The collapse of Silicon Valley Bank has uncovered the truth about the startup sector. What rose from the ashes of the GFC is now a bubble about to burst.
We are going to start right back in 2008. Remember the Global Financial Crisis? it was meant to have huge ramifications for the banking sector – And after all the collapses, all the redundancies, all the pain – we were told it could never happen again.
Well just a few weeks ago, the very foundations of our banking system were called into question – again.
Silicon Valley Bank may not be the world’s biggest, or even America’s biggest – but it did punch above its weight. Why? Because of its title. It was literally the bank of Silicon Valley.
The past 16 years have been extraordinary for the startup sector. Enormous growth multiples that defied the rest of Wall Street.
That is – until the music stopped in the investment community. All these startups that believed you could be worth a billion dollars on the back of buzz suddenly realised the money had run dry.
It’s now about good old-fashioned profit. It had to happen some time.
But it happened right after COVID – and right before all that stimulus money washing around the community had to be taken back. Interest rates had to rise, and suddenly all these startups had to withdraw their cash to survive.
Central Banks now find themselves at a horrible crossroads. Keep raising rates to fight inflation, but risk financial instability.
The job of central bankers is to keep banks stable. But in order to keep them stable, they have to raise rates to combat inflation, and the unintended consequences about that hit really hard.
The central banks are now contradicting themselves. To create stability, they have to create instability. It’s the problem with their blunt instruments.
Let’s take Silicon Valley Bank – More expensive money reduced the value of their securities portfolios and has made it likelier that depositors will flee to the big banks.
Did you hear that? So after creating the conditions that led to too much money in the economy, to now raising rates to claw it all back, that now led to instability in the financial system – the Fed doesn’t want to know.
Let’s bring it back to the poor depositors of Silicon Valley Bank – It’s a nightmare out there in startup land.
Economic fear and funding uncertainty has put startup-founder mental health in a tailspin. Many suffer in silence because they worry that talking about it will worry investors that the sector is in trouble.
The startup economy of today is eerily similar to the banking sector of 2007 right before the financial crisis – with companies dangerously close to the edge. #Silicon Valley bank #svb #credit suisse #fed reserve #silicon valley
