What Does the Silicon Valley Bank Crisis Mean for the Tech Industry?

Silicon Valley Bank has avoided collapse, but this recent emergency might signal a need for change in the mindset that rules tech.

Written by David Ryan Polgar
Published on Apr. 05, 2023
What Does the Silicon Valley Bank Crisis Mean for the Tech Industry?
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“Silicon Valley” is far more than a geographic area of 1,854 square miles in the San Francisco Bay area. It is also an entrepreneurial and growth mindset that sets the tone for how startups should build their companies and the tech industry should go about its business. Silicon Valley is synonymous with high-tech innovation and a mindset defined by risk-taking and fearlessness when it comes to failure. The mindset is also sometimes marked by defying traditional economic ideas for a sound business model with foreseeable profitability. The Silicon Valley approach is based on an optimistic belief that future money can always come in to save the day.

When bad events happen that showcase the folly of this approach, it can have a tendency to put a spotlight on the very foundation that makes up this Silicon Valley mindset.

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What Happened to Silicon Valley Bank?

Silicon Valley Bank, given both its name and its role in bankrolling startups, is this mindset made real as a financial institution of lending. But gravity has a way of catching up to optimism, and the very culture that the bank promoted may have also contributed to its unraveling. Silicon Valley’s success thrives on ideas going viral, but what happens when that virality spreads panic through its heavily connected community? Clients withdrew $42 billion in a mere 24-hour time span, the biggest bank run in the last decade. Unfortunately, moving quickly is not a benefit when it comes to bank withdrawals. 

Several theories seek to explain why Silicon Valley collapsed so suddenly. Some of the potential reasons include:

Why Did Silicon Valley Bank Crash?

  • Silicon Valley Bank had a significant amount of unrealized losses that became realized when they had to sell the distressed assets.
  • Rising interest rates dramatically decreased the value of the bonds held by the bank.
  • Silicon Valley Bank’s depositors were largely in the tech industry, which is in a moment of upheaval. 
  • 96 percent of the money in Silicon Valley Bank was unsecured through the FDIC since it was above the $250,000 threshold for protection. This means that the bank’s customers had a lot of money that could be lost forever if the bank collapsed, which in itself caused a rush of withdrawals from individuals trying to get their money out before impending doom. 

The picture that is emerging is one of a bank whose lenders failed to plan for a realistic future and neglected looming financial and operational problems,” writes Jeanna Smialek of the New York Times.

Although the investigation into what exactly led to Silicon Valley Bank’s collapse is ongoing, the bank was clearly suffused with the kind of optimism ubiquitous in Silicon Valley. Just a few days before the bank’s collapse, their chief executive Gregory Becker spoke at a tech conference in San Francisco about its glowing prospects. This overly optimistic stance was in contrast to recent warnings from Moody’s that Silicon Valley Bank’s financial health was in jeopardy. Given its failure, the bank’s posturing in the weeks before seem to showcase the bombastic hyperbole that is de rigueur for Silicon Valley culture. Spectacular failures, however, can shift our thinking about what is appropriate. 

So, a larger problem looms as to what the bank’s failure means for the Silicon Valley mindset and the general direction of startup culture. In other words, does Silicon Valley Bank’s association with a culture of moving fast and taking big risks erode the public’s regard for its ethos? Is the Silicon Valley approach still a model for other startup communities across the globe? 

 

What Does “Silicon Valley” Represent Now?

Connotations matter. Silicon Valley drew entrepreneurs with its culture of fearless innovation, evolving from an area renowned for its orchards and farmland to a magnet for startups working on the Next Big Thing. In addition, startups throughout the world often operate with a Silicon Valley mindset and approach. This means that the unique values of a small swath of California have permeated startups far and wide. But what if the connotation for Silicon Valley evolves now from fearless to reckless? Will the taint from Silicon Valley Bank’s collapse destroy the very concept of Silicon Valley as one worth replicating? 

In my opinion, we’re entering a moment of tech realism. Emerging technology can power efficiency, entertainment, and promote general welfare, but it won’t solve every problem and can also exacerbate societal ills. Although the general public was previously in awe of Silicon Valley, the fever has broken. So, even though Silicon Valley still stands for innovation, it also may be gaining a reputation for magical thinking and hubris. The fall of Silicon Valley Bank underlines the danger inherent to this outlook.

For example, an average person probably thinks that entrepreneurship works such that founders can become wealthy if they create profitable companies. That’s not the way Silicon Valley operates, however. Startups are rewarded handsomely for growth and buzz, which may have no relationship with actual profitability.

WeWork, with its stock currently trading at a paltry dollar a share, has had to restructure its debt with Softbank as its valuation has fallen below $1 billion. But not to worry: WeWork’s infamous founder and former CEO, Adam Neumann, is doing just fine after resigning in September 2019 when the company’s frothy initial public offering was scuttled by those examining basic business fundamentals. His net worth is $2.2 billion according to the latest Forbes estimate. The Silicon Valley mindset of growth at all costs is great for founders that enrich themselves, but terrible for future investors and workers who get laid off when reality rears its ugly head. 

Likewise, Uber is a company that has never turned a net profit but has made a billionaire of founder Travis Kalanick. This success came despite his leaving the company in 2017 amid accusations of toxic and unethical company culture. 

Lastly, though Twitter has dramatically changed online communication, the media landscape, and the broader culture, it is also perpetually underperforming. Its popularity has only translated to two profitable years (2018 and 2019) during its lifetime. Nevertheless, its founder and former CEO Jack Dorsey became a billionaire and received $268 million when Elon Musk bought the financially struggling social media platform.

Under the upside-down rules of Silicon Valley, you can be a wildly successful founder by creating an unprofitable company as long as you cash out at the right time. 

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A Successful Startup Should Be a Profitable Startup 

It stands to reason that startup founders become rich when their companies do financially well, but under the Silicon Valley system of rewards, there is little relationship between profitability and the creation of wealthy founders. Instead of introducing a better form of wealth creation where innovative startups lead to societal gains, Silicon Valley may have just created a different form of wealth distribution. When lots of people are making money, not many people will question the model. But when people start losing money, companies need to lay off their workers, and Silicon Valley’s go-to source for bankrolling these companies self-destructs, people start questioning the logic behind the mindset.

Silicon Valley Bank is synonymous with Silicon Valley. So, how does that change our impression of “Silicon Valley” when the bank goes bust? If we find the underlying ethos suspect, we may want a new mindset to guide the tech industry. 

Mindsets change, and so do the centers of innovation. Though Silicon Valley and its culture may still be the center of gravity for tech innovation, that wasn’t always the case. Therefore, it might be dethroned in the future. Lest we forget, our nation’s center of innovation used to be New Jersey.

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