This analysis was first published in SvD Näringsliv, in Swedish, on March 13th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
The collapse of Silicon Valley Bank is a financial wake-up call for the tech industry. In 48 hours, the lowest-priority questions shot to the top of the agenda.
“Move fast and break things” was one of Facebook’s old mottos. It was printed on posters that hung around their offices.
Over 48 dramatic hours, Silicon Valley got to experience that speed and involuntary destruction aren’t always a good thing. When Silicon Valley Bank was halted from trading on Friday, the entire tech world received the basic finance course most of them had never had.
Around half of America’s venture-capital-backed companies had some connection to SVB. And unlike the largest tech companies, most startups have a poor grasp of financial matters. These tend to be prioritized much later in a company’s development. What founders spend their time on is getting money into the business — not how that money is then managed and risk-minimized once it’s there.
In practice, that meant thousands of companies had received millions of dollars each in investment and simply parked it in an account at SVB. They then used the account with the same simple logic as a private customer — you spend the money until it runs out, more or less. Many startups had no diversification, no redundancy — nothing but a regular bank account. That suddenly became inaccessible.
SVB had lending arrangements that worsened the situation for many companies. In its lending to businesses — a substantial part of the bank’s operations — companies were often required to move all their other banking relationships to SVB as well. It resembles how many banks negotiate with homeowners — you get a certain discount on your rate if you also start saving with the same bank. Structures like these also made it harder for companies to spread their financial risk.
Timing played a large role here. Americans get paid twice a month, and the next payroll is due this Wednesday, March 15th. Which means it has to be sent on Monday to arrive in time. Garry Tan, CEO of the well-known incubator Y Combinator, stated that 30 percent of the 40,000 small businesses banking with SVB would not be able to make this payroll if their funds remained frozen.
Not receiving a paycheck is obviously devastating for employees. But it can also hit the people behind the companies hard. In California, there is a law stating that if wages are not paid out — even if a company goes bankrupt — individual executives and owners can be held personally liable. This applies regardless of why the payments were missed.
The heated rhetoric from many American venture capitalists over the weekend had its reasons, in other words. They almost certainly had their own money at SVB, but also risked having to personally cover their portfolio companies’ payroll costs.
Now it’s the American authorities that are picking up the tab, while what remains of SVB is potentially sold to other industry players.
For the tech world, the collapse of both Silicon Valley Bank and Signature Bank comes as a financial wake-up call. Questions of liquidity and access to capital have long been taken for granted and treated as low priority. A reasonable assumption in many ways, it should be said — who expects their bank to fail? But today there isn’t a tech CEO who doesn’t need an iron grip on these questions. Especially as the pressure continues to build on other similar banks.
Trust takes a long time to build but can be lost very quickly. Silicon Valley Bank took over 40 years to establish its position. It took half a week to destroy it. And for tech companies, things will never be the same again.
