Silicon Road Ventures

“I think I can effectually force you” and Monte Cristo drew another packet from his pocket. “Here are ten thousand more francs,” he said, “with the fifteen thousand already in your pocket, they will make twenty–five thousand. With five thousand you can buy a pretty little house with two acres of land; the remaining twenty thousand will bring you in a thousand francs a year.” In this excerpt from , Count Monte Cristo corrupts a humble operator of a government optical telegraph post to transmit a false message. That was part of Monte Cristo’s revenge plan against his long-time foe Baron Danglars, a bank tycoon, who used informal access to classified information to trade Spanish bonds. Alexandre Dumas' classic novel A lot has changed since the first half of the 19th century, depicted in the novel. Well, sudden and fabulous fortunes are still around (maybe even more than ever). And so are corruption and insider trading. However, there is one important thing long gone over the past 200 years: stable interest rates. In fact, Monte Cristo tempted the bank operator not with mere money, but with a chance to live happily ever after. Let us do some simple maths: a capital of 20,000 francs, properly invested, would produce an annual rent of 1,000 francs, which makes an annualized rate of 5%. This figure had been a constant for several generations. It became so commonplace that it was clearly understood by any character of this novel (and of many other books of the time), be it a banker, young aristocrat, tavern owner, or sailor. In the early 19th century it was enough to say ‘he/she has a rent of 50,000 francs’ to describe a hefty fortune of 1 million francs. In those days, the amount of money in the economy was basically limited to the amount of gold controlled by the government. But after the gold standard was abolished in the mid-20th century, interest rates became one of the major tools for the economy’s ‘thermal regulation’. The monetary authorities lend money at a rate known as the prime credit rate to major banks, which in turn spread them across the entire economy. The lower the rate, the more money is available in the system, fueling business activity, consumption, and with it inflation. In theory (and sometimes even in practice) moving interest rates is aimed at smoothening the ‘ ’ economic cycles, making booms not so painful inflation-wise as rates should be hiked and busts not so destructive in terms of economic growth as rates get lower and more supportive. boom-bust This rate play worked more or less until the subprime meltdown of 2008. The US Federal Reserve rates hit the bottom to support the disrupted financial system. Other central banks followed putting the world in a state of nearly zero rates for seven years. The chart below may be outdated on the right side of the scale and quite debatable on the left side. But it is still a decent illustration of a basically ‘free money’ period, unprecedented in human history. For more recent and exact data across major countries starting in 1946, you can browse . statistics aggregated by the Bank for International Settlements Source: Robinson Sewell Partners Then, after a brief period of recovery and an attempt to return rates to the norm, COVID hit, sending rates to the bottom yet again. But as the economy rebounded in late 2021, inflation surged. Consumer demand, fuelled by cheap credit and direct government subsidies, recovered quicker than supply chains that still limped due to severe COVID restrictions in China. Things got worse as Russia invaded Ukraine, as the consequences of the war disrupted commodity markets, primarily energy, food, fertilizer, and metals. World logistics and transportation were also severely affected. All this led to an , forcing the Fed to hike its rates within just 12 months. inflation spike unseen for decades to levels last observed in 2007 Why did SVB fail? Being focused on the tech industry, which was one of the primary beneficiaries of the cheap money boom, Silicon Valley Bank (SVB) accumulated substantial deposits from tech companies in 2020-21, topping $130 billion by March 2023. However, it failed to invest that money in a profitable way. Issuing loans in times of almost zero rates brought more risk than profit. So, the bank chose to invest in long-term sovereign bonds: the return was low, but the risks were even lower. However, the Fed rate hikes were projected onto all rates throughout the economy, including government bonds. As the new debt was issued with higher interest rates, the old bond issues dropped in value. Selling them to get extra liquidity would shoot a cannonball through the bank’s balance sheet. And that is exactly what happened to SVB: it had to sell $21 billion in highly liquid assets to cover withdrawals, . posting a loss of $1.8 billion Who lost? The news spread like fire through social networks, causing even more clients to withdraw their money from the . In times of old, a classic bank run could take several days, as clients would have to come to the office to complete the necessary paperwork. But now transfers can be done online in just several clicks. So it took only 48 hours for SVB to collapse. troubled SVB On March 9 alone clients . As a result, regulators seized SVB assets three days later. As the authorities decided not to bail out the bank itself, holders of SVB stocks and bonds were obviously hit hardest. withdrew deposits worth $42 billion Below is an illustration of what happened to the SVB bonds. A slight rebound, often referred to as a ‘dead cat bounce’, was probably that specialize in purchasing troubled securities. caused by the distressed debt funds Source: Bloomberg SVB stocks took a . Interestingly, many investment bank analysts, including those of Goldman Sachs, Wells Fargo, and others maintained strong ‘Buy’ recommendations on SVB stocks along with stratospheric target prices months, weeks, and even days before the collapse. Meanwhile, SVB’s problems and potential losses were obvious to JP Morgan . similar dive as early as November 2022 But the main question was whether the loss-takers’ list would include SVB clients that held deposits with the crushed bank. Depositors were warned, although on rather short notice. Just ahead of the collapse, JP Morgan SVB customers a safe haven. Peter Tiel through his Founders Fund portfolio companies to flee from SVB. And as the panic reached its peak, Founders Fund already safe. Also, Union Square Ventures and Coatue Management on portfolio companies to withdraw from the SVB. However, it was too late for many. offered urged was called Under US law, all bank deposits under $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC). According to the regulators’ estimates, held with the SVB fell outside this category. It would be logical to assume that holders of all deposits above that sum would have to wait until the bank’s assets are liquidated and proceeds distributed between the clients. In practice that would mean that a lot of clients would lose a lot of money. But it took the US government just a few days that all SVB clients would get their money regardless of the deposit size. 85% of all deposits to announce This decision may sound controversial from a market fundamentalist's point of view. But apparently, the authorities were choosing between the bad and the terrible. SVB specialised in banking for tech and startup companies. According to the , 50% of US venture-backed tech and life sciences companies bank with SVB. SVB website Reuters compiled a of companies that held deposits with SVB: from Roblox online gaming platform with about $150 million to the cryptocurrency firm Circle with an astonishing $3.3 billion. This list should have definitely sent shivers up the regulators’ spines. Should these companies lose their money, the potential fallout could spread across the entire tech sector. comprehensive list Big tech companies, these Monte Cristos of today, have seen better days even without SVB failure. With money becoming dearer and people mostly returning to their normal offline lives after COVID restrictions were lifted, many top tech companies have to cut their headcount . Considering that tech now backbone stock market index, SVB's demise could trigger consequences that could have shadowed the dotcom bust of the early 2000s, the 2008 financial crisis, and possibly even the economic outcome of COVID. by anything between 5% and 50% composes over 20% of the S&P 500 Who won? Odd as it may sound, the most immediate winners were SVB's top managers. It turned out that SVB CEO Greg Becker sold the bank stock worth almost $30 million at prices ranging between $287 and $598 per share over the past two years. That included a sale of $3.6 million worth of shares made on February 27, just days before the bank collapsed. All in all, SVB executives sold shares worth a total of $84 million over two years, . It remains to be seen if regulators pursue any investigation over what might look like insider trading. CNBC reported The major winners are the usual suspects: big players. Top US banks embraced clients from SVB and other (not necessarily troubled) banks. For instance, Bank of America alone in only a few days of the SVB drama. attracted more than $15 billion in deposits Salvaging SVB wrecks also produced some very lucrative deals. it was buying SVB’s UK arm for £1 (yes, one pound sterling). According to the statement, SVB UK had loans of around £5.5 billion and deposits of around £6.7 billion, with £88 million of full-year profit before tax in 2022. HSBC announced Finding buyers for the main chunk of SVB assets took more time and toil. At first, majors like JPMorgan Chase & Co, PNC Financial Services Group, Apollo Management, Morgan Stanley, and Royal Bank of Canada among the bidders. But finally, that First Citizens Bank agreed to buy about $72 billion of Silicon Valley Bank’s assets at a discount of $16.5 billion. Another $90 billion in assets remain in FDIC’s receivership. The FDIC is also entitled to the First Citizens Bank shares that could be worth up to $500 million. were mentioned it was announced A story to be continued? Summing things up, SVB fell prey as it got into the crosshair of several major trends. First, dirt cheap money is a highly addictive substance, especially when prescribed for a long period of time. Its removal, especially in a swift and harsh way performed by the Fed, cannot come without a severe hangover. Troubled banks and signs of decay in the tech sector may be just the beginning. Second, everything related to tech had become a major concern. Economy and finance leveraging easily available credit and technology have become phenomenally agile and effective. However, any leverage is a two-way road. The economic system has become an infant prodigy, exceptionally talented, but hysterical and unpredictable, making its regulator ‘parents’ violate their own rules of free markets and investor responsibility principles. Protecting the tech sector and, with it, the financial markets was the most probable reason the authorities took an unprecedented step of effectively waiving the limit for deposit insurance. The third major trend we have been witnessing is the consolidation of the banking sector. Banks in the US and elsewhere are getting fewer and bigger. Over the past two decades, the number of FDIC-insured and FDIC-supervised banks . This is happening at the expense of two categories: smaller banks and niche banks with their clientele limited to a certain geographical area or industry. halved, while total assets of those banks combined nearly tripled Up until now, it was a silent massacre, mostly happening through M&A activity. Loud bangs were scarce: SVB failure was . However, things may not be that quiet anymore: as panic continued, two banks followed a similar faith: and , both focused on real estate and mortgages. the biggest one since 2008 Signature Bank First Republic The death row may well continue in the coming months: in one week of March alone, smaller US banks lost a record $119 billion in deposits. Meanwhile, large institutions like benefit not just from a customer influx but from acquiring assets of failing banks at a discounted price. Bank of America, Wells Fargo, and Citigroup Well, Count Monte Cristo may be an entertaining read, but in real life, it is the that prevail and make profits. Danglars Lead image generated with stable diffusion. Prompt: Illustrate the count of monte cristo with a bag of money in front of a burning bank.

Profiting in Times of Crises: The Silicon Valley Bank Story

সংকটের সময়ে লাভবান: সিলিকন ভ্যালি ব্যাংকের গল্প

In Krisenzeiten profitieren: Die Geschichte der Silicon Valley Bank

Obtener ganancias en tiempos de crisis: la historia de Silicon Valley Bank

Profiter en temps de crise : l'histoire de la banque de la Silicon Valley

टाइम्स ऑफ क्राइसिस में प्रॉफिटिंग: द सिलिकॉन वैली बैंक स्टोरी

危機の時代に利益を得る: シリコンバレー銀行のストーリー

위기 상황에서 이익을 얻으세요: Silicon Valley Bank 이야기

Lucrando em tempos de crise: a história do banco do Vale do Silício

Kriz Zamanlarında Kâr Etmek: Silikon Vadisi Bankası Hikayesi

Thu lợi nhuận trong thời kỳ khủng hoảng: Câu chuyện ngân hàng ở Thung lũng Silicon

在危机时期获利：硅谷银行的故事

Founder Story: Lessons From Over 25 Years in Silicon Valley

No Stopping Any Time It was only two generations ago when California became famous for its hippy culture and socialist leanings. The weed smoking baby-boomers created the ethos, rejected consumerism, revelled in brotherly love and shared all manner of things. sex, drugs and rock-n-roll Today San Franciscans are less likely to share a girlfriend or a joint, but will share a cab, an apartment and other things afforded by the “sharing economy”. Silicon Valley is a different place now — sober, focussed and Calvinistic. California has an economy the size of France, with half the population, and its influence extends across the world stronger than ever. However, this time rather than leading with a radical lifestyle, it is propagating the things and methods designed here. If Californians rebel today, they do this by getting capitalists to scale up their ideas. Apple, Facebook, Google, Airbnb and Uber started here and changed entire industries across the world. Disrupting global businesses is the modus operandi of the local tech community, though they are just as happy to disrupt themselves. The place has its own lore. Intel’s was Moses that led the “ ” out of the oppressing Egypt (the East Coast) of corporate America into the apricot orchards of San Jose. Steve Jobs, like Jesus, was raised by adoptive parents, walked barefoot, preached a radical new credo, fought the establishment and “died” for our sins in 1985, when he was ousted from Apple — only to stage a second coming in 1997 when he transformed a maverick cult into the world’s most valuable company. The Valley grew its own elite with tech celebrities, the circle and others who boldly and sometimes hubristically take on the world — witness “ ” quipped with the brevity of his tweets. The popularity of ancient stoic philosophy among them did not diminish their libertarian aspirations. These elites are self assured, messianic, and yes, smug. Robert Noyce Fairchildren PayPal mafia Marc Andreessen’s we can reinvent finance, it’s just numbers San Francisco, a bustling city only 7 miles across, is teeming with 20-somethings vying to join the ranks of these elite. Before they make it, they typically have to share rickety 19 century houses, which survived at least two major earthquakes, paying a king’s ransom in rent. The European immigrants very quickly start looking and dressing up like Americans, but proudly carry their accents (which American girls find particularly attractive, like the protagonist in ). The Asians look different but speak with a Texan twang or Mississippi drawl. This is a crowd heavy on males, and one gets the impression that the prettiest girls choose the film industry of LA over San Francisco’s geek scene. Everyone is too busy trying to get rich, and night life dies out by 10pm — so that future billionaires can have a jog before getting busy early in the morning. Still, work attitude in California is a lot more chill than on the East Coast — and some headhunters complain about it. A Fish Called Wanda This young and ambitious contingent of coders, inventors and marketers is being looked after by a cohort of venture capitalists. They are in their late 30s to 50s, and populate the comfortable offices of in Palo Alto. The gray heads chaperon startupers’ first steps, for a slice of their winnings. The winnings come rarely but when they do, they are big, and pay off for the majority of ideas that flop. The law of big numbers rules here, and this game requires scale. Of the pre-screened companies that get investments from early stage VCs, up to 75% are written off completely. About 15% pay their money back, another 5% return a modest profit, and only about 1% shoot the lights out, and they are the ones that pay for the rest. Sand Hill Road Noone has yet managed to distill the magic recipe for success here. As Tolstoy famously wrote, “ ” Happy unions of investors and companies in the Valley are the opposite — every success story is unique, and many are a result of a fortunate pivot from the original idea. At the same time, hoards of flops share a similar array of shortcomings. all happy families are alike; each unhappy family is unhappy in its own way. San Franciscans are very enthusiastic early adopters of new tech, discerning consumers and rights advocates. They often band together to influence business and services to get what they want. When Uber was briefly suspected of discriminating against women, the word spread quickly, social networks rebelled, and the entire city seemed to get up in arms to boycott Uber — which had an immediate effect on the company. This makes Silicon Valley a perfect test lab for many new ideas. But San Francisco is not big on luxury goods compared to other world hubs like London, New York or Hong Kong. Despite SV having the most millionaires and billionaire per capita in the US, one would struggle to find many hypercar dealerships or designer furniture shops. Under the gentle sun, amid the culture of t-shirts and sandals, their fashion in clothing and food is not sophisticated. The coolest car to drive is the locally produced Tesla, but the highways are also clogged with a most diverse collection of old clunkers, that would either rust out or be outright banned in Europe. In corporate presentations, at investor receptions, at breakfast and over drinks, everyone is talking about ways to disrupt the world. The startups come and go quickly in accordance with mantra, but the startupers bounce back, reorganise, and carry on to new ventures — or in the industry parlance, . In his book described evolution as the game of genes, which constantly recombine to produce ever-more adaptable life forms. To the “selfish genes”, the survival of a particular physical organism is less important than passing their genetic code to the next generation. The genes adapt to the environment, form better DNA sequences, and accumulate best traits, thus improving their own chances of being passed on by their host. A given business model has a life expectancy of less than 5 years. Unlike in Europe, the bankruptcy or unwind here are not signs of failure, but scars worn proudly as distinction of honour and experience. Those who fail, pick up and move on. Those who succeed rarely retire — they become investors and mentors to others. fail fast pivot The Selfish Gene Richard Dawkins Similar to Dawkins’s “selfish genes”, the entrepreneurs of Silicon Valley tirelessly regroup, pivot, disrupt themselves and move on. The locals prefer to invest locally. It is not uncommon to hear private investors say, “I don’t invest in a company unless I can drive there in under 1 hour”. So if they really like a company, they make it relocate — like they did with Facebook. Such agglomeration is consolidating the best talent and smart money within a 50 mile radius of San Jose. For all its world fame, the Valley is essentially an introverted ecosystem. Thus investment clusters in the US do not talk to each other as much as one would expect. San Francisco rarely deals with San Diego, and Boston’s biotech hub might as well be on a different planet. The competition for hot deals is rife. Entrepreneurs beat the path to the doors of the top 20 VC firms. The other investors seem to feed off the spoils of the Big 20 table. What’s hot today maybe long forgotten tomorrow. If you come here with your money to invest and are not properly plugged in, it is easy to end up with a dud deal. Yet despite all signs of a bubble, many entrepreneurs expect from investors more than just their cash. They want to see what else you would bring to the table — a qualified industry advice, an influential board member, a valuable industry connection to a supplier, or a lucrative customer contract. Before investing, formulate your thesis in terms of the stage and sector specialisation — otherwise you won’t be taken seriously. As formidable as the US venture capital industry is today, its size is not big in the grand scheme of things. The total amount of VC funds invested each year in the US is within $60 billion. The less visible part of the equation is government grants and the spillover effect from defence industries. Parents of many of the first generation tech entrepreneurs in California worked in aerospace and defence companies, like Steve Wozniak’s father, a Lockheed Martin engineer. Many Californian kids got to play with computer parts and technical manuals early on. In 1960s US Government started sponsoring Computer Sciences degrees, and Stanford University had the best program in the country. Stanford took a very liberal approach to letting its professors and students start companies, using its equipment and libraries. Many ideas and companies, like Google, came out of Stanford’s campus. Various projects of Advanced Research Project Agency (ARPA) benefited the local tech community. In fact, the US Department of Defense yearly R&D budget is greater than the total of VC investments per year, and a lot of it is spent in the Valley. The connection between the government and tech industry is growing closer. , a local tech celebrity, may be best known as the author of , a member of the PayPal Mafia and an early investor in Facebook. However, he is also the chairman of Palantir, a $20 billion company catering to the defence establishment. , ex-CEO of Google, who recently , is aiming to bring Silicon Valley even closer to the Department of Defense. Peter Thiel Zero to One Eric Schmidt went on to head an advisory board at the Pentagon In a recent op-ed in The Guardian titled , author pointed out how the new tech elite is positioning itself as a part of the new establishment: “[…] while the financial industry has historically been key to “buying time” and staving off the populist rebellion, in the future that role will be assigned to the technology industry.” He argued that with real incomes stagnating, personal information becomes the new currency, and as the likes of Facebook and Google gain significant control over this currency, they will inevitably cooperate with, or even take over the establishment. Disrupting the social contract would merely follow from disrupting advertising, travel, education, or manufacturing. The state has lost control: tech firms now run western politics Evgeny Morozov Such consolidation gives the tech giants much bigger influence than banks ever had. While there may be thousands of influential banks, the “ ” principle of tech created the world where there is only one search engine, and only 3 or 4 social networks of substance. That is a lot of power to exercise responsibly, despite Google’s proclaimed benevolence. winner takes all Don’t Be Evil On a human level, what truly sets Silicon Valley apart from traditional business culture is the openness and willingness with which the information is shared here. Entrepreneurs are very happy to tell you about their idea, hear your feedback, test your response as a potential customer, competitor or investor. The VCs are open to discussing latest trends and trade ideas. When coders or marketers change jobs (as they do statistically every 2 years) they retain human connections and create valuable horizontal networks, transcending corporate boundaries. In other countries billionaires often have bodyguards. But if you see a billionaire in a cafe in Palo Alto, more often than not you can have a quick chat over coffee — although it might be easier if you tweet at him first. Many other parts of the US establishment are impenetrable if you’re born to the wrong family. But in here, if you have something interesting to say, you’d be given your chance. What drives Silicon Valley is not just the abundance of highly motivated talent, smart money and government support in a concentrated place with nice climate and easy, if expensive, lifestyle. What distinguishes it from the European markets is its plethora of exits. Local companies are quite acquisitive, and it is fairly easy to get a bid for your business at almost any stage of development. This shortens the investment cycle and greatly motivates inventors and investors alike. Another uniquely American advantage is the availability of reliable cadre of middle management, ready to be hired to scale up a successful business model. There have been many attempts to recreate the success of Silicon Valley in other countries, with government support and much enthusiasm. But this spirit, the ecosystem and the concentration of talent remain a unique locus at the thin sliver of American West Coast. We are seeing signs of deflating investment bubble as the business cycle ebbs in 2016. With the advent of general AI and , we will enter perhaps the most exciting period of technological change — the one which can fundamentally disrupt the disruptors. Will Silicon Valley survive this turn in its present form? Will it overcome own hubris, its gender skew, housing problem, the troubled and sometimes incestuous relationship with the government? Can it continue to innovate faster that it’s being copied? There is already very little silicon left in Silicon Valley, since semiconductor manufacturing left its shores. The Valley has been a remarkably resilient lab of human achievements and failures. It will be fascinating to watch as it attempts to reinvent itself as yet another, to quote 15 year old book, . quantum computing Michael Lewis’s The New, New Thing © 2016 Oleg Desh

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