After bank debacle, Silicon Valley reckons with its image

On Sunday afternoon, Prashant Fonseka was flying to San Francisco from Austin, Texas, with other techies returning from the South by Southwest conference. Midway through the flight, federal regulators announced the government would ensure that all depositors of Silicon Valley Bank — which had failed on Friday — would be paid back in full.

The plane erupted in cheers.

“It was the most excited I’ve ever seen people on an airplane,” said Fonseka, a venture capitalist at Tuesday Capital.

Everyone’s money was safe, but the debacle over Silicon Valley Bank, which had been a linchpin of the tech startup ecosystem, was a revealing moment for the technology industry. While the government’s announcement gave startups and investors whose money had been trapped at the bank the reassurance that they would be made whole, the episode exposed the tech industry’s vulnerabilities and laid bare the blame-game behaviour of many who work in it.

In particular, the hand-wringing over Silicon Valley Bank’s demise — which was followed by pleas for the government to step in and then ecstatic relief when regulators agreed — highlighted how dependent the startup industry had been on one institution. On Twitter, several tech investors pointed fingers of blame for the situation at almost everyone but themselves, and then were surprised that so few outside the industry were sympathetic to their plight.

Mike Solana, vice-president at Founders Fund, wrote on Twitter on Sunday, “if there’s one thing i’ve learned over the last few days it’s tech is no political party’s ‘darling.’” Ashley Mayer, an investor at Coalition Operators, an investment fund and network, said on Twitter that venture capitalists had unintentionally created a narrative that the government’s ensuring customers’ deposits at Silicon Valley Bank was a “VC/billionaire bailout,” which made a poor case for the industry.

Jason Goldman, a longtime technologist and startup veteran who has worked at Twitter and Google, said Silicon Valley Bank’s implosion “revealed a few problems in the way the industry portrays itself to the rest of the world.” Many techies still viewed themselves as upstarts rather than incumbents, he said, and balked at scrutiny and accountability.

But this was made worse when investors and startups publicly lost faith en masse in Silicon Valley Bank last week, which led to panic, he said. Some of the “loudest voices of the investment community” were “screaming about the end times,” positioning themselves as the victims of the bank’s failure, rather than the small businesses who couldn’t make payroll, Goldman said.

“It raised the question of hypocrisy as some of the loudest voices were also those who had been repeatedly on the record against any government funded safety nets in other contexts,” he said, referring to some of the tech industry’s past criticism of government spending and some social programmes. “And it forced people to ask, ‘Who are the adults who can safely steward the financial backbone of this industry if these folks are publicly panicking?’”

Some tried to combat the anti-tech perception that was bubbling up on social media. Over the weekend, Garry Tan, president of startup incubator Y Combinator, sent a message to hundreds of founders and entrepreneurs telling them to begin posting “tweetstorms” to humanise the impact that Silicon Valley Bank’s failure was having on them.

The idea was to show how innovation could be stifled if depositors were not made whole, with the added benefit that more of those types of narratives would prevent some of the more outspoken “tech bro” venture capitalists and founders from becoming Silicon Valley’s faces of the situation.

“By coming together as a community and showing our strength, we can have an impact on the future of startups,” Tan wrote in the letter, which was obtained by The New York Times. He later posted an online petition to the government asking them “to save innovation in the American economy,” which was signed by more than 5,000 CEOs representing nearly half a million employees.

More than 600 venture capital firms also banded together on Saturday and Sunday to sign a statement, organised by the firm General Catalyst, expressing support for Silicon Valley Bank and disappointment in its failure. They pledged to encourage their portfolio companies to resume banking with Silicon Valley Bank if the bank was sold.Many tech startups banked with Silicon Valley Bank because it specialised in lending money to risky young companies, something that few banks offered. By its own admission, the bank provided banking services to nearly half of all venture-backed technology and life-science companies in the US and was also a bank to more than 2,500 venture capital firms.

That gave it an outsize footprint in the startup industry. In a letter to investors over the weekend, which was seen by the Times, Andreessen Horowitz, one of the highest-profile venture firms, said that roughly half of the startups it had invested in had banking relationships with Silicon Valley Bank. A spokesperson for the firm declined to comment.

Fonseka, the venture capital investor, predicted the weekend’s events would create a permanent change in the way startups managed their money. Some tech companies were even looking at building a tech product that helped businesses manage money across multiple bank accounts, he said.“We’re going to see a permanent shift in behaviour in how people manage their cash because of this,” he said. “People are never going to unremember what happened on Friday.”

Silicon Valley Bank was also deeply entangled in the personal finances of high net worth tech executives. It offered low-interest loans to investors and startup founders who banked with them, so they were able to secure such loans — which traditional banks declined — for multimillion-dollar homes, said three people who banked with Silicon Valley Bank.

– This article originally appeared in The New York Times