silicon Valley
Silicon Valley will not be the same after the collapse of its home bank, said Therese Poletti in MarketWatch. “So far in this downturn, investors have been focused on the big revamp going on in Big Tech and other large publicly traded firms, which have been cutting jobs, selling real-estate assets, and reducing office space in response to Wall Street’s concerns.” But Silicon Valley Bank was “at the core of venture-capital funding,” the lifeblood of startups. The trouble for smaller tech firms began last year, when the Federal Reserve started raising rates, ending the “era of free money.” In 2022, venture funding fell 31 percent from the year prior. Some are calling this a comeuppance after “12 to 13 years of insane growth, often irresponsible spending, hubris, and swagger.” All that easy capital helped fuel terrific tech success stories, but “also frauds and debacles like Theranos and WeWork.”
The bank run “showed how much fear was already in the market,” said Erin Griffith in The New York Times. “SVB offered many startups a form of credit that other banks found too risky,” extending debt that was secured by venture funding. It enabled many companies to “stretch their money to the next round of funding.” Now, one VC fund backer said, “a quarter to a third of the companies his funds had backed would run out of money in the next six months.” In a recent survey of 870 founders, 22 percent fretted that they might not be able to raise any funding this year. The acquisition this week of SVB’s remaining loans and deposits by First Citizens BancShares might ease some of the anxiety.
Still, said Brian Merchant in the Los Angeles Times, the tech sector needed to be brought back to earth. SVB “catered to an industry where showering unproven companies with cash is the norm, with venture capitalists competing among themselves to see who can make it rain the hardest.” That’s a system that “breeds recklessness.” I’m surprised it took this long for the “move fast and break things” tech ethos to break down.
And now that it has, the people who could keep it together are nowhere to be found, said Anita Ramaswamy in Reuters. During the banking crisis of 1907, J. Pierpont Morgan “corralled his peers into using their own money to calm the crisis.” JPMorgan Chase’s chief executive, Jamie Dimon, has been attempting to do the same to rescue troubled First Republic. But when SVB started faltering, “venture capitalists did the opposite of pitch in, publicly encouraging companies to yank their funds.” Silicon Valley obviously has no shortage of tech billionaires, and yet none of them has stood up to “restore confidence in the banks that grease their industry’s wheels.”