Between huge, ongoing job losses, the relentless drama at Twitter HQ, a parade of cryptocurrency woes and regulation crackdowns in Europe and the US, it has been a dark season for the tech sphere. The one bright light in the gloom has been the excitement around, and potential of, generative artificial intelligence (AI) — advances in AI capabilities so captivating that it was going to take a miracle or a tragedy to loosen its chokehold on tech headlines.
Sadly for start-ups particular it was the latter this last week, as the effect of the collapse of Silicon Valley Bank (SVB) washed through techlandia like a tidal wave. News of a loss on the sale of a bunch of securities broke on Wednesday last week that seemed to fuel panic and a stock price slump, prompting a run on the bank, and within 48 hours SVB Financial Group had collapsed.
It was a failure so quick and unexpected that SVB was actually hosting an industry event featuring venture capitalist Bill Reichert of Pegasus Tech Ventures the night before closure. Attendees told The Verge “the band played on” but the scene was “eerie” as people started to trickle out mid-event. The next day SVB was shuttered, with US federal regulators stepping in to try staunching the resulting blood loss.
Though it was considerable in value — managing $200bn in assets before the crash — SVB wasn’t your run-of-the-mill consumer bank, nor was it a household name outside specific circles.
Rather it was a top 20 commercial bank in the US and, in CNN’s words, the “go-to bank for US tech start-ups ... provide[ing] financing for almost half of US venture-backed technology and healthcare companies” — which is why it falls under the ambit of this column as much as it does for investment and financial commentators. These overlapping spheres are all feeling the hurt, and the ramifications are still very much unfolding at the time of writing.
Painfully affected
Founded in 1983, SVB’s clients worldwide include many start-ups and mid-tier firms, such as digital media company Buzzfeed, online gaming firm Roblox, streaming device maker Roku, digital payments provider Payoneer and reviews platform Trustpilot. Additionally, about 2,500 venture capital (VC) firms banked with SVB, as did many prominent VC and tech executives.
Companies that run their payrolls through SVB will be among those most immediately and painfully affected. The bank does have the obligatory Federal Deposit Insurance Corporation (FDIC) insurance — limited to $250,000 per account — but many customers are businesses moving millions a month. A regulatory filing suggests 90% of deposits were uninsured by December 2022.
Without significant interventions, the Verge reported, up to a third of business accelerator Y Combinator companies “won’t be able to make payroll in the next 30 days” due to the collapse, quoting Y Combinator CEO Garry Tan who tweeted a thread on the implications.
Tan’s Twitter thread essentially argued that if new funding solutions and bridging options weren’t found, or access to full deposits reinstated, this would be “an extinction-level event for start-ups” that would “set start-ups and innovation back by 10 years or more”.
Tan’s terror will be subsiding by now, because due to regulator and industry intervention customers were able to access those critical deposits early this week. US authorities also promised that customers of New York-based Signature Bank, which also closed at the weekend, can expect to be “made whole”. Also, on Monday the BBC reported that HSBC had agreed to buy the UK arm of SVB, a transaction that was supported by the Bank of England and the Treasury.
Hard questions
The worst of the worst may just have been circumvented then, but probably only because failure to act and bolster market confidence would have had such profound implications for the sector and the wider economy. Even with these mitigations the SVB failure rocked global markets. The JSE was down on Tuesday morning, as were a range of global stocks and indices — something analysts attribute to SVB-induced anxieties.
Beyond the effect on bottom lines, the scandal has many asking hard questions about how we — well, SVB in particularly — got here. Investor and keen commentator Nigel Green of deVere Group said “Trump-era deregulation ... allowed SVB to take reckless risks”.
Others, such as Hayman Capital’s Kyle Bass, say rising interest rates are the problem. Bass told Reuters: “When you go this aggressively into a hiking manoeuvre after creating so much inflation, you’re going to break something.” And certainly, there is no doubt that tech is hurting now that this “decade-long era of cheap money ends”, as Reuters puts it.
We are still too “in it” to have a sense of the real cost of SVB’s failure, but for now I and every techie, tech entrepreneur and industry analyst will be glued to our news sources as the ripples continue to make themselves known.
I concede that it has been a tough few years for the world generally, so perhaps this is my own recency or selection bias at play, but as I write this it does feel like the technology sector now exemplifies the spirit of “permacrisis” — the 2022 Collins Dictionary word of the year.
“Permacrisis”, according to Collins, “perfectly embodies the dizzying sense of lurching from one unprecedented event to another, as we wonder bleakly what new horrors might be around the corner”. If the smart shoe fits, wear it.
• Thompson Davy, a freelance journalist, is an impactAFRICA fellow and WanaData member.
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