If the technological innovation coming out of Silicon Valley is as important as venture capitalists insist, the past few days suggest they haven’t been very responsible stewards of it. The collapse of Silicon Valley Bank late last week may have resulted from a perfect storm of ugly events. But it was also emblematic of a startup ecosystem and venture-capital apparatus that are too unstable, too risky, and too unmoored from reality to be left in charge of something as important as the direction of our technological development.
As the startups that make up Silicon Valley Bank’s customer base scrambled to figure out whether they would be able to make payroll, a group of extremely online venture capitalists spent four days emoting on Twitter, ginning up confusion and hysteria about the threat of a systemic risk if depositors didn’t get all their money back, pronto. All weekend, they screamed that there would be an economic collapse, that they were concerned about the workers, that the Federal Reserve was responsible, that-that-that … until finally, on Sunday evening, they got what they wanted: the government promising full account access to all Silicon Valley Bank depositors.
By now, it is relatively clear what happened at Silicon Valley Bank. A pandemic bull run inflated the value of tech startups and the funds of investors, resulting in a tripling of deposits at the regional bank that specializes in the industry’s fledgling companies, from $62 billion at the end of 2019 to $189 billion at the end of 2021. SVB wanted to put that money to work, so it bought up U.S. Treasury and mortgage bonds that would take years to mature but serve as a relatively safe place to park its cash—as long as interest rates didn’t rise. They did rise, however, multiple times.
For over a decade, low interest rates have allowed venture capitalists to accumulate huge funds to give increasingly unprofitable firms with unrealistic business models increasingly larger valuations—one 2021 analysis found that not only were 90 percent of U.S. startups that were valued over $1 billion unprofitable, but that most would remain so. Give me tens of billions of dollars and a $120 billion valuation and someday, somehow, I will replace every taxi driver with gig workers paid subminimum wages—or robot taxis paid no wages—while charging exorbitant fares for rides, increasing pollution, and adding to traffic. Or not, and I will sell off all the science-fiction projects I’ve promised, but still fail to make a profit.
Over the last year, rising interest rates to combat inflation have meant less free money for science-fiction projects, pressuring investors to change their entire approach and actually fund realistic ventures at realistic valuations with realistically sized funds and deals. Drops in valuations meant smaller checks, which meant smaller deposits at Silicon Valley Bank, and more and more withdrawals as startups ran out of cash themselves. It also meant the bonds SVB bought were now worth less than when purchased, so they’d have to be sold at a loss to generate some liquidity, so that clients could withdraw their deposits.
On March 8, the bank’s parent company, SVB Financial Group, announced it had sold $21 billion of assets at a $1.8 billion loss and was going to sell $1.75 billion worth of shares to help plug that hole. Its clients began to panic, cratering the bank’s stock price, and the following night, depositors tried to withdraw $42 billion, effectively rendering the financial institution insolvent. By Friday the Federal Deposit Insurance Corporation had taken control of SVB.
This was dramatic, but in fact it should have calmed down everyone who had money there—SVB serviced every level of the tech ecosystem, from venture capitalists who stashed their Smaugian hoards there to startups that kept operational cash or payroll or reserves there. The FDIC, after all, has a clear protocol for this that it reiterated in a statement Friday morning: Get all the federally insured depositors their money by Monday, search for a buyer of the bank over the weekend, and if none was found, then auction off the bank’s assets and segments of operation.
And yet what followed were increasingly baffling online tantrums from prominent investors who either didn’t seem to understand the well-established process or were trying to shift blame for the momentary crisis onto anyone they could.
Early Saturday morning, the famous activist investor Bill Ackman used his Twitter Blue subscription to pen a 649-word rant predicting an economic apocalypse if every single depositor was not made completely whole. Mark Cuban expressed frustration with the FDIC insurance cap that guarantees up to $250,000 in a bank account as being “too low”; he also insisted the Federal Reserve buy up all of SVB’s assets and liabilities. Rep. Eric Swalwell, a California Democrat, joined the chorus, tweeting that “We must make sure all deposits exceeding the FDIC $250k limit are honored.”
That’s what federal regulators spent the weekend doing, invoking something called the “systemic risk exception” in order to get every depositor their money. (Stockholders in SVB will take a bath, and the institution’s leadership were all fired.)
And yet you still saw famous venture capitalists like PayPal co-founder and Elon Musk buddy David Sacks begging the Federal Reserve to force a merger or a bailout, then insisting he was not asking for a bailout while again asking for a bailout. This may have seemed a bit strange considering Sacks’ previous disparaging of handouts (specifically to Ukraine) and reactionary vitriol for liberalism itself. But then again, Sacks is a longtime associate of investor Peter Thiel, who believes in free markets but not in competition—in capitalism so long as the rules are attuned to satisfy his own interests first and foremost. It was Thiel’s Founders Fund, by the way, that helped kick off the bank run that sank SVB in the first place.
Sacks’ podcast co-host Jason Calanacis worked a bit harder for it and spent days posting incessantly that there must be a bailout or else the entire economy would die. Over and over and over and over and over and over and over again, Calanacis prostrated himself without shame and fomented hysteria about a bank run—probably making the very banking contagion he was warning about more likely.
Who knows if the hysteria made the difference, but on Sunday, the FDIC announced it would be backstopping SVB and providing full access to all depositors to their funds on Monday. The VCs could rest their Twitter thumbs.
It would be easy enough to simply dismiss these tweets as the ravings of idiots, but it was actually instructive, a glimpse into how reckless venture capitalists are in pursuit of something they want, so long as it doesn’t bear any risk to them.
Venture capitalists tout themselves as investors who take on big risks by finding value—they provide capital to entrepreneurs lacking the revenue or credit to get traditional financing, but whose big ideas promise to change the world (and make some money along the way). In their self-conception, they would be entitled to white-glove service from the federal government in the wake of this massively inconveniencing event.
The reality, however, is that VCs are herd animals. The industry is overconcetrated—enmeshed, as Geri Kirilova at venture capital firm Laconia Group puts it—and structurally drives capital into a few well-connected hands who pile it into larger funds, cut it into larger checks, and hand it off to a tightly knit network of entrepreneurs and startups. This overreliance on established actors or social networks may seem like a shortcut when you’re risk-averse or unable (and unwilling) to vet every single prospective investment, but it has at times left venture capitalists unable to weed out well-connected or charismatic charlatans.
In a comprehensive case study of the VC industry, UC Davis law professor Peter Lee argues that these are structural deficits that fundamentally undercut venture capital’s ability to actually provide social utility. But venture capital isn’t just wearing blinders. It uses capital as a weapon to crush the competition and corner a market. It works to rewrite laws and regulations, as VC-backed firms tried to do for the gig economy and the crypto industry. Sometimes that means lobbying, as the industry did in the 1970s and 1980s to achieve reforms that cut capital gains taxes, made stock-based compensation attractive, and loosened pension regulations that give VCs access to new funds (and secure a massive subsidy from the government). Being loud and emphasizing their role in creating value has worked for VCs in the past. This past weekend was another example.
What does all of this have to do with SVB? By all accounts, SVB was the beating heart of the valley. In 2015, the New York Times reported that it serviced 65 percent of “all existing start-ups and many of the most prominent venture capital firms.” The bank’s collapse came out of a panic and a bad bet on interest rates, but it got into this situation because everyone involved seems to have helped build a risky system. VCs required portfolio companies to bank with SVB, SVB offered mortgages and wealth management services to VCs, and if SVB offered services similar to other banks serving Silicon Valley, then it likely made the terms of those deals incredibly attractive. First Republic Bank, for example, gave Mark Zuckerberg a mortgage at an interest rate that was below inflation—essentially offering a loan for free.
The risk introduced to SVB by overreliance on low interest rates in both its depositor base and portfolio investments is the same risk embedded in the core of the venture capital model. Profligate fundraising and investment have operated on the assumption that money would be cheap, allowing it to make increasingly exotic bets. Venture capitalists have had a decade of negative to zero real interest rates to build the future through their intrepid noses for value, so what did they give us? We got benefits largely limited to the realm of consumer goods and services, like cheap on-demand delivery and ride-hail (so long as you ignored the exploitation that powered them) and cheap streaming services (until they began hiking prices), namely. But what were the costs? Startups that revolutionized the militarization of our border and our migrant deportation operations, helped weaponize robots, offered A.I. services that exploit invisible underpaid workers in the Global South, and roiled urban transit, rental, and restaurant markets. These projects and others generated billions for investors who got in on an early fundraising round, but they also degraded the quality of life for people across the world.
To put it more plainly, for the past 10 years venture capitalists have had near-perfect laboratory conditions to create a lot of money and make the world a much better place. And yet, some of their proudest accomplishments that have attracted some of the most eye-watering sums have been: 1) chasing the dream of zeroing out labor costs while monopolizing a sector to charge the highest price possible (A.I. and the gig economy); 2) creating infrastructure for speculating on digital assets that will be used to commodify more and more of our daily lives (cryptocurrency and the metaverse); and 3) militarizing public space, or helping bolster police and military operations.
You would be hard-pressed to find another parasite that has so thoroughly wrecked the body and environment of its host, all while trying to convince the host that it is deserving of praise and further accommodation.
As it happened, there was another Silicon Valley bank collapse last week: Silvergate, the preferred bank of crypto and itself a darling of venture capital.
When few other banks would touch the sector, Silvergate not only held funds for crypto exchanges and traders, but also settled trades through a payments network called Silvergate Exchange Network. But as one Bloomberg columnist noted, deposits at Silvergate are better understood as debts owed to traders and exchanges—a volatile source of funding that would dry up the second the payments network saw less utility, which happened when crypto market conditions worsened.
Over the years, crypto did see a growing need to settle trades and hold cash. A huge pickup in gambling during the pandemic, relentless crypto marketing by crypto firms and investors (Super Bowl commercials, print ads, naming rights for stadiums, partnerships with public figures, recruiting Twitch streamers to promote crypto casinos, etc.), and a revolving door between government and industry laid fertile ground for the crypto industry’s market capitalization to peak at $3 trillion in November 2021.
Whether there was actually ever $3 trillion there is a different discussion—there seems to have been far too much fraud, insider trading, speculation, and market manipulation for that to have ever been the case. Still, there was enough new interest that crypto firms would stash more money than ever at Silvergate: Deposits exploded from $1.8 billion at the end of 2019 to $14.3 billion at the end of 2021. And yet, when numerous crypto exchanges began collapsing due to one (1) interest rate hike, liquidity crunches, rampant fraud, (well-founded) panics about an industrywide contagion, poor management, or a potent mix of all these factors, a flood of withdrawals followed—meaning a flood of withdrawals from Silvergate.
Like SVB, Silvergate bought Treasury and mortgage bonds, ate shit when interest rates were hiked, was forced to sell assets to clear deposits, and (unlike SVB) voluntarily liquidated itself when it became clear the situation was untenable.
During the chaos on Friday, David Z. Morris, CoinDesk’s chief columnist, tweeted that “I don’t know what to say about venture-funded web and delivery startups having the exact same arc as crypto over the past three years. But that is what has happened. Down to their respective banks collapsing in the same week.” Well I do.
It’s not obvious to me why venture capitalists should be so in control of what tech gets funded, who designs it, how it gets developed, why it gets deployed, and where the returns go. If it is simply a question of capital, we can and should explore alternatives to the privately run VC system prioritizing tech that degrades and commodifies more of our life, gambles on these developments with other people’s money, and in the blink of an eye causes regular panics that threaten to upend life for countless people. If it is a question of talent, we can and should recognize that these people are not any smarter or more talented than us—they just have more capital to throw at problems, better connections to ensure things work out their way, and less shame preventing them from pursuing what they want. If it is a question of politics, then we should ask whether a system that subsidizes a bunch of well-connected, wealthy libertarians as they enrich one another with lottery tickets is truly the only way we can and should develop technology. I hope not.