Unless you’ve been living the Van Winkle life, you’ve no doubt heard about the collapse of Silicon Valley Bank (SVB) on March 10.
The news roiled Wall Street, of course.
More importantly, not a few IT sector executives, board members, investors, and employees no doubt had several sleepless nights.
You still may be wondering how this may – or may not – affect the tech industry, your company or business, or even your career.
We’ve done some research on the matter. Here’s what we found.
First, a bit of background on SVB.
Founded in 1983 in Santa Clarita, California, SVB provided bank services to smaller tech companies, eventually doing so for almost half of the “country’s venture capital-backed technology and life-science companies, as well as more than 2.5k venture capital firms.” (According to The New York Times article linked to, above.)
The firm was the darling of tech start-ups for decades. It wasn’t a large financial institution, but large enough – as we now know – to greatly spook other companies in the tech and startup sector worried about whether they’d be able to make payroll in the days following SVB’s collapse.
Rising interest rates played a big role in the bank’s struggles
Interest rates during the COVID-19 pandemic fell to historic lows, making it difficult for financial institutions to generate profits. (After all, they’re providing loans themselves at very low-interest rates to customers themselves.)
In addition, according to the NYTimes article, like most of its rivals, over the years SVB kept “a small chunk of its deposits in cash, and it used the rest to buy long-term debt like Treasury bonds,” which provide “steady, modest returns when interest rates remained low.” (Boldface ours.)
The bank also “hadn’t considered what was happening in the broader economy, which was overheated after more than a year of pandemic stimulus.
Once the Federal Reserve started raising rates over the past year, “those once-safe investments looked a lot less attractive as newer government bonds kicked off more interest.”
Yet, the newspaper reported – and this is a big chunk of quoted reporting, just so you know:
“The bank was unique in ways that contributed to its rapid demise. Because the bank’s business was concentrated in the tech industry, Silicon Valley Bank started to see trouble when start-up funding began to dwindle, leading its clients — a mixture of technology start-ups and their executives — to tap their accounts more. The bank also had a significant number of big, uninsured depositors — the kind of investors who tend to withdraw their money during signs of turbulence. To fulfill its customers’ requests, the bank had to sell some of its investments at a steep discount.
“Once it revealed its huge loss….the tech industry panicked, and start-ups rushed to pull out their money, resulting in a bank run.”
That’s how it started; what could SVB’s collapse mean for the tech industry as a whole?
For starters, it could make it more difficult for startups and other tech companies to secure funding. In addition, the bank was a go-to source for financing within the industry, so its absence could leave a significant hole.
Yet, the bank’s collapse may not have an immediate impact on the industry. It’s not clear yet how long it will take the bank to wind down its operations. It’s also possible that other institutions will step in to fill the gap.
Predicting the future is always a challenge. We’ll give it a shot anyway.
- We could see increased oversight and regulation of banking.
The Washington Post reported on March 29 that President Biden plans to call for federal banking regulators to “impose new rules on midsize banks.”
(Although the article continued, it “appears unlikely that the administration will ask Congress in the immediate future to undo a deregulation law passed five years ago with bipartisan support.”)
Still, stricter lending standards and more stringent risk management practices could be in the tech industry’s future.
- We might see a rise in alternative financing models.
Crowdfunding, for example, has become quite popular in recent years and we possibly could see more tech companies turn to this model in the future.
Other potential funding sources could include:
- Other banks,
- Venture capitalists,
- Angel investors,
- Even government grants.
- SVB’s collapse shook the tech sector so much, we could see a fundamental shift in funding.
The industry’s ethos for years has been “growth at all costs,” with companies focused on scaling as quickly as possible, often at profitability’s expense.
Yet, as the Harvard Business Review wrote even before SVB’ collapse: “2023 will likely be a more sober year in tech. Geopolitical and economic uncertainties are injecting more caution into the next phase of tech’s evolution. Leaders will have to search for ways to do more with less, find value where innovations overlap, and strategically invest in technologies that are hitting a tipping point.
What’s more, as a direct result of SVB’s collapse, traditional sources of funding may no longer be as readily available.
Still, the tech sector is known for its resilience and ability to innovate.
It’s highly likely that we’ll see new and creative solutions emerge in the years to come.
That being the case, the industry always will need great IT professionals.
This is where we can be of great value as we provide IT/professional services staffing, enterprise technology, application services, and process automation/automation testing world-wide for a wide variety of industries.
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