Tech startups have been dominating the American economy for decades. That seems to be changing now, as the bank for U.S. tech startups completely collapsed over a single weekend.
Tech money is drying up
There seemed to be no limit to venture capital for funding tech startups. For the past decade, everyone and their little brother became CEOs at a tech startup, hoping to grow into or be bought by a giant tech company. However, according to the Harvard Business Review, things started to change during the third quarter of 2022, when there was a 50% drop in investing. The same article notes that venture capitalists would put most of their money into “promising companies already in their portfolio,” so if you weren’t already semi-established, there was little to no money for pre-seed and seed rounds for budding companies. Investors are now in “triage mode.”
There have been tech layoffs left and right, so there have been multiple warning signs that the industry is in danger. These layoffs have been occurring since early 2022. Currently, there have been almost 130,000 tech layoffs in 2023 alone, which is 30,000 less than all of 2022.
The Federal Reserve Problem
We’re still recovering from the COVID-19 pandemic. To gain back money from the Federal Economic Impact Payments—the relief checks—Federal interest rates have increased. Raising interest rates was an attempt to curb inflation, but this increased borrowing costs and made riskier investments unappealing. So venture capital has disappeared seemingly overnight.
Now smaller banks are beginning to suffer.
Silicon Valley Bank timeline
Silicon Valley Bank, the largest bank for tech startups, crumbled on March 10, 2023. Right now is not the time for risky investments, which SVB has benefited from since they were founded in 1983.
The previous Wednesday, SVB announced it announced it sold a bunch of security at a loss, which sent venture capital firms into a panic.
Thursday morning, the bank’s stock dropped at an alarming rate as investors pulled out in an attempt to avoid losses.
To stop the complete and utter collapse, California regulators shut the bank down and it’s now under the control of the Federal Deposit Insurance Corporation.
What is the Federal Deposit Insurance Corporation?
The FDIC is a U.S. government corporation created during the Great Depression to protect American banks and bank members in the event of an economic crash. That means that everyone who has accounts and investments through SVB has now been insured.
Sheila Bair, who was chairwoman of the FDIC during the 2008 financial crisis, recalled that with nearly all the bank failures, “we sold a failed bank to a healthy bank. And usually, the healthy acquirer would also cover the uninsured because they wanted the franchise value of those large depositors so optimally, that’s the best outcome.”
(featured image: Justin Sullivan, Getty Images)
