A Blog by Jonathan Low


Mar 15, 2023

Why VCs Must Own Their Role In Crashing SVB - And the Federal Bailout

Transitions are hard. Not everyone or every enterprise can make it. Whether it's startup to big tech, low interest rates to high interest rates, or attention dominance to chaos, when change comes it requires new behaviors which - despite the chest thumping exhortations to embrace it - is more disruptive than it sounds. 

VCs and tech generally have increasingly demanded a risk-free economy: if a startup threatens, buy it. If a politician threatens, buy her. All returns must be guaranteed. SVB is a symptom of what happens when that happy bubble bursts. And to move forward and keep innovation going, embracing venture's role in this near-disaster - saved by that ol' ball-and-chain joke...the government! - there must be an acknowledgement that tech and its funding are now integral to the broader economy - and vice versa - and that the era of being the only geniuses in the room is over. If it's only "an extinction level event!!!" when your money's at risk, you can taste the contempt from everyone else. JL 

Derek Thompson reports in The Atlantic:

The death of Silicon Valley Bank offers a lesson for VCs. SVB's death required clients, led by venture-capital, to turn on a trusted financial partner. Large venture investors told their companies to pull out their cash. (But) after some VCs helped trigger the bank run, others beseeched the federal government to fly to the rescue. Tech is struggling through the transition from low interest rates that supported cash-burning consumer-tech companies to high interest rates that require discipline, a transition from dominance of attention economics, and from high-growth start-ups to “Big Tech,” the largest companies in the world. All contribute to a scarcity mentality in Silicon Valley, “as zero sum contests for end users.” This explains a crippling run on SVB followed by a call for national bailouts.

Who killed SVB—and triggered the mini–banking crisis sweeping the United States?

You could blame the bank’s executives, who bet $80 billion on long-term bonds that bled value when interest rates went up, thus torching their portfolio with fantastic efficiency.

You could blame the Federal Reserve for falling behind inflation and then quickly raising interest rates, bludgeoning investors who watched in horror as their bold portfolios melted down.

You could blame regulators or the auditors at KPMG, who gave SVB a clean bill of health when they looked into its portfolio just weeks before its historic collapse.

You could blame the phalanx of interests—President Donald Trump, Senate Republicans, tech titans, bankers, and even a handful of Democrats—who called to roll back midsize-bank regulations in 2018, potentially setting the stage for this catastrophic mismanagement.

You could, abandoning all common sense, blame “woke” banking culture, under the bizarre assumption that only an all-white, all-male banking team can properly steward a financial institution. (Never mind, say, the entire crisis-strewn history of mostly white, mostly male banking.)

Or you could blame venture capitalists. One week ago, SVB was technically insolvent but far from doomed. Without a massive run on its deposits, the bank likely would have puttered along as its long-term bonds matured. Surely, SVB had put itself in an awful position by tossing fresh cash into the Dumpster fire of the 2022 bond market. But actual bank death required one further step: Clients, led by the venture-capital community, had to turn on a trusted financial partner. That’s exactly what happened. As SVB’s leadership scrambled to raise funds, Founders Fund and other large venture investors told their companies late last week to pull out all of their cash. When other start-ups banking with SVB caught wind of this exodus on group chats and Twitter, they, too, raced for the exits. On Thursday alone, SVB customers withdrew $42 billion—or $1 million a second, for 10 straight hours—in the largest bank run in history. If SVB executives, regulators, and conservative politicians built a barn out of highly flammable wood and filled it with hay and oil drums, venture capitalists were the ones who tipped over the barrels and dropped a lit match.

After some VCs helped trigger the bank run that crashed SVB, others went online to beseech the federal government to fly to the rescue. “YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW,” the investor Jason Calacanis bleated on Twitter. David Sacks, another investor and a regular panelist on the popular tech podcast All In, chimed in by blaming Treasury Secretary Janet Yellen and Fed Chair Jerome Powell for jacking up rates “so hard it collapsed a huge bank.” (Never mind that the CEO of SVB was on the board of directors of the Federal Reserve Bank of San Francisco.) On Sunday night, the tech community got its wish when the federal government announced it would backstop every dollar of every depositor in SVB.

The death of Silicon Valley Bank offers a strange lesson for VCs. In a typical bank-run prisoner’s dilemma, individuals have to choose to cooperate (everybody keeps their money in the bank, and the bank lives) or defect for individual advantage (a few players pull their funds, spurring others to do the same and leading to a bank collapse). But now all depositors at SVB have been made whole, which means that early defection conferred no advantage. The withdrawals benefited no individual depositor, but they collectively killed SVB.

On Monday, the tech writer Ben Thompson wrote that the collapse of SVB pointed to a broader rot in Silicon Valley itself. “I assumed that the venture capitalist set knew about Silicon Valley Bank’s situation [and] I assumed that Silicon Valley broadly was in the business of taking care of their own,” he wrote. “Last week showed that both [theories] were totally wrong.” Far from the familiar metaphor of Silicon Valley as a symbiotic ecosystem, where investors, mentors, and collaborators benefit from a culture of trust and faith in progress, the SVB collapse makes the tech world seem more like an actual jungle, where everything looks lovely and peaceful until a jaguar comes along and lays waste to some capybara.

In this light, the SVB saga is just the latest episode of the American tech industry struggling through three overlapping transitions. First is the macro transition from an era of low interest rates that supported cash-burning consumer-tech companies to an era of high interest rates that require discipline and unit economics. Second is the existential transition from tech’s dominance of attention economics and cloud computing to its expensive struggle to figure out the next mountain to climb, whether it’s crypto, the metaverse, artificial intelligence, climate, or something else. Third is the cultural transition from “tech” as a metonym for high-growth start-ups to “Big Tech” as a description of the largest companies in the world. All three transitions are contributing to a scarcity mentality in Silicon Valley, where, as Thompson observed, “tech has been shifting away from greenfield opportunities and expanding the pie to taking share in zero sum contests for end users, from their attention to their pocketbooks.” This is the cultural climate that explains a crippling run on SVB followed by a call for national bailouts.

Something I’ve always liked about the founders, venture capitalists, and tech evangelists that I’ve met over the years is their disposition toward technology as a lever for progress. They tend to see the world as a set of solvable problems, and I’d like to think that I generally share that attitude. But this techno-optimist mindset can tip into a conviction that tradition is a synonym for inefficiency and that every institution’s age is a measure of its incompetence. One cannot ignore the irony that tech has spent years blasting the slow and stodgy government systems of the 20th century only to cry out, in times of need, for the Fed, the Treasury, and the FDIC to save the day—three institutions with a collective age of several hundred years.


I am still “long” on American invention and innovation, which is a way of saying that I’m long on Silicon Valley as a place and as an idea. But we are still learning exactly how much of this industry’s genius was a mere LIRP, or low-interest-rate phenomenon. The answer from the past 100 hours is that it’s more than I feared. As the saying goes, kind of: When the interest-rate tide goes out, you see who’s been LIRPing naked.


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