The collapse of Silicon Valley Bank foreshadows a bigger reckoning for the tech industry

In the days since the stunning collapse of Silicon Valley Bank, I've seen the tech world point a lot of fingers. I've seen venture-capital titans and tech gurus blame the regulators, the banking system, the Federal Reserve, Joe Biden, the bank's communications team, and anyone else within shouting distance of this mess.

But I have yet to see any of these grown-ups take some of the blame for themselves. 

Silicon Valley Bank imploded in part because it was a repository for the riskiest behaviors of the industry it serviced. Its growth was supercharged by tech's clubby, insular nature, and its operation depended on a rising tide that was always sure to go out. A financial institution should be aware of economic cycles — but SVB's management, like so many in the Valley before it, blew off the realities of the market until it was too late. SVB helped fuel the tech bubble, and the tech bubble helped fuel SVB — but now that's all blown up. 

In spite of this reality, there has been little self-reflection on the part of the industry that was so closely tied to Silicon Valley Bank. And in the midst of these immature excuses from VCs and shallow recriminations from billionaire investors, the seeds of the next bubble are being planted. Without some serious accounting about Silicon Valley's culture and the tech industry's role in SVB's collapse, then something ugly like this is going to happen again.

Growth, not grown

In Silicon Valley the highest priority for any business is growth. That means if a certain trend is making money, the entire industry will pile in headfirst. Silicon Valley Bank thrived on these trends. It turned itself into the kind of asset VCs would want to own during the peak of this bubble: a high-growth business with a client list full of well-connected VCs, pedigreed startups, and depositors capitalizing on the latest craze. It was the Valley reflected back on itself in a bank balance sheet. SVB built its chummy relationships in classic tech fashion, winning over startups and their founders with an array of products meant to weave clients deeper into Silicon Valley's financial fabric. From direct equity investments to personal mortgages to founders, it was part of the plumbing that connected the industry. It was a part of tech culture, and it's that culture that ultimately did it in.

But to grow at the breakneck speed of its clients, Silicon Valley Bank executives had to change things in Washington. After the financial crisis, institutions with $50 billion or more in assets were designated "systemically important" and subjected to more-onerous rules. These requirements made the banks safer, but they also tamped down SVB's ability to grow. So the bank launched a lobbying campaign to neuter these regulations. The Trump administration and Congress finally gave SVB what it wanted in 2018, raising the "systemically important" threshold to $250 billion in assets.

Once that was accomplished, the bank was able to balloon, growing deposits from just under $50 billion in 2019 to nearly $200 billion in 2021. SVB's customers were growth-focused tech companies sensitive to interest-rate hikes. These customers all had the same sensitivity to rising interest rates and a slowing economy. They were startups depending on rounds of money that would get cut off in a downturn. They were crypto firms that faced the mounting threat of increased regulation. SVB took on a client base with a risk profile like none other in the country, and it then invested their money in assets that were sure to decline as rates rose. There was no hedging. SVB's balance sheet reflected complete trust in the Silicon Valley model: grow fast, grab customers, bet it all, and figure the rest out later. But, ironically, the very industry that the bank modeled itself on bailed at the first sign of trouble.

Crisis of trust

The end of a financial mania is, in essence, a crisis of trust. As the tech bubble has popped over the past year, that crisis has been visible all over the industry. Workers no longer trust that their employer is looking out for them, companies stopped trusting that employees were pulling their weight, and investors no longer trust that companies will deliver explosive returns. In this environment of suspicion, the very financial institution that facilitated the tech industry's exuberance became unreliable. A few whispers from powerful VCs, like the leaders of Peter Thiel's hyperinfluential Founders Fund, and the run was on. If there is a better real-life illustration for that utter collapse of confidence than a bank run, I don't know what it is.

"VCs rely on gossip as facts," one founder connected to the much-vaunted startup incubator Y Combinator told me. "They like to say they're empirically minded — 'Occam's razor' and 'first principles' — but when it comes down to it the greatest weapon and greatest tool they have is gossip. And last week was a brilliant case in which it went awry. Grown people with advanced degrees using gossip as gospel."

Once the spark was lit, Silicon Valley's hype machine took it from there. The faithless VCs ended up freaking out the founders of companies they were invested in, leading to startups yanking all of their cash as quickly as possible. One founder with 12 years of experience in the tech industry who was at the South by Southwest festival in Austin, Texas, told me some of the horror stories: Startup CEOs with tens of millions of dollars sitting in SVB scrambling to get some money out, fearful they would get only a fraction of it back. The VCs had told them to put their money in the bank, so they did — and now the same VCs were warning of an "extinction-level event."

Or as the economic historian Adam Tooze put it in a recent newsletter: "This was not so much a classic large-scale bank run in which mass psychology played its part on a grand scale, but a bitchy high-school playground in which the cool thing to do was to bank with SVB until it no longer was."

Silicon Valley blame game

To Wall Street, the collapse of SVB was shocking but not surprising. Short-sellers have been talking about the bank's weak balance sheet and even weaker oversight for months. The true revelation here is the utter lack of financial acumen among Silicon Valley's supposed top minds. Bankers are supposed to figure out ways to mitigate or disperse the risk on their balance sheet. SVB's failure is, in large part, that its executives failed to do that basic task. No one considered that building a bank with a client base in a single industry that depended on interest rates going in only one direction might be a problem. It is hard to understand how none of its supposedly sophisticated clients or investors or board members asked why not.

"I think we have proven that the average CFO/Treasurer in the venture world doesn't know how to read a balance sheet," a billionaire hedge fund manager cracked to me over email. And if the VCs who are supposedly providing sage advice don't know how to manage basic business risk, how are they supposed to teach their portfolio companies?

For the startups and businesses that had their money in Silicon Valley Bank, this panic should trigger a meaningful conversation about what it means to be a mature company. The pressure to secure the next round of funding means that while startups grow fast, they may not have time to develop. Perhaps if portfolio companies were allowed to slow down a bit earlier in their life cycles — building the proper financial infrastructure — similar disasters could be avoided. Instead of leaving tens of millions of dollars in a single bank account, well above the FDIC's $250,000 protection limit, a more mature company may have availed themselves of products to make sure their money was safe. Or they could just hire the NBA star Giannis Antetokounmpo, who was said to have split his earnings into dozens of bank accounts so none of them held over the $250,000 limit for deposit insurance. He seems to know something about risk management.

And beyond basic business practices, the collapse of Silicon Valley Bank should be an opportunity for tech cheerleaders to take a step back and reexamine their place in the world. For years, the leading lights of venture capital have offered up their ideas on how society should be run — giving suggestions on everything from education and transportation to infrastructure and, yes, the financial system.

Now, thanks in large part to Twitter, VCs are providing the market with plenty of insight into their lack of insight. During the tech bubble of 2001, "VCs didn't interact via social media, like now," one legendary investor known for picking through the wreckage of several bubbles told me. "So we didn't realize what idiots they were until they all went bankrupt!" The VC transformation from rugged libertarian technologists to statists in distress was almost instant. They bleated for help from a government that — it seems like just yesterday — they claimed to have no need for. The startup founders who live at their beck and call are either in denial or keenly aware of this hypocrisy.

"The VCs are the villains here," the founder connected to Y Combinator said. "They are the kid with affluenza who crashes the Jet Ski into a sightseeing boat and then everyone has to suffer." The same founder also shared an analogy in which the VCs were the person in a zombie movie who gets bitten but doesn't tell anyone and goes on to infect the whole cast. You get the idea.

In an ideal world there might be a tone of contrition from the people who just flew billions into a mountain betting on ZIRP and crypto. The meltdown of the tech industry could serve as a reminder that VCs are just a club of people, taking risks in tech — that they don't have the answers to every problem in our society. But I'm not holding my breath.

"THEY WILL LEARN NOTHING FROM THIS," the tech founder who attended South by Southwest texted me.

A time to cast away stones

As the rubble of SVB clears, the pain in Silicon Valley will continue. In the short term, the Federal Reserve's battle with inflation isn't over, with the latest consumer price index showing that US prices are still climbing at an uncomfortable pace. That means most of the growth-oriented companies in the sector will continue to struggle. It's likely the Biden administration just saved the deposits of some companies that are about to go bankrupt anyway.

In the long run, Silicon Valley's unwillingness to reckon with this mess and its role in it means that its culture of mindless growth will endure. And alongside (or instead of) getting real innovation, we'll get another bubble of chasing fads and nonsense. Given the lack of circumspection, I have no doubt the next one will be even bigger.

Do not expect any apologies from the leaders of Silicon Valley. They do not know what they have to apologize for. The culture they built told us they were here to "move fast and break things" and in the true spirit of caveat emptor, we should have listened. The destruction wrought by SVB could be a moment for Silicon Valley to take a step back and reflect on its relationship with growth, the way it raises capital, and how it nurtures companies. But it won't be. Silicon Valley would rather blow itself up than go to therapy.

Linette Lopez is a senior correspondent at Insider.