How Silicon Valley Bank’s failure will affect the tech industry, according to a historian

The collapse of Silicon Valley Bank was a big deal. It didn’t just impact Silicon Valley businesses — or the many non-Silicon Valley-based businesses that banked there, including Vox’s parent company Vox Media. The end of SVB created ripple effects throughout the American banking and financial system.

It also showed how some of the practices that made Silicon Valley what it is today contributed to SVB’s demise. And it showed how Silicon Valley might not be the cradle of innovation and the pride of American business culture that it used to be. It was not a good look when some of Silicon Valley’s loudest voices — the same people who decried bailing out student loan borrowers — were begging, some in all caps, for the government to make SVB depositors whole. After days of prominent venture capitalists’ pleas, the government found a way to bail out SVB depositors without using taxpayer dollars. Nevertheless, plenty of people noticed Silicon Valley’s hypocrisy.

It’s possible it was the begging from the VCs that got the Biden administration’s attention. But multiple reports suggest that the federal government very quickly realized the need to act lest SVB’s fall trigger a larger collapse akin to the 2008 financial crisis which led to the Great Recession. And so the Biden administration stepped in, did its job, and a mass panic-inspired bank run was avoided.

But how did SVB become such an important part of the Silicon Valley ecosystem in the first place, and does its failure signify anything about Silicon Valley itself? Will a new Silicon Valley culture come out of it, maybe one that wants to move slower and fix things?

Vox talked to Silicon Valley historian Margaret O’Mara, who literally wrote the book on Silicon Valley’s history, about the bank’s place in the tech world and how the fallout from its collapse might change the region — or not. This interview has been edited for length and clarity.

Sara Morrison

How intertwined is Silicon Valley Bank with the history of Silicon Valley?

Margaret O’Mara

It’s deeply intertwined. It’s one of these interesting, unique creatures of what I’ve called the “entrepreneurial Galapagos” of early Silicon Valley: Firms that are catering to the particular needs of high-tech startups run by a relatively inexperienced, technically minded management team. Like law firms and venture capital firms. The bank is kind of like that.

Silicon Valley Bank was founded in 1983 by a couple of former bankers who had been working at a high-tech business but saw this gap in traditional banking. There were a lot of companies in the early ’80s — this is the personal computer boom, so there are these consumer-facing products like desktop computers and software — that the Bank of Americas and the Wells Fargos were like, “Oh, I don’t know what that does. That’s a new risky thing. I don’t think I’m gonna give you a business loan for this.”

SVB comes out of that. And it’s very much the networks that make it go. The relationships with VCs allowed them to do that. Startups had that third-party validation from VCs, so it’s very much, very deeply, deeply embedded, although it’s one of those entities that doesn’t make headlines, usually, because it’s a bank. It’s not Fortune magazine cover story stuff.

Sara Morrison

Why did the tech industry love SVB so much? What did it offer that other banks didn’t?

Margaret O’Mara

SVB would extend loans and did venture financing for firms that were very early stage. And there was also a personal banking dimension. They would look at a borrower’s portfolio: Someone’s trying to finance a mortgage, and they would look at their stock options. They’re taking into account those things that traditional banks often would not. And so they’re really allowing capital to flow into early-stage companies as well as to early-stage founders. This was a community bank; it was a regional bank. It also wasn’t that big, which is another separate question, separate answer.

Sara Morrison

It sure seemed big …

Margaret O’Mara

Well, that’s the thing. Yes, SVB is the 16th biggest now. But that is in part because of the extraordinary growth it had in the last several years. In 2015, its balance sheet was about $40 billion. And if I’m reading its last financial report right, they had over $200 billion this year. So they just grew so fast. And that’s because the tech industry had this fire hose of capital flowing into it and has grown so much, especially during the pandemic.

Sara Morrison

How much did SVB’s less orthodox banking practices facilitate the growth of Silicon Valley in the early days — the ’80s and ’90s? And what was its role in the growth of the post-dot-com bubble startup economy?

Margaret O’Mara

Well, Silicon Valley was growing a lot before SVB was founded. I think that it was one piece of the larger puzzle of the Silicon Valley ecosystem that was important. But had the bank not existed, I think there probably would have been some kind of financial institution that was catering to that ecosystem. You already had big banks, like Wells Fargo and Bank of America, that had divisions that were doing that stuff. I think they would have adapted.

In recent years, there was a tight, symbiotic relationship with Sand Hill Road — or the venture industry, broadly defined — that was mutually beneficial. So you had venture-backed companies that were being encouraged by their investors to bank with Silicon Valley Bank. One thing I learned, just being on the radio two hours ago, was that if you took venture financing from SVB, then you had to do all your banking with them. This is something that banks do: If you take our products here, you’ve got to do all your business with us. And that locks companies in. This might be part of a regulatory reform that Washington is now looking at.

Sara Morrison

Between the cutbacks, the layoffs, venture capital funding slowing down, and now this — does all this signal that we’re entering a new era for Silicon Valley?

Margaret O’Mara

I think we’re entering a new phase. There have been a lot of premature obituaries written for the Valley over the years, but there’s a lot that is still sound. There’s a lot going on, and I think the industry now is just so enormous. It contains multitudes that even all of the different negative signaling — whether it be the crypto winter, then the layoffs, and most recently, another 10,000 layoffs at Meta — even with all those things happening, there’s still so much there there. The largest companies still have a headcount that’s larger than it was at the beginning of 2020. You still have Silicon Valley products and platforms that are so integral to so many other pieces of the economy: communication, education, work, and leisure.

So, yes, we are entering a different phase, but that doesn’t mean this is the end. There’s always this desire to say, “Well, that was fun, it’s all over now, on to the next thing.” I think that would be a more dramatic story, but I don’t think that’s actually what’s going on now. I do think there’s been abundant evidence that moving a little slower on a lot of things could be beneficial, whether it be designing software or AI, or simply doing more due diligence.

Sara Morrison

Is that lack of due diligence emblematic of Silicon Valley at large?

Margaret O’Mara

I think the growth has been so breakneck and hockey stick that the money has just been flowing. Whether you’re on the management team of SVB or you’re lucky enough to be in one of these fortunate companies, you’re just making so much money. And there’s FOMO, right? Everyone knows the party’s not gonna last forever. So you want to just get in there and maximize as much as you can get. That has been the Silicon Valley way forever. And that has been a critical part of the whole ecosystem: Be super aggressive and grow, grow, grow, grow, grow, and get in there and get your ROI and cross your fingers and hope it all works out.

And it’s been such a long boom, it kind of outlasted a lot of predictions of the bust. I mean, I’m a history professor so I do not do, nor should I be doing, any sort of predicting. But just based on my knowledge of the history, I’d kind of been waiting since, I don’t know, 2015 for the bubble to burst. And it kept on going and going and going and then going some more. So you can see why people were like, “Okay, we’re just going to keep on going at 100 miles an hour.” Because the people who were like, “Oh, maybe we should be more careful. And maybe we should hedge our bets here, and who knows what’s going to happen?” You do that and then you lose out on what could be an enormous payday. So I see how this all played out. And it’s not to say that no one bears any responsibility or there wasn’t bad decision-making. But you can understand, in context, how some of this stuff happened.

Sara Morrison

Do you think that plays into why you saw a lot of non-Silicon Valley people almost celebrating SVB’s failure? There was a lot of that on Twitter in the days following the collapse. But maybe that’s just the nature of Twitter.

Margaret O’Mara

It’s a little bit of: Twitter’s not the real world. There’s kind of a, “Yeah, you got yours,” to people who read a lot of Jason Calacanis’s past tweets, I guess. The All-In guys are not Silicon Valley, either. They’ve become shorthand for Silicon Valley VCs, but they’re not. They’re just very, very visible, very successful, and very influential, particularly in the broader public or a slice of the public. But they’re not everybody.

There was a little bit of “Oh yeah, you got yours,” “We shouldn’t bail you out,” “What about student debts?” There’s sort of that left-wing argument, and it’s fair. But I think there also was this rush from some of the extremely online members of the VC community to say, “Oh, Washington just wants to see us fail, they hate us.” And actually, if anything, the last few days have shown how much Washington does not want to see Silicon Valley fail.

There was a real effort to carefully play the politics and not seem like it was 2008 all over again — that the big guys were getting bailed out and the little guys were getting screwed. But we saw that Joe Biden does not [want to] see Silicon Valley fail. The CHIPS Act is 50 billion bipartisan dollars. Money not just for big Intel plants in Ohio, but for a lot of things that are actually going to be very generative to the next generation of the innovation economy, even if it’s not going directly into the pockets of the people who already are atop that economy. The bank depositors were made whole. I’m not surprised by that. That’s not just because it’s Silicon Valley, but just the lessons of American history — 1933, 2008. The federal government sees what happens when there is a bank run, when there’s panic about the banking system, when there’s contagion, when there are these cascading failures. And they worked very hard, very swiftly, to keep that from happening.

Sara Morrison

Were you surprised by some of the over-the-top pleas from some of the most prominent (or maybe just the loudest) people in Silicon Valley to the government to fix this? These are the same people who said bailouts shouldn’t happen for other people, or that the government hurts more than it helps?

Margaret O’Mara

There was a certain shamelessness to it. There’s some cognitive dissonance that seems pretty obvious to those of us who aren’t them. I think it reflects, first of all, the Silicon Valley bubble of extreme wealth and success and privilege, of having your priors reinforced again and again by people around you saying, “You’re amazing.” And there’s a very deep, quasi-apocalyptic belief that government is dysfunctional, that it cannot do things right. Unless we yell at them, they’re not going to do the right thing, they actually don’t know how to do it. But this showed that the FDIC did its thing, and the process was working as it should.

They’ve been so heads-down focused on what they do, they actually don’t really think that policymaking is important. Not only don’t they have respect for it, they also just don’t really know how it works. This kind of constant warning about “contagion,” I don’t think that was wrong, but it was alarmist and potentially kind of dangerous because you were firing people up.

Every bank run in history, every financial crisis is groupthink and herd mentality and panic. It’s human nature. It’s not just tech, it’s just the way it works. So, if you do have a great big platform and a big soapbox, it is important to be careful about what you say and how you say it.

Sara Morrison

Will there be any self-reflection? Any kind of culture change?

Margaret O’Mara

I would really hope so. And I would encourage people — especially people who are in positions of power, authority, and influence — to take a beat and have a healthier perspective here, go a little slower and think about their industry as part of a broader ecosystem. Are certain very opinionated leaders going to change their minds? I doubt it. Will people maybe not take their declarations quite as seriously, or maybe be a little more careful about how they receive that information and what they do with it? Possibly.

I think we’ve seen so much evidence over the last couple of years of the downsides of moving really, really fast and growing fast and not thinking about the downstream consequences of products or business models. I would hope that there will be a little more deliberate and careful attention — in part because the thing that is new about the tech sector now that wasn’t the case even in the ’90s, is it’s just so, so big and so central to so many different parts of society. It’s not just devices on your desk or email or an internet browser. Those were a big deal. But it’s so much bigger now. And the money is bigger, and the influence is bigger. That’s why so much attention was paid to finding a solution when the bank failed.

A version of this story was first published in the Vox technology newsletter. Sign up here so you don’t miss the next one!

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