The failure of a bank is never good news. Silicon Valley Bank was the benchmark for the tech sector, for startups and venture capitalists. The risk is that of a new crisis like the one in 2008, although from the U.S. they are confident that it will not happen.
The tale of those who live there is of an eerily quiet Sand Hill Road. It is the road west of Silicon Valley that runs through Palo Alto, Menlo Park and Woodside, known for its concentration of tech and tech-related companies. A silence that brings to mind a nightmare already experienced.
The failure of a bank is never good news, and the memory of what happened in the great financial crisis of 2008 resurfaces with the great risk of it all happening again. And the consequences could be even more severe.
The facts tell us that within a very short period of time, it is striking how quickly it all happened, the Silicon Valley Bank, the startup bank, the one that gave money to investment funds to grow the name of Silicon Valley, that is, that strip of land in California that gave birth to the tech giants we know today, went bankrupt.
Silicon Valley Bank (SVB) was shut down by U.S. regulators and taken over by the U.S. government after depositors rushed to withdraw their money following a “surprise” announcement from the company on Wednesday night that it had sold $21 billion in assets and was selling more of its own stock to shore up its balance sheet. From this moment on it was panic.
Start-up founders and venture capitalists quickly realized that the money needed to pay employees could be lost or frozen by the bank’s collapse and rushed to withdraw their money. Now a withdrawal limit has been imposed at $250,000, although of course companies, mostly startups have deposits with the bank in much higher amounts.
Quickly the Federal Deposit Insurance Corporation (FDIC) the federal agency that intervenes in cases like these, of troubled banks, to guarantee consumers, already envisaging the establishment of a bank that should replace the SVB and carry on this very delicate phase. The Federal Reserve leadership says it is confident of averting the contagion effect, as was precisely the case in the 2008 crisis, as the laws brought in after that severe crisis should prevent a recurrence of similar situations.
But in the meantime, SVB’s bankruptcy leaves a huge void in a technology sector, the Silicon Valley sector, which is already in great difficulty due to rising rates, as an obvious and recent phenomenon, and grappling with the management of difficulties of companies in the sector that has caused, and still continues now, a chain of mass layoffs.
We are talking about a bank that was born in 1983 and has grown along with the tech industry, weathering the ups and downs of the industry as it has over the years. With the boom in the venture capital market in the late 2000s and early 2010s, the bank took advantage of the exponential growth of the start-up phenomenon, becoming the go-to bank for companies that needed a bank that could handle the risky and fast-moving world at the delicate stage of the tech industry’s emergence.
The bank grew rapidly and today has a presence in nine countries, including China and India. And in China, as a result of this failure, there is no small amount of concern. SVB partnered with a number of small and large tech companies, including e-commerce company Shopify and cybersecurity firm CrowdStrike. Its client list also included founders and top tech executives, as well as well-known venture capital firms such as Andreessen Horowitz and Insight Partners.
It should be noted that a large part of the layoffs can be attributed to the excessive hiring that occurred during the pandemic, thinking that markets would go in a certain direction, while venture capitalists said that the decline in funding for new start-ups is a necessary correction after years of over-exuberance.
At the moment, the bank’s capital is all still there, at the end of 2022 the SVB had about $209 billion in total assets and $175 billion in deposits, and on Monday the issue of raising funds from startups, the vast majority being affected by this crisis, should be resolved in order to cope with the payment of salaries to its employees, which remains the main concern.
And meanwhile, Roku, the company that provides operating systems to streaming companies, lets it be known that from the SVB bankruptcy it could see 25 percent of its cash at risk, being deposited with the bank and not insured.
The entire tech industry is grappling with changes in the economy and renewed pressure from Wall Street investors to cut costs and focus on profits, after years of spending to continually grow their companies at a breakneck pace.
During the pandemic, big companies like Amazon, Facebook and Google hired tens of thousands of new workers. But most of them cut costs and laid off workers, something few have had to do in the past decade.
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This failure marks how much the tech sector still has to reckon with itself, and we know, unfortunately, that at the end of these accounts the highest price will be paid by tens of thousands of people who had believed in that great growth that seemed endless.
The word is not yet out, but from now on restructuring and layoffs will become more and more significant and some companies will close. Let us hope that the lessons of the great financial crisis of 2008 have served some purpose, if only to limit financial contagion and consequences. Let’s hope.