“No photos and videos,” reads an A4 sheet on the door of the Silicon Valley Bank (SVB) office in Menlo Park, California. There is no peeking inside; the curtains are closed. Even before the entrance, a security guard stops unannounced visitors. Just go inside? “No sorry. Customers only.”
At Silicon Valley Bank they are done with all the negative publicity. A month ago, the largest was found here in California bank run in history, when SVB customers took $40 billion from their accounts within 24 hours. This happened after unrest among investors due to poor investments that had brought the bank to the brink of collapse. Investors and tech entrepreneurs drove each other crazy on Twitter and panicked to withdraw their money from the bank.
After a restless weekend, peace returned. Fearing a new banking crisis, the US government decided to guarantee all customer assets. SVB was declared bankrupt, the government took over the bank’s assets and sold its seventeen branches to rival First Citizens. Under new ownership the staff are now desperately trying to win back customers. Many have moved to large systemic banks, such as JP Morgan, or to smaller regional banks trying to profit from the crisis.
With the fall of SVB – founded forty years ago – a crucial part of the ‘ecosystem’ in Silicon Valley has disappeared. More than half of all young American, fast-growing technology companies banked with SVB. The bank also had almost all – about a thousand – investment funds in Silicon Valley as customers. She managed $119 billion in deposits and provided personal and mortgage loans to tech entrepreneurs. Because of their companies with losses of millions, they usually found it difficult to get to another bank.
How is Silicon Valley reacting to the collapse of its main bank?
Network place
The bar at The Rosewood is barely half full on an April afternoon. The five-star hotel on Sand Hill Road — with $25 cocktails, caviar on the menu and a rooftop terrace overlooking the green California hills — is the premier networking venue for the managers of America’s largest tech investment funds.
Andreessen Horowitz, Sequoia Capital and Greylock, along with Silicon Valley Bank, all maintain offices on Sand Hill Road. Around the beautifully landscaped gardens of The Rosewood – owned by nearby Stanford University, where many future tech entrepreneurs study – the major funds each have their own suite.
In this place, the stereotypes about Silicon Valley turn out to be at least partly correct. The entrepreneurs – young, flaxen beard, sneakers, hoodie – talk to investors, usually dressed in khaki pants and an Arc’teryx or Patagonia jacket. The conversations at the bar and in the hotel lobby are about money, pitch decksAn product-market fit and growth rates. According to the bartender, despite the buzz, it is “another quiet afternoon,” he says. “We are far from being back to pre-corona levels here.”
If you want to know what the situation is in Silicon Valley, you have to go to Sand Hill Road, says the Dutchman Bastiaan de Goei at the bar of The Rosewood. De Goei works at data company Instabase, invests in start-ups and has been living in San Francisco since 2015. He points outside, where even for California standards a remarkable number of Teslas are parked. “Here on this road, all major tech deals are still being closed.”
Although, according to De Goei, “in Silicon Valley the good companies always make money”, the number of deals in the tech sector has fallen sharply in the past year. Aided by record low interest rates, almost unlimited amounts of money flowed from wealthy investors to venture capitalists for years. In search of the new Google or Facebook, they invested heavily in start-ups in Silicon Valley.
But inflation, rising interest rates and the war in Ukraine have pushed investors back to low-risk investments. According to data company PitchBook, 61 percent less capital was invested in American start-ups in the last three months of last year than a year earlier.
That has major consequences. The lack of money led to mass layoffs at tech companies that have to cut costs. Young entrepreneurs with a good idea to combat climate change are struggling to get the money to get their business off the ground. For start-ups that are a bit further along and that need large amounts of money to keep their heads above water, there is a threat of financial distress. The companies that first have to put in a lot of money before perhaps a lot will ever come out, are currently at the back of the queue.
‘Pressure continues to increase’
The fall of SVB has reinforced that negative atmosphere. “It is now very difficult to be a budding tech entrepreneur who needs money,” said Marc Schröder, founder of Silicon Valley investor MGV. “The market for start-ups was already having a very difficult time before the SVB debacle. The pressure is now increasing.”
That can be felt all along Sand Hill Road. Investors have been spoiled for years with unlimited budgets, while start-ups with potential have had investors to choose and received millions for only a few percent of their shares.
At the moment that the end of that golden period came, panic set in after a rumor on Twitter. That dynamic now makes Silicon Valley fearful, cautious and averse to risk. “During the fall of SVB, there was a lot of fear for a few days,” says Schröder. “And that fear is not simply forgotten.”
Let’s hope all this leads to our industry coming of age
Marc Schroeder founder Silicon Valley investor MGV
What does this lead to? Investors take it easy and choose safe investments. Start-ups spread their money over several larger banks that do not just collapse, keep larger reserves and try to spend as little as possible. And the banks think twice before committing start-ups and investors without firm conditions. “Let’s hope that all this will lead our industry to mature,” says Schröder.
This does mean that the entrepreneurs pay the price for the mismanagement at SVB. The golden conditions that tech entrepreneurs received at Silicon Valley Bank, it is the general expectation, will not return under the new owner. At SVB, start-ups could borrow extra money cheaply, use investment money as collateral for a mortgage or arrange a company credit card. It will be more difficult for starting tech entrepreneurs to find a bank that understands their way of doing business.
At the same time: Silicon Valley wouldn’t be Silicon Valley if it didn’t see opportunities in every crisis. At the bar in The Rosewood, Bastiaan de Goei has to laugh when asked how nervous Silicon Valley tech entrepreneurs are about what they’ve been through in the past month. “Everyone was extremely nervous here for a few days, but to be honest: the conversation about it has already faded into the background,” he says.
A fallen bank or not: good entrepreneurs always come to the surface, he wants to say. And the culture in this region is: a crisis makes you better, not worse.
“Silicon Valley is extremely resilient,” says De Goei. “Every day people experience defeat here.”
A version of this article also appeared in the newspaper of April 15, 2023.