The Washington PostDemocracy Dies in Darkness

Silicon Valley, once the underdog, is now too big to fail

The government stepped in to save the start-up industry from itself. Not everyone is relieved.

Silicon Valley Bank offices in Palo Alto, Calif., on Friday. (Jason Henry/For The Washington Post)
6 min

An industry built on risk-taking, which made mountains of money when those risks paid off, has just been reminded of what happens when they don’t. And the answer, once again, is: Someone else pays the price.

On Sunday, the U.S. government stepped in to backstop depositors in Silicon Valley Bank when no one else would. The move came after venture capitalists panicked last week and advised their tech-startup clients to pull money out, sparking a bank run that led to the second-largest bank collapse in the country’s history. And it followed a weekend of pleading from industry leaders who warned that if the government didn’t ride to the rescue, the entire start-up ecosystem would be devastated.

“If the government doesn’t step in, I think a whole generation of start-ups will be wiped off the planet,” Garry Tan, CEO of the influential start-up hub Y Combinator, said in an interview with NPR last Saturday.

Instead, the start-ups will get to keep their money, to the relief of the venture capitalists who fund them. But the mythology that has made Silicon Valley start-ups the darlings of the American business world may prove harder to recoup.

Here we have a sector full of self-styled free thinkers — brought to its knees by groupthink. Risk-takers who valorize failure — as long as someone else is footing the bill. Meritocrats who couldn’t hack it on their own. Mavericks who scoff at the political establishment until they desperately need it.

Many experts believe the Federal Reserve made the right move, under the circumstances, to stanch what it deemed a “systemic risk” after a second bank, New York’s cryptocurrency-friendly Signature Bank, also failed over the weekend. At stake were not just the portfolios of deep-pocketed venture capitalists and shady crypto companies, but the ability of numerous small businesses to pay their expenses and employees, along with the solvency of other midsize banks around the country. As it is, the bank’s investors will lose their money, and its leadership is out of a job, but the start-ups that banked there will have their deposits guaranteed by the government — even the large chunks that weren’t FDIC insured.

Still, the government’s intervention is sitting poorly with many across the political spectrum. The resentment speaks to a growing sense that Silicon Valley, once a beacon of ingenuity and innovation, has lost the one thing banks need even more than cash: trust.

It was trust that Silicon Valley Bank’s CEO, Greg Becker, asked for when he lobbied in 2015 for Congress to raise the size threshold for stricter banking oversight under the Dodd-Frank Act so that midsize banks like his would be exempt. “SVB, like our midsized peers, does not present systemic risks,” he testified. In 2018, President Donald Trump granted his wish, signing a law that rolled back regulations on all but the country’s largest banks.

But the trust that the U.S. government showed in the bank’s ability to self-regulate wasn’t repaid by the industry whose interests it was built to serve. The bank failed, not because it couldn’t make ends meet day-to-day, but because it lacked the liquidity to handle a huge portion of its depositors pulling their money all at once — which is exactly what happened on Thursday, with investors and founders sounding the alarm via group texts and Slack messages as they raced to get ahead of a crash of their own making. By day’s end, they had withdrawn $42 billion, enough to take down the country’s 16th-largest bank.

As one start-up founder told the Wall Street Journal, “The best place to be in a bank run is first out the door.”

While the underlying causes of Silicon Valley Bank’s weakness had to do with interest rates, bond yields, asset mismanagement and the tech downturn, it was a lack of trust that dealt the death blow. And in the wake of its implosion, the trust the start-up sector has received from regulators, politicians and the public may be among the casualties.

“No republican should support bailing out the svb bank,” Newt Gingrich, the former Republican House Speaker, said on Twitter. “The speculators and manipulators who took absurd risks should bear the cost.”

Malcolm Harris, the leftist author of a new history of Palo Alto, took a jab at tech’s libertarian luminaries: “Interesting that no one in Silicon Valley had the juice to get everyone together and solve this thing without the government,” he wrote. “Capital is not sending its best.”

One of those luminaries, the venture capitalist Peter Thiel, may have helped to kick-start the bank run when his Founders Fund pulled all of its money from Silicon Valley Bank before Thursday and advised companies to do the same, according to reports by Bloomberg News.

Days later, Thiel’s longtime friend and fellow right-leaning venture capitalist David Sacks called on U.S. leaders to “stop this crisis NOW” or else “there will be contagion and the crisis will spread.” This was the same Sacks who criticized President Biden’s student loan forgiveness as a “trillion-dollar giveaway with zero reform of the underlying system.” Sacks is also part of Elon Musk’s inner circle, having worked with both Musk and Thiel at PayPal.

The logic isn’t necessarily contradictory — just self-serving. If you’re poor and struggling, that’s your own problem. But if you make enough money that a significant swath of the economy depends on you, preventing your collapse becomes a matter of public interest.

It’s the “too big to fail” theory that motivated the 2008 bank bailout. Only this time, the sector that’s being deemed too big to fail is not Wall Street but the tech start-up ecosystem, which has long billed itself as the scrappy little guy taking on the entrenched business establishment.

Now, in the eyes of many, Silicon Valley is the entrenched business establishment. It got the help it needed from the government this time. But the next time it asks for trust instead of regulation, the answer might be different.