THR Web Features   /   March 21, 2023

After the Fall of Silicon Valley Bank

It is time for the tech world to start thinking institutionally.

Jonathan D. Teubner

( Alpha Photo via Flickr.)

Around noon on March 9, I learned that the Federal Deposit Insurance Corporation (FDIC) had shut down the Silicon Valley Bank (SVB), where my company has some of its accounts. My co-founder and I were in the middle of a call with some of our advisors, all experienced hands in the tech startup world actively advising and investing in tech startups like ours. The Zoom room was empty within seconds. We all immediately knew what that meant: The cash we pay our employees and vendors was now locked up—perhaps indefinitely.

Rumors, and rumors of rumors, that SVB was teetering on the edge of collapse had been circulating in private chat groups throughout the week. On Tuesday, I began receiving nervous calls asking what I thought. By Thursday, the dam had finally broken. CEOs, CFOs, and anyone with signature privileges spent large portions of the day attempting to transfer as much cash as possible to their other accounts—or to set up new ones, if they had accounts only at SVB, as many startups did. We were fortunate to have started out with good old-fashioned community bank accounts, but others weren’t so lucky. Their money was likely stuck in financial purgatory for some time.

We had a bank run on our hands, of course. Some of the wealthiest corporations and investors in the world attempted to withdraw $42 billion in a single day, nearly a quarter of the bank’s $200 billion of deposits. But there was perhaps just as much money that was stuck in attempted wire transfers; a process that usually take minutes crashed as a result of high demand. No one knows how much money would have been transferred to other banks if the SVB’s system hadn’t crashed.

In spite of the Capraesque clamor at the counter, however, this wasn’t your old-fashioned bank run. During the last week or so, many have called it the first social media-driven bank run. In fact, it was really a newsletter popular with venture capitalists that got the ball rolling toward the end of February—that, and the herd mentality of so many Silicon Valley denizens who consider themselves “disruptors” or “iconoclasts.” In a certain intellectually inclined pocket of the tech entrepreneur echo chamber, where the ideas of the late French polymathic theorist René Girard reign supreme, Girard’s mimetic theory was inevitably summoned to explain the phenomenon. Girard’s theory of “mimesis” posits that desire is mediated through another person: We desire what we see others desiring. Within the context of late modernity, Girard’s thesis unsettles presumptions of the sovereignty and goodness of individual choice. Many of SVB’s innovators, despite their self-conception as rugged individuals, were simply doing what others were doing. On Twitter, where many managing partners of powerful venture capitalists spend their days, mimesis takes place in overdrive. Once it was disclosed on Twitter that some were pulling their money out of SVB, the bank’s fate was sealed. Or so the story has been reported in recent days.

As it turns out, the demise of SVB is both less and more interesting than a tale of a tweet storm taking down a bank. It is less interesting because it was simply a case of financial mismanagement. SVB had invested a significant portion of their deposits in US Treasury bonds, normally considered stable and safe holdings. The major risk was that interest rates might rise, causing the underlying value of the bonds to decrease. Which is exactly what happened: SVB’s bond portfolio was yielding an average of 1.79%, which was significantly lower than the current yield of 3.9% of the current 10-year Treasury. In normal times, this would mean that SVB would simply have a “paper loss.” In their case, the paper loss was around $16 billion at one point. Even a mid-sized bank such as SVB would normally be able to withstand this “paper loss.”

But SVB had a further challenge in its unique clientele. As its name suggests, the bank had a very high concentration of deposits from venture capital-backed startups—indeed, it boasted of banking half of all such startups. As a result, SVB was dependent on businesses that typically register relatively insignificant revenues as a proportion of operating costs. Tech startups all talk about their “burn rate,” the amount of money they burn through each month or year, and every CEO can tell you what it is, for the last year and the last month and what it should be in the next year. These are businesses that need banks that can withstand constant withdrawals and occasionally very large deposits (sometimes in the billions).

But if venture capitalists start to get a bit stingy with their money—as they have been over the last twelve months as interest rates began to climb—the bank accounts of many startups dwindle. When these accounts start to go lower, the bank has to sell its assets in order to cover the withdrawals. In a scenario with rising rates—rapidly rising, in this case—SVB was selling portions of their bond portfolio at a loss. This meant they had to raise money by issuing more stock—a sign that they couldn’t cover their deposits, which made depositors nervous. And suddenly everyone wanted their money out.

That this nervousness turned contagious on social media is not, however, the remarkable feature of SVB’s demise. Two Swedish banks suffered a bank run in 2011 when a rumor circulated on Twitter that they were having “problems.” And in 2019, Metro Bank in the United Kingdom had a bank run that was kicked off by a rumor on WhatsApp. Yes, social media (and messaging apps, which function like a social media platform in many cases) can accelerate the spread of a message. But it is surprising how infrequently this has actually happened.

SVB’s case is more striking because of the relationships that existed between the bank, venture capitalists, and startups. And it is here that we discover one of the crucial enabling fictions of the tech world: that is, the notion that it operates as if institutions did not exist, as if there were no pre-existing patterns and models that define, govern, and constrain their actions. Many highly intelligent people in the tech world claim that everything comes down to the network—“It’s all just relationships,” as one of the more thoughtful tech world operators once said to me. Anything is possible if you meet the right people in the Valley.

In fact, as a Girardian would be quick to note, a pattern of behavior does obtain in the tech world, one that emerges in the way its players mirror other people’s desires, trying to be part of the hottest new thing: Sequoia Capital is investing in X , so I should want to put money in that (or something similar); Peter Thiel’s Founders Fund is recommending pulling money out of SVB, so I should follow suit. But while mimetic desire has considerable explanatory value, I think it misses the larger point.

Mimesis in the Valley is so intense because the tech world is, in fact, a relatively centralized system. A high percentage of successful startups get funneled through a small circle of gatekeepers, whether the famed accelerators Y-Combinator and TechStars or top-tier venture capitalists like Sequoia Capital and Andreessen Horowitz. SVB banked these winners of the system. But it was more than their bank: It was, in many respects, the institution that held the ecosystem together. It was also a potential source of regulatory order and structure. Or should have been.

The inclination to reduce everything to relationships, as attractive as that might be for a certain type of personality, reveals one of the critical problems at the heart of the tech world: It thinks that its products and services, its governance and strategic decisions, and its culture stands in isolation from the world that uses its products. To acknowledge, to bring into your everyday thought patterns, the fact that you exist within an order, an institution (for better or worse) would kindle solidarity with overlapping societies and communities, not just with individuals. If there is a single problem with the tech sector today, it is tech’s failure to acknowledge its responsibility for how its services, products, and culture are now deeply embedded in the broader world.

Shirking responsibility has often been taken as some kind of virtue—move fast and break things, as Facebook’s early motto put it. To achieve the innovation that we all supposedly need, tech companies operated in a state of exception. They need to be in violation of the rules, allegedly, so that they might fulfill their promise to society (which in many cases means simply helping people sell more stuff). This culture of capitalism in late modernity enveloped SVB. The chief executive officer of SVB, Greg Becker, successfully lobbied congress to loosen regulation for banks like his. SVB’s mission was to provide financing to job-creating companies in the innovation economy, Becker argued, not to spend their days ensuring compliance with government regulations. This was, among other things, a dangerous form of narrowmindedness. The propensity to see oneself as indebted only to those with whom one has a fiduciary responsibility (e.g., toward shareholders) is itself radically destructive of solidarity.

So when it came to understanding the impact of withdrawing all of their money from SVB, very few account holders—if any—stopped to think about what it might mean for others. Perhaps we can write this off as simply a feature of all bank runs, when the customer’s individualistic hysteria—or animal spirits—is inevitably on display. Or perhaps we can dismiss it as mismanagement. Both are part of this story. But SVB’s clientele are not Mom and Pop, with their life savings in the bank; they are some of the best capitalized companies and among the highest earning investors. Their employees, who depend on the money in SVB accounts, are the true victims of this kind of bank run. SVB and its customers are more deeply embedded in institutions than your run-of-the-mill community bank. The federal government’s bailout of SVB is a testament to this. A mid-sized bank with a relatively narrow range of customers can also be a systemic risk, especially if those customers have outsized influence over how we conduct business and interact with each other. Perhaps we should be concerned about institutions that are not only too big to fail but those that are also too embedded to fail.

SVB was a poorly managed bank, but it was a critical part of the tech industry. Whatever one thinks about the products and services tech companies have invented, only the purest of Luddites would believe that we could unwind the industry as a whole. Nor should we want that. Tech is far too diffuse to be captured by a handful of very large, very profitable companies (one or two of which probably should go the way of MySpace). But participants in this diffuse world of products and services—including companies, investors and, yes, banks—need to acknowledge that they are embedded in a larger social and political order.