How Silicon Valley learnt to love the government

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

“YOU SHOULD BE ABSOLUTELY TERRIFIED RIGHT NOW — THAT IS THE PROPER REACTION TO A BANK RUN AND CONTAGION,” he wrote. “THIS WILL SPIRAL INTO CHAOS”.

The rapid fall of the tech sector’s regional bank has upended social mores in the Valley. Investors like Calacanis who typically upbraid regulators for stifling innovation turned to Washington in their hour of need.

Most warned of severe repercussions if depositors lost permanent access to their money. Hedge fund manager Bill Ackman wrote on Twitter that the consequence of government failure to guarantee SVB deposits would be “vast and profound”. Y Combinator chief executive Garry Tan called the bank’s failure an extinction level event for start-ups — a few days before the tech accelerator laid off 20 per cent of its own staff in a non-SVB linked move.

David Sacks, general partner of VC firm Craft Ventures, who like Calacanis is a close associate of Elon Musk and has a large following on Twitter, warned of further bank runs. “Place SVB with a Top 4 bank,” he tweeted. “Do this before Monday open or there will be contagion and the crisis will spread.”

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

Relief has been tempered, however, by criticism of the role that 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 remove funds. This helped to trigger a run on the bank.

There is a broader charge of hypocrisy towards some of the venture capitalists who chafe against government regulation of tech but demanded regulators step in to help SVB depositors. Going online to plead for support “was an ‘atheist in a foxhole’ moment”, says one executive at a venture capital fund who was derisive of his peers’ conversion.

Some investors are concerned that the meltdown at SVB could feed into a backlash against the tech sector at a time when there is already growing debate about the impact of social media on young people and the potential monopoly power of some of the biggest tech companies.

Supporters can point to the tech sector’s role as the American economy’s engine of innovation. But after a sharp slump in tech stocks over the past year, large lay-offs and now the failure of the sector’s favourite bank, companies are navigating an increasingly hostile environment.

Margaret O’Mara, history professor at the University of Washington and author of The Code: Silicon Valley and the Remaking of America, says it is possible that regulators could use SVB’s collapse to push for harder regulation of the tech sector.

“There is some shamelessness of outspoken libertarians who were quick to scold [Treasury secretary] Janet Yellen about what she wasn’t doing,” she says. “But some of that was defensive. There is a sense among some people that there is a war on tech and that regulators would not 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 offered loans, checking accounts, VC investment, networking opportunities and financial advice to investors and founders. At the time of its failure, it was doing business with almost half of all 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 fuelled an investment boom in tech. Debt was cheap and growth was prioritised over profits. When tech valuations hit a peak in 2021, deposits in SVB reached a record $198bn.

Now the tide has gone out. Rising rates curb investor appetite for risky tech investments. SVB was exposed to higher rates on two fronts: falling deposits and a lower value for the bank’s portfolio of supposedly safe long-dated securities.

As efforts accelerated over the weekend to save the bank, some venture capitalists took pains to distance themselves from the show playing out on social media. “People think that six people on Twitter, because they’re outspoken, speak for Silicon Valley,” says Peter Hébert, co-founder and managing partner at venture fund Lux Capital who spent the weekend calling representatives in government.

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

“Very little of the activity was centrally co-ordinated, this was just a brigade of people doing what they felt they needed to do,” says Hébert.

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

But the repercussions from SVB’s failure could not all be written off as concerns only of the wealthy. As the weekend progressed, founders of small companies were frantically trying to find cash in order to pay staff the following week. Lay-offs looked inevitable without intervention.

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

“Over and again founders will say to you — ‘when I went through the death valley, SVB was there. My relationship manager found the appropriate credit to get me to the other side’. That’s why SVB was so critical: they understand what it is 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 to national security.

In conversations with congressional representatives, investors emphasised the importance of those early stage companies now left vulnerable, and played to bipartisan fears about being outstripped by China. “This is not a bailout of big tech, like Facebook or Amazon, it’s a bailout of little tech,” says one senior banker at a Wall Street firm who was involved over the weekend. “[The case being made was] ‘if you want the Chinese to get ahead of us, then stifle that innovation machine’.”

It was a hard sell, according to the banker, to drum up support on both sides of the political divide. “It couldn’t be worse. ‘Silicon Valley’ and ‘Bank’, these are the two things that bring Republicans and Democrats together: they both hate Silicon Valley and they both hate banks.”

“Many of the people in Silicon Valley have almost taken pride in having nothing to do with DC or Wall Street. That’s not beneficial in times of crisis,” says Hébert. “There was still schadenfreude [in Washington], the belief that this was the comeuppance for technology.”

Ultimately, however, efforts made by Silicon Valley luminaries were successful, helped over the line by fears in Washington that SVB could be the first domino in a procession of regional lenders. Those fears looked more justified over the course of the week. Late on Thursday, several of the country’s largest banks announced $30bn in aid for First Republic Bank in order to shore up investor confidence in the California lender.

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

“The alarm bell I sounded was because I saw a fire . . . after Silicon Valley Bank was put into receivership and when I saw additional bank runs occurring,” he said. He conceded that using all caps was “perhaps a little too much”. It was really a comedy “bit”, he added, but “people didn’t understand that.”

Will there be a bill 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 rehash the events of the past few days. One guest, Conrad Burke, co-founder of San Francisco-based MetaVC Partners, describes the event as group therapy. “After four days of sheer hell you could feel the relief in the air,” he says.

But amid the jubilation, there is a growing recognition that the government’s largesse is likely to come at a cost. As the aftershocks reverberate through the US financial system, there is already talk of more regulation of banks.

Ro Khanna, the Democratic congressman from California who also played a role in talks over the fate of SVB on the weekend, said the bank’s collapse was “a clear reminder that Congress has failed to properly regulate banks . . . Congress tends to act when there is momentum around an issue and I’m hopeful that public pressure could bring some Republicans to the table on this.”

That political sentiment could also affect Washington’s approach to the tech sector. The industry is not fond of admitting it, but its fortunes have always been entwined with the state. US government funding for the cold war and space race played a key role in Silicon Valley’s creation.

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

The government still creates a smooth runway for growth, says O’Mara, the academic. “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 makes people in the industry feel as if they did it all alone.”

Having rescued their local bank, some investors expect that the government will be a more obvious presence. “The government is squarely in Silicon Valley and they are here to stay,” says the Wall Street banker involved in rescue talks. “It’s a little unnerving.”

Additional reporting by Colby Smith in Washington