How Silicon Valley Learned to Love Government -Dlight News

How Silicon Valley Learned to Love Government

Late last Saturday night, Jason Calacanis, a prominent Internet entrepreneur and investor, hit the caps button on his keyboard and tweeted a warning about the collapse of a Silicon Valley bank.

“You should be absolutely terrified right now — it’s an appropriate reaction to a bank run and contagion,” he wrote. “This will turn into chaos”.

The rapid decline of regional banks in the tech sector has led to increased social tensions in the Valley. Investors like Calakanis, who typically upbraid regulators to stifle innovation, turned to Washington in their hour of need.

Most warn of dire consequences if depositors lose permanent access to their money. Hedge fund manager Bill Ackman wrote on Twitter that the consequences of the government’s failure to guarantee SVB deposits would be “vast and profound”. Gary Tan, chief executive of Y Combinator, called the bank’s failure an extinction-level event for start-ups – just days before the tech accelerator laid off 20 percent of its own staff in a non-SVB linked move.

David Sachs, general partner at VC firm Kraft Ventures, which like Calacanis is a close ally of Elon Musk and has a large following on Twitter, warned of more bank runs. “Put SVB with top 4 banks,” he tweeted. “Do this before opening Monday or there will be an infection and the crisis will spread.”

Close up of Jason Calacanis facing the camera with a computer screen behind him
Investors like tech entrepreneur and investor Jason Calacanis, who typically complain of being stifled by regulation, flocked to Washington after SVB’s collapse © Stephen Osman/Los Angeles Times/Getty Images

His appeal worked. Two days after the Federal Deposit Insurance Corporation took control of the bank’s assets, the Treasury, the Federal Reserve and the FDIC announced Monday morning that depositors will have access to all their money.

However, the relief has been tempered by criticism of the role some venture capitalists played in the crisis at SVB. When concerns about SVB’s balance sheet rose last week, VC firms including Peter Thiel’s Founders Fund urged portfolio companies to act in their own best interests and divest funds. This helped start a run on the bank.

There have been widespread accusations of hypocrisy on the part of some venture capitalists who oppose government regulation of tech but have demanded that regulators take action to help SVB depositors. Going online to plead for support was “an ‘atheist in a foxhole,'” says one venture capital fund executive who mocked his colleagues’ conversions.

Some investors worry that a slowdown in SVB could backfire against the tech sector at a time when there is already debate about the impact of social media on young people and the potential monopoly power of some big tech companies.

Supporters can point to the tech sector’s role as an engine of innovation for the American economy. But after a sharp decline in tech stocks over the past year, major layoffs and now the failure of the sector’s favorite bank, companies are navigating an increasingly hostile environment.

Janet Yellen turns a page in a lever arch file while sitting in the Senate
US Treasury Secretary Janet Yellen was initially criticized by libertarians for not doing enough, before the government promised to protect SVB depositors © Getty Images via AFP

Margaret O’Mara, University of Washington history professor and author Code: Silicon Valley and the Remaking of AmericaSays it’s possible regulators could use SVB’s collapse to push for tighter regulation of the tech sector.

“There is some brazenness of outspoken libertarians who were quick to rebuke [Treasury secretary] Janet Yellen about what she wasn’t doing,” she says. “But some of it was defensive. Some people have a sense that there’s a war on tech and that regulators aren’t going to help.

Lobby Valley

Founded in 1983, Silicon Valley Bank was the go-to lender for tech start-ups. The bank understood the idiosyncrasies of early-stage companies, which often have funding but no profits. It offers loans, checking accounts, VC investments, networking opportunities and financial advice to investors and founders. At the time of its failure, it was doing business with about half of the VC-backed start-ups in the US.

Those close ties meant the bank’s fortunes rose and fell with the tech industry. Over the past decade, ultra-low interest rates have fueled a boom in tech investment. Debt was cheap and growth was prioritized over profits. Deposits in SVB reached a record $198bn in 2021 when tech valuations peaked.

Now the tide is out. Rising rates curb investor appetite for risky tech investments. The SVB was exposed to higher rates on two fronts: declining deposits and lower value for the bank’s portfolio of long-term safe securities.

As efforts to save the bank intensified over the weekend, some venture capitalists took pains to distance themselves from the ongoing show on social media. “People think the six people on Twitter, because they’re outspoken, speak for Silicon Valley,” says Peter Hebert, co-founder and managing partner of venture fund Lux ​​Capital, who called representatives in government over the weekend.

Ron Conway is sitting at a table in a restaurant

Ron Conway, an early investor in big tech companies and a supporter of the Democratic Party, lobbied for a bailout. . . © Michael Macor/San Francisco Chronicle via AP

Doug Leon, wearing a sweatshirt, holds a cellphone to his ear as he walks

. . . such as Doug Leone, a Sequoia Capital partner and major Republican donor, according to people with knowledge of the lobbying efforts © Brendan McDermid/Reuters

Among the billionaires working through their Rolodexes were Ron Conway, an early investor in Twitter, Google and Facebook and a major supporter of Democrat causes, and Doug Lyon, a partner at Sequoia Capital and a financial supporter of Republicans including Donald Trump, according to two people with knowledge of the lobbying efforts.

“Very little activity was centrally coordinated, it was just a brigade of people doing what they needed to do,” Hebert says.

There was an element of self-interest in these efforts: SVB’s collapse locked up investments from venture capital firms and their portfolio companies, threatening to further slow already sluggish tech investment.

But the consequences of SVB’s failure cannot be written off as the concern of the wealthy alone. As the weekend wore on, small company founders were scrambling to find cash to pay staff for the week ahead. Layoffs seemed inevitable without intervention.

For many nonprofit start-ups requiring near-continuous lines of credit, SVB was not only the best option, it was the only one. “Traditional banks don’t provide the lines of credit and venture debt that are so important to the tech ecosystem. SVB does,” says Maëlle Gavet, chief executive of Techstars, one of the world’s largest investors in early-stage start-ups.

A line chart of the share price ($) of SVB Financial Group, the Silicon Valley bank's fortunes rose and fell with the tech industry

“Often founders will tell you – ‘When I went through the valley of death, SVB was there. My relationship manager gets the credit for bringing me to the other side. That’s why SVB was so critical: They understand what it’s like to run a tech company,'” she says.

The lobbying effort on behalf of SVB played on the tech sector’s importance to the US economy — and even national security.

In conversations with congressional representatives, investors emphasized the importance of those early-stage companies that are now vulnerable, and countered bipartisan fears of being overtaken by China. “This is not a big tech bailout like Facebook or Amazon, it’s a little tech bailout,” says a senior banker at a Wall Street firm who was involved over the weekend. “[The case being made was] ‘If you want the Chinese to outpace us, stifle that innovation machine.

It was a tough sell, according to Banker, gaining support on both sides of the political divide. “It can’t be bad. ‘Silicon Valley’ and ‘banks,’ these are the two things that bring Republicans and Democrats together: They both hate Silicon Valley and they both hate banks.

“Many people in Silicon Valley have almost prided themselves on having nothing to do with DC or Wall Street. It is not beneficial in times of crisis,” says Hebert. “There was still schadenfreude [in Washington]It is believed that this was a breakthrough for technology.”

Traders at the NYSE walk in front of a screen showing First Republic Bank stock

NYSE screens First Republic Bank stock. Fearing contagion from SVB’s collapse, some of the biggest banks have injected $30bn to save the lender © REUTERS

Ultimately, however, the efforts by the Silicon Valley giants succeeded, helped by fears in Washington that SVB could become the first domino in a procession of regional lenders. Those fears looked more justified during the week. Late on Thursday, several of the country’s biggest banks announced $30bn in support for First Republic Bank to boost investor confidence in the California lender.

On Friday, Calacanis used the weekly podcast he hosts with Sachs and Chamath Palihapitiya, another venture capitalist, to explain his tweets.

“The alarm bell I rang was because I saw the fire. . . After Silicon Valley Bank was put into receivership and when I saw that there were additional bank runs,” he said. He acknowledged that the use of all caps was “probably a little excessive.” It was actually a comedy “bit,” he added, but “people that Couldn’t understand.”

Bill coming from Washington?

On Monday evening, a group of tech investors and start-up founders gathered on a terrace in Mountain View, California to celebrate St. Patrick’s Day early and relive the events of the past few days. One guest, Conrad Burke, co-founder of San Francisco-based MetaVC Partners, described the event as group therapy. “After four days of sheer hell you can feel the relief in the air,” he says.

But amid the euphoria, there is a growing belief that huge government spending is likely. As aftershocks reverberate through the US financial system, there is already talk of further regulation of banks.

Democratic Congressman Ro Khanna of California also played a role in talks over the future of SVB over the weekend, saying the bank’s collapse was a “clear reminder that Congress is failing to properly regulate banks. . . . When there is momentum around an issue, Congress has to act.” Attitudes and I hope that public pressure can bring some Republicans to the table on this.

Ro Khanna gestures with both hands while talking.
California Democratic Congressman Ro Khanna is calling for tighter regulation of banks © Getty Images via CQ-Roll Call, Inc

That political sentiment may also affect Washington’s approach to the tech sector. Industry is not fond of admitting it, but its fortunes have always been tied to the state. The Cold War and US government funding for the space race played a major role in the creation of Silicon Valley.

For years, electric car company Tesla has relied on government incentives to turn a profit by selling carbon credits to conventional car makers. Last year, the Pentagon split a massive $9bn cloud computing contract between Google, Amazon, Oracle and Microsoft. The US chip sector is in the process of applying for $39 billion in funding from the US Chips and Science Act.

Academic O’Mara says the government still creates an easy runway for development. “In the US we have state-building by stealth,” she says. “Government money flows to private companies in a way that allows the state to put its thumb on the scale but industry people feel as if they have done it all alone.”

After rescuing their local bank, some investors expect the government to make a more visible presence. “Governments are totally in Silicon Valley and they’re here to stay,” says a Wall Street banker involved in bailout negotiations. “It’s a little uncomfortable.”

Additional reporting by Colby Smith in Washington

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