The fault, dear VCs, is not in your stars

Sinéad O’Sullivan is a senior researcher at Harvard Business School’s Institute for Strategy and Competitiveness.

After more than a decade of venture capitalists insisting they provide more than just cash to their portfolio companies, the moment to prove that finally arrived. Then it went.

As the news of the Silicon Valley Bank collapse reverberates through the technology ecosystem — and investors and founders alike furiously Google terms such as “available-for-sale” and “held-to-maturity” — even some of our most prominent financiers, like ‘PayPal Mafia’ member David Sacks, are learning once again how banks work, the hard way.

The idea that depositors are creditors to a bank is an absurd and outdated notion. Everyone just wants a checking account, not to loan the bank money.

— David Sacks (@DavidSacks) March 11, 2023

Meanwhile, side-eyes and fingers are starting to point within the investor community. Hushed DMs are flying. “Let’s take this offline” is appearing in group WhatsApp chats.

OK, so there was a liquidity problem with SVB and something about mortgage-backed-securities, and fundamental timing mismatches of liabilities. But who stirred the rumours that created the run that exposed the fundamental risk in the first place? Who screwed us over?

Sentiment is one hell of a drug, and it should come as no surprise that venture capital, which has perfected the art of moving entire markets through its echo-chamber hype, has managed to hype its own rumours of a potential banking collapse to . . . collapse a bank.

I am so angry. And sad, and scared. Just remember, WE did this. Collectively. If you did the right thing, and kept your $ at SVB, you’re being f’ed. If you did the wrong thing, and moved your money, you f’ed thousands of startups and people you’ve never met. Why can’t we ever… https://t.co/4vSpykES5r

— Nicole Glaros (@nglaros) March 10, 2023

And to what end? As fingers are pointed, and VCs get angry at themselves but mostly each other for destroying the goose that laid the golden egg, Silicon Valley’s partner of first and last resort — a much loved, appreciated and adored accomplice in the tech ecosystem (sometimes for a price) — has been slain.

So how did we get here? Well, consider that VC has pumped and dumped nearly every industry it could get its hands on over the past decade. Now, with crypto exiting the market stage left, there is only one industry remaining to “disrupt”: venture capital itself. Even if accidentally. And in doing so, even the most ardently atheist investors have managed to find religion again. Except this time, their God is the federal government.

That’s right. As Professor Galloway puts it, the bailout playbook is back with a bang. We’ve got “rugged individualism and capitalism on the way up, privatising the gains, then ‘we’re all in this together’ on the way down”. While most non-investors are horrified at the thought of bailing out investors of yet another high-risk industry, that doesn’t deter Bill Ackman.

The failure of @SVB_Financial could destroy an important long-term driver of the economy as VC-backed companies rely on SVB for loans and holding their operating cash. If private capital can’t provide a solution, a highly dilutive gov’t preferred bailout should be considered.

— Bill Ackman (@BillAckman) March 10, 2023

Things are moving fast, but the full toll of the SBV collapse and its fallout will probably take time to resolve. There is a real human cost to this as founders, CEOs and investors and ordinary workers in many start-ups scramble to save assets and their livelihoods.

However, even as the industry is turned upside down and inside out, there are thankfully some eternal constants: pumpers gonna pump.

We can’t trust the banks. That’s why we need Bitcoin.

— Balaji (@balajis) March 10, 2023