Bloomberg Businessweek (March 20, 2023)
Год выпуска: March 20, 2023
Автор: Bloomberg Businessweek USA
Издательство: «Bloomberg Businessweek USA»
Формат: PDF (журнал на английском языке)
Количество страниц: 64
Point of failure
Silicon Valley Bank’s collapse exposed a weakness in tech— and in the broader economy
For 40 years, Silicon Valley Bank enmeshed itself in the venture capital community, often with the comfortable touches of a beloved hometown bank. Sequoia Capital partner Michael Moritz compared the bank to a “cherished local market” where the people behind the counter knew every customer’s name and sold them their cut of meat with a smile. SVB and its employees could be counted on to “tend community gardens, supply food banks, or provide companionship to the elderly,” he wrote March 12 in an op-ed article in the Financial Times. Until the events of the previous week, he said, Sequoia always recommended that new startups open an account with SVB.
In cities such as London, Boston, New York and Palo Alto, California, SVB pulled out the checkbook to sponsor technology conferences, networking dinners and happy hours, where stressed-out founders clinked glasses with peers and investors. One startup executive says he always told job-hunting friends to get lunch with a local SVB rep-they’d know everyone in the industry who was hiring.
SVB was a regional bank for a specific industry. That industry just happened to be one of the most powerful economic engines in the world, which made SVB the 16th-largest bank in the US, with assets of about $200 billion. It also made its collapse on March to the biggest US bank failure since 2008.
The day before, news that the bank had lost money on some of its investments sent the stock of its parent company, SVB Financial Group, into freefall. Depositors frantically tried to pull out $42 billion in a single day-an astonishingly fast bank run. So many people in the startup world did business with SVB, it was as if they had stumbled upon an inferno in their own living room.
It only got worse after the bank went into Federal Deposit Insurance Corp, receivership. Sure, the FDIC would cover up to $250,000 of deposits against losses, but many businesses that banked at SVB had much, much more in their accounts. Founders were terrified their money had been vaporized. One chief executive whose business had more than $40 million at SVB rushed all weekend to line up a handful of loans to cover $1.2 million needed in days for a 250-employee payroll. Normally, a startup in a pinch might ask for a shortterm loan from its investors, but many VC firms also banked with SVB, and their money was frozen, too.
Why did seemingly all of Silicon Valley keep their millions with the same bank? One reason is SVB catered to customers other banks didn’t really understand. Startups with no revenue but promising growth needed loans and corporate credit cards; entrepreneurs with valuable equity but a low salary needed mortgages. Traditional banks ignored them, but SVB treated them to lunch. Liz Giorgi, a startup founder, tweeted that 27 banks turned her down for a line of credit before SVB welcomed her. When the payments company Stripe launched a program in 2016 to help overseas startup founders incorporate in the US, each freshly hatched business was set up with an SVB US account, because the bank was willing to work with people who didn’t have Social Security numbers. SVB frequently lent a startup money on friendly terms, with a key requirement: The startup had to park almost all its cash with SVB.
Silicon Valley lionizes innovators and disrupters, but it’s also prone to herding. When a particular niche-artificial intelligence, for example-gets hot, founders rush in, and investors scramble to fund them. With SVB, the tech industry showed the same groupthink about where to bank.
Some may not have had a choice. “Frankly, we did it because there weren’t others knocking down our doors,” says Giorgi. Most of her peers in her startup accelerator cohort banked with SVB, she says: “This is a 40-year-old bank with a credible reputation across the startup industry.” Individually, that didn’t seem risky. Collectively, it balanced an entire industry on a single point of potential failure.
SVB was born in 1983, which turned out to be the perfect moment to start a new financial institution at the heart of a new economy. Interest rates and inflation would roll mostly downhill for the next 39 years, making it easier to raise money as computers relentlessly got faster, cheaper and more connected. Cash poured into the region’s venture capital firms and startups, and they in turn shoveled it through SVB’s teller windows, real and virtual.
In Silicon Valley, the saying goes: Startups die of indigestion, not starvation. That is, too much money can be as bad as not enough. It wasn’t that the bank lent money to businesses that couldn’t pay it back. Instead, stuffed with deposits, SVB bought bonds. These bonds were safe from a credit perspective-the issuers weren’t going to go broke-but they had long maturities and low yields. That’s a toxic combination when interest rates start rising. And suddenly last year, rates started going up a lot.
SVB, perhaps lulled by the long stretch of rock-bottom rates, failed to grasp how drastically conditions would shift. It was an error shared by many internet companies, which saw revenue soar in the pandemic’s first year and hired small armies of workers, unable to foresee that they would have to lay off more than 100,000 of them two years later. (On March 14, Facebook parent Meta Platforms Inc. announced plans to eliminate 15,000 positions, its second major round of cuts in the past six months.)
When venture capital investors started warning the companies they funded that SVB might go under, the rush to pull deposits happened all at once-assisted by digital tools. It created a dark version of what the business school crowd calls “first-mover advantage.” Quaid Walker, a founder who managed to wire funds out of the bank on March 9, before it closed, says the ones who moved fastest-sparing themselves angst-were those who spent more time on Twitter, where good information is often mixed with paranoia that amplifies Silicon Valley pile-ons.
The immediate SVB fiasco has calmed; depositors were assured at the end of a scary weekend that they would get their money back. Still, the panic served as a painful reminder that it’s hard for people to change their assumptions as quickly as the world can change. It isn’t just techies. Supposedly gimlet-eyed stock analysts in New York missed this one, too. But in the tech industry, the long, good run fueled stratospheric growth, and the culture saw no problem with collecting much of that growth in one institution. So when something big had to break, it happened here first.
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