Why You Shouldn't Panic About The Silicon Valley Bank Collapse

There is something surreal about seeing a bank go... bankrupt. Within 30 hours, the Silicon Valley Bank (SVB), with $209 Billion in assets, faced insolvency. The news is relevant for us since most tech companies were its customers. Suddenly, hundreds of startups faced the prospect of not making payroll. Twitter exploded with claims of the closure creating a domino effect that would cripple the tech sector, if not the economy at large.

Yes, Twitter has this tendency to get itself worked over.

After the bank got shut down by the Federal Deposit Insurance Corporation Friday, the US government stepped in Sunday to guarantee the deposits, thus providing breathing room for companies.

The crisis is a stark reminder of how fragile the tech ecosystem currently is. With massive layoffs, dried-up venture capital, and inflation, things are tough.

Yet, I remain positive about the future of the technology business. Let me explain to you why in simple terms.

Blame Pandemic Measures For This Mess

Let's quickly recap the events. I am not an economist, so bear with me. The way I see this is a tragedy in 3 parts. Simply put:

Part I: Free Money and Low-Interest Rates Fueled an Unsustainable Tech Gold Rush

• During the covid lockdowns, governments printed money to prevent the economy from collapsing;
• People, stuck at home, couldn't spend on the usual travels and social events. They used eCommerce, delivery apps, and streaming services. Businesses relied on SaaS as well to power remote work (remember Zoombombing?);
• Raising money for any tech company which provided these vital services became extremely easy. Startups raised $620 Billion VC funding in 2021. Many of them deposited their cash at the Silicon Valley Bank.

Part II: Inflation Measures Dried Up The Well

• The pandemic measures ended. All that new money created massive inflation, which needs to be combated with hiked interest rates.
• SVB meanwhile re-invested its funds in mortgage bonds worth 1.5%, which became huge money losers because the market suddenly offered 4-5% ones.
• Tech companies didn't raise money anymore. Deposits slowed down at the SVB which lost its primary source of cash.
• SVB foresaw its liquidity problem. It took a loss on its 1.5% bonds to generate cash flow.

Part III: SVB Became the First Bank to Go Bankrupt Due to Social Media Panic

• People saw the bank do that and completely freaked out;
• Influent people within the tribe of Silicon Valley called for a run to get all their money before the bank collapsed;
• The self-fulling prophecy became true when everybody attempted to withdraw their money all at once.

Part IV: The Fallout

As usual, we could point out many factors in this collapse. I blame the widespread erroneous assumption that how we lived during the lockdowns would become permanent. I wrote about how experts oversold the pandemic's transformational impact on our use of technology. It's pretty convenient to hype the "virtual everything" when you're selling digital transformation.

They were wrong. Travel and eCommerce are pretty much back to their pre-pandemic trends. Restaurants and hotels are driving record levels of job creation in the US.

In insight, seeing companies' behaviours through the "tech will be everywhere" misconception explains everything. The reason most tech businesses have been doing layoffs in the past year is due to "overhiring during the pandemic", after all.

I said I was going to show the positives of the phenomenon. I'm not sounding positive at all! Where is the optimism? Well...

This Is What Normal Looks Like

The inflated stock, the printed money, the zero interest rates, the speculation, the toilet paper off the shelves... this was the crisis.

I love the low-code automation platform Airtables, I gave it a glowing review. In 2021, Airtable raised $735 million on an $11 billion valuation with around $100M-$115M revenue. That's 100x its revenue. However, here's what I wrote about Airtables:

Questionable value proposition against Excel/Google Sheet incumbent may lead to business disruptions, pricing changes, and product realignments [...] Be warned your CIO will not make money appear out of thin air for it.

So yeah, only a broken financial system can value 100x revenue a company that basically builds a spreadsheet app.

This influx of cash also created those weird so-called "generational crises" of quiet quitting and "the great resignation". No. It was just a job market on steroids.

This is also my advice to you: things are going back to normal. This means:

• focusing on providing value
• keeping skills current
• caring about the business fundamentals of your current and future employers or clients

Sounds bland? Yup. The fundamentals are back in style.

The Emergence of Generative AI in This Climate Becomes a Huge Wildcard

While the financial meltdown unfolds, another bubble could emerge. With OpenAI opening its API (heh, see what I did? — oh by the way if you've ever asked yourself what's an API, I got you covered), we're about to see a wave of AI startups flood the market.

Imagine if that hype cycle happened during the pandemic craze. We would have seen a dog-barking AI net $100 million.

This new-found carefulness relieves me. AI has immense upside. Seeing a swarm of over-funded noise would have drowned the fish and made people cynical. It would have hurt AI's reputation and, ultimately, slowed down adoption.

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❓ Question of the Week

Next week is back to explain like I'm five! What do you want me to cover? I'm hesitating between networks, databases, and viruses!