Massive funds transfers like the above to other banks would have put pressure on them as well, as they would’ve seen a rapid increase in deposits which are essentially liabilities for financial institutions, ones that cost money to hold.
British venture capitalist and internet wit Benedict Evans suggested the banks should’ve used blockchain for the transfers, as they then would’ve taken years to complete. That being a reference to the slow and inefficient database used by cryptocurrencies to record transactions.
It’s almost over now though. The United States financial authorities initially nixed intervention, but will now make depositors whole (lovely quaint banking jargon there) at SVB. And, at the crypto-friendly Signature Bank in New York.
Why did that happen, and why did SVB’s collapse cause panic in China, India, the UK and to a lesser degree, locally?
Obviously, there were worries that other banks with exposure to the tech sector would see runs on them as well. However, you only need to look at how much the tech sector is valued at to understand what was at stake. For example, UK’s tech sector hit the US$1 trillion milestone last year.
So when some 5000 startups published a petition on incubator site Y Combinator, urging official action on SVB or their startups would go under, resulting in hundreds of thousands of job losses, it’s a safe bet authorities took notice.
That’s the ecosystem effect: let’s imagine that you love lawn mowing. Setting up a lawn mowing business for yourself would just be silly however. There’s a hard limit to how many lawns any person can mow, you have to pay for the gear, and you are a single point of failure if you’re taken ill and can’t work and earn money.
Instead, you startuppify the mowing as a service. It needs to be in the cloud, accessible through an app that maps customer lawns. Add fruit like Internet of Things sensors to measure grass growth and soil moisture and quality, and now you have a consumption-based mow-on-demand model to sell through subscriptions.
Plan to Uberify the lot with students doing the work, be fast to snag that first-mower advantage for world domination, draw up an exit strategy based on an insane company valuation and LawnMwr is born.
Obviously, that scenario requires a lot of capital upfront. If venture capitalists are sold on the LawnMwr idea, the money is handed over (and as it were, often banked at SVB).
Now, compared to a simple small business, LawnMwr adds serious money-go-round to the economy. Service providers get a share of the venture capital, people are hired to develop the cloud-based apps, to manage the business and to do the actual work.
All of that is integrated in our economies today and once you realise that, you’ll appreciate why what Y Combinator’s chief executive Garry Tan labelled an “extinction level event for startups” was best avoided.
Apparently, nine out of 10 startups fail, but exits have rewarded investors often enough to encourage them to throw more money at entrepreneurs. However, those rivers of money have started to dry up in the current uncertain economic climate; if investors next lose funds staked without even getting to the exit stage end game they might feel much less inclined to support startups.
That’s before you start counting the human cost to startup founders and the staff they employ. It’s hard to imagine what it feels like, thinking your startup will go under through no fault of your own, and so fast as well.
One thing is clear though: the SVB failure has uncovered a serious vulnerability threatening an important sector of the economy. New regulation to prevent similar failures from happening again will be necessary.
