How SVB's Closure Could Signal Changes in Tech 🌩️

It’s been a little while Reader

If you’ve been following the news at all, you have probably heard about Silicon Valley Bank, bank runs, concerns over a banking collapse, Credit Suisse, and all that good stuff. To keep this from being a small novel, I’m not getting into all of it … just one part.

Does the SVB collapse mark the start of dark times for the tech industry and tech investing?

What is Silicon Valley Bank and what is a bank run?

SVB wasn't your average financial institution. It was a haven for early-stage startups and their ambitious founders. I even had a personal friend working there, helping these visionaries turn their dreams into reality. I considered roles at the company and it was always a dream to raise enough capital to have them be my bank. Three weeks ago a friend and client was telling me we should use them as a bank for our joint investment.

Yet, now they are no more. As you may or may not know, banks do this balancing act where they take your money and then take a part to lend out or invest, paying you an interest rate for the privilege. But when people get scared and everyone decides they want their money back right now, it can lead to a bank run. Suddenly, the bank can’t come up with all the money that quickly (about $200 billion) since some of it’s lent out, and the gov’t steps in and shuts it down. And that, my friends, is what we saw with SVB.

If you’re really into this stuff, like me, this ColdFusion Youtube video is a great explanation. If you’re not, I’ll quickly recap. When tech was booming during COVID, there were tons of startups with a ton of cash. The bank’s deposits quadrupled in a few short years. Feeling themselves a little, with all this cash, they went and bought some gov’t bonds for investment. But then the tech industry got hammered and interest rates rose. When interest rates rise, it lowers bond values. Companies needed their money to run payroll, and they had to sell some bonds, at a loss, to come up with the cash. That loss, scared the f* out of investors, stock crashed, VCs started emailing companies like “get your money out NOW” … bank run, blah blah.

Who cares?

I do.

Because SVB isn’t just a bank, it was THE bank for tech and startups. It’s estimated that 50% of VC funded startups had an account there. Bank failures are very rare and don’t happen often. When a bank that is the direct representative for the tech industry fails, it might mean tech is doing even worse than people think.

The State of The Tech Industry

I owe a lot to the tech industry. Sure, real estate has been my primary wealth-builder, but it was the impressive tech money (thank you, Facebook stock!) that helped me build that wealth and buy those rental properties.

Now, as I survey the tech landscape, I can't help but feel a sense of “is the party over”?. The post-pandemic slump in tech stocks is real, rising interest rates makes growth hard, layoffs are piling up, there still might be a recession, and then there's the whole SVB fiasco.

Going deeper, we can see there is a lot of pressure on the sector right now, not just from an investing standpoint, but even just keeping your job.

  1. Post-pandemic slump: Tech companies experienced a growth spurt during the pandemic, as remote work, e-commerce, and digital services took center stage. But that’s all over now. Tech stocks have gotten beaten up, companies are missing their earnings, and everyone is saying they over hired and were too optimistic. With companies like Amazon, down 40% in a year, it’s clear the industry is going through some pain. Who would have guessed people would go to the store when they could leave the house 🤷🏾‍♂️.

  2. Rising interest rates: Interest rates are climbing very fast in an attempt to stop inflation. This makes money / capital more expensive and is aimed at slowing down growth. Since tech is basically all growth, and they already over grew, high interest rates have an outsized impact. It’s also one of the key reasons SVB went under.

  3. Layoffs, layoffs, and more layoffs: The tech industry has seen a wave of layoffs recently, signaling that companies may be tightening their belts and preparing for leaner times ahead. For example, my alma mater, Meta, made some layoffs. Then they made more layoffs. And now they are in a “year of efficiency”. Back in the day, we used to fly business class to London for sushi team offsites. Things done changed.

  4. The SVB collapse: The closure of Silicon Valley Bank, a crucial player in the tech startup ecosystem, could signal broader challenges facing the industry. First, existing companies need to spend time and effort away from building a company to get bankers. Second, this resource will hamper future companies from being made. Lastly, it just says a lot when your sector is getting hurt so bad … you kill a bank in the way.

All these factors combined create a perfect storm that raises concerns about the future of the tech industry.

The Impact

If you work in tech, it's time to "watch ya neck" (and maybe polish that resume). Layoffs are real and maybe a reality for a few years. No one is safe.

If you invest in tech, watch your neck too. I don’t believe you should panic sell or avoid the industry, but now might be a good time to focus on fundamentals and maybe diversify all of that TSLA stock you YOLO’d into 4 years ago.

So while you may not have as much of a soft spot for SVB as I did, there are some real signs in this pivotal industry that are worth watching out for.

Damien Peters Tech enthusiast, real estate aficionado, and amateur SVB historian