A sign hangs at Silicon Valley Banks headquarters in Santa Clara, California on March 10, 2023. - US ... [+]
No one bank, incubator, company, university or Center of Excellence should own a disproportionate size of the innovation economy. The trend toward innovation oligarchies is what’s dangerous here, not the failure of one bank. The US needs a real innovation infrastructure well beyond one small town in northern California.
Context
Silicon Valley Bank (SVB) has been providing banking services to technology startups, VCs and even “big brands” for decades.
Jack Milligan provides some context (the bold italics are mine):
“As the largest financial institution in the VC market – and one that focuses on it exclusively – SVB has benefited enormously from the surge in venture funding. But the bank’s advantage goes well beyond just being in the right place at the right time. The innovation economy has its own ecosystem made up of serial entrepreneurs, startup companies, investors, advisors and other lenders.”
“The biggest risk to SVB’s profitability is probably an economic slump that puts a damper on investor enthusiasm. ‘If you see a change around investor appetite to invest in startups and companies tied to the innovation economy, that could slow things down in terms of growth of the business, at least temporarily,’ says Ebrahim Poonawala, who heads up North American bank research at Bank of America Securities.”
Innovation Risk
NPR’s Bobby Allyn’s described the threat of innovation as “an 'existential risk' to innovation and competition in America.” Worse, much worse: “eventually, Silicon Valley Bank would come to do business with nearly half of all U.S. tech startups backed by venture capitalists … (which) can be an existential risk to competition and innovation in the American economy for the next decade."
Half?
Why is the innovation financial infrastructure so weak? Why do half of US start-ups rely upon one bank? Does anyone see this as “unusual” or unusually risky? Does anyone see this as a way to win the global innovation war?
Small Town Fixes
Listen to Kate Clark and Maria Heeter:
“Many startup founders on Friday signed up for new loans based on the future revenues of their companies, according to Nathan Latka, CEO of Founderpath, a startup that offers this type of financing. Others heard from their VC backers, who said they could provide short-term cash. Menlo Ventures is planning on offering loans to portfolio companies that need to make payroll, Matt Murphy, a partner at the firm, said. Murphy said other large venture firms have committed to or are planning on doing the same.
“And in some cases, founders sought to stanch their own personal losses. Omeed Malik, founder and CEO of Farvahar Partners, an investment bank that specializes in secondary share sales, said that founders were calling all day on Friday trying to sell their shares to shore up personal cash positions amid a growing worry about their business prospects.”
Is this how it’s done?
Innovation is the real loser here.
Is innovation actually managed in one small town (the bold italics are mine)?
“This kind of gets us to one of SVB’s key problems: Silicon Valley is actually a small town. And while that meant SVB was the cool banker for the tech and life sciences startups here, that also meant its portfolio wasn’t very diverse. The incestuous nature of Silicon Valley startups means gossip is a contact sport, because everyone here is hopelessly entwined with everyone else.”
“If SVB, which for 40 years has been a pillar of the startup ecosystem, can disappear in 36 hours, what else is going to drop?,” said Rick Heitzmann, the founder of VC firm FirstMark Capital.”
“Garry Tan, president and chief executive of Y Combinator, a startup accelerator in Silicon Valley, said many of its roughly 3,000 active companies had a relationship with Silicon Valley Bank. YC surveyed those companies Friday morning and by Friday afternoon, nearly 400 had said they had exposure and over 100 said they worried they couldn’t make payroll over the next 30 days without a quick resolution for the bank.”
3,000 companies?
National Innovation Infrastructure
Clearly the innovation infrastructure must be expanded way beyond the small town of Silicon Valley. The big banks who are now the darlings of the SVB mess need to play much larger roles in the innovation infrastructure. Terms? Obviously, they need to modify. Hedge fund buyouts at 60 cents on the dollar is not the answer. Personal loans from wealthy VCs is also not the answer.
There are always the usual funding suspects:
- Self-Funding/Bootstrapping
- Friends and Family Investors
- Crowdfunding
- Incubators/Accelerators
- Angel Investors
- Venture Capitalists
- Loans/Credit Cards/Debt
- Small Business Grants
- Barter
- Partnership/Licensing
- Commitment to A Major Customer
But all of these are subject to swings in the economy. Today, for example, is not a good time to swing.
If the SVB debacle has taught us anything it’s that a concentration of financial innovation management in one institution (or one geographic location) is dangerous, risky and, frankly, stupid. There’s time enough to ask questions about how all this happened and why no one saw it coming (which is arguably not actually the case). There’s time to ask who made the most money from SVB’s failure – and how they made it. There will be legitimate and silly debates about how the SVB failure was handled. Finger pointing aside, what’s the real, long-term answer? Is there a meaningful lesson here?
Innovation is Not a Local Problem
The call here is for an expanded national innovation infrastructure. Here’s where the US was in 2020:
- “The U.S. national innovation system is in crisis, and in need of thorough rejuvenation, especially through significant increases in federal funding.
- “A strong national innovation system requires correctly structuring all three sides of the “innovation success triangle” – the business environment, the regulatory environment, and the innovation policy environment.
- “While under threat, the United States still has reasonably good business and regulatory environments, but it has a weak innovation policy environment.
- “Compared to other nations, the United States is trending downward in its funding for universities, federal labs, and other innovation inputs that policymakers have been unwilling to prioritize in the federal budget process.”
What does this have to do with the failure of SVB? A strong national innovation infrastructure would significantly reduce pressure on the usual suspects – including VCs and banks. It would fuel innovation everywhere and across sectors. (Today’s funding/banking oligarchy should be challenged. Replacing SVB with another go-bank is not the answer.) While some progress has been made, there’s much more to do. Funding and banking are intertwined: what if both were more widely available and more professionally managed?
Pie in the sky?
Probably.
The argument here is that “innovation” is not a local problem. It’s seductive to focus on SVB and other banks that might fail the start-up community. It’s solid click-bait. But the real challenge is not to fix start-up banks, but to make innovation a real, sustained national priority. The SVB collapse will be forgotten in a few weeks, but the innovation challenge will remain with us forever.
