The collapse of Silicon Valley Bank has stripped the Bay Area’s startup industry — a key driver of the region’s economy — of a crucial source of funding that for decades has fueled innovation and growth.
“The failure of Silicon Valley Bank leaves an enormous void,” said Ahmad Thomas, CEO of the Silicon Valley Leadership Group, a business-backed policy and advocacy organization. “Looking at their role in lending to startups, where funding wasn’t otherwise available, this has driven economic growth here for 40 years.”
The startup-focused institution headquartered in Santa Clara imploded Friday after a bank run sparked by news of losses in its investments. The California Department of Financial Protection and Innovation shut the bank down and appointed the Federal Deposit Insurance Corporation as receiver to hold its assets for future sale.
Before it went under, Silicon Valley Bank said it provided banking services for nearly half America’s venture-backed startups. The institution not only provided key funding to startups, it also lent money to enable growth at more-established tech companies with hundreds of employees, said Sean Randolph, senior director at the Bay Area Council Economic Institute, a think tank.
“Our economy is considered to be the most innovative in the world and the most effective in turning technology and ideas into companies that hire people and deliver innovative products and services,” Randolph said. “It’s a concern if those companies in the future are going to find it more difficult to find the financing they need to grow and to hire people.”
Startup Genome, a San Francisco think tank, in its 2022 Global Startup Ecosystem Report described Silicon Valley as “the world’s pre-eminent startup ecosystem” and pegged its economic impact at $2 trillion between the second half of 2019 and the end of 2021.
The shutdown has delivered a significant blow to the Silicon Valley startup industry, a key Bay Area economic engine already struggling through a funding squeeze driven by rising interest rates and inflation, experts said. Fallout could include startups cutting jobs or failing for lack of money, and slower growth and hiring across the innovation industry, reducing the amount of money that spins out from companies through employee pay, purchases of goods and services, office leases and taxes to local governments for essential services.
“This is a set of developments that takes an already challenging market environment for startup funding and raises the bar even higher for those startups looking to raise money,” Thomas said. “Certainly venture capitalists and others will step up to try and fill that gap, but it’s quite a significant gap.”
Silicon Valley Bank pioneered a unique business model tied closely to the venture capital industry that saw it lending money to startups to supplement their venture capital funding, Randolph said. “That’s not something that big banks have historically done,” Randolph said. “The whole startup area tends to be a riskier field than conventional banking. Silicon Valley Bank, they understood the business.”
The loss will, in the short term at least, create an environment where it’s harder for developers of new-frontier technologies, or less-proven management teams, to get financing, Thomas said. “Often those riskier bets … provide by far the highest return,” Thomas said.
Should significant numbers of companies fail or stop growing, “we’ll have fewer innovative products coming to the market,” Randolph said. “A lot of these companies are coming up with terrific technologies, solutions to a lot of problems. You can go through a long list of companies that not many years ago, going back 10 years or less, were very tiny companies. Now they’re global brands, and they have major revenues. If you erode that base, we could see that in the companies that do or don’t emerge as major employers in future years.”
But the collapse of Silicon Valley Bank does not threaten Silicon Valley’s position as the world-wide innovation leader, Thomas said. “The strengths of our innovation infrastructure still make this a very attractive place for startups to locate and grow,” Thomas said. “Our access to capital and talent in particular is unique.” And, Thomas added, “there’s a fair amount of capital out there to be put to work.”
Still, Thomas said, “It would be very challenging to replicate the business model of Silicon Valley Bank, which was one honed as a community partner and four-decade-old mainstay in our startup and innovator community here in the Valley.”
San Jose State University finance professor Matthew Faulkner said the bank’s failure does not appear to represent a tilt toward what happened in the 2008 financial crisis. “There may be some banks that are bad. There are always some,” Faulkner said. “But the overarching financial institutions are probably reasonably sound compared to where they got to in 2008.”
Faulkner said something resembling Silicon Valley Bank will rise from its ashes, via an existing bank or a new one. “Someone needs to step in and will step in and say, ‘This bank was a good bank in some capacity — obviously there were some flaws in its management,’ ” Faulkner said. “The good thing about living in the Bay Area is there’s a lot of resiliency: People have started and failed and started and failed and started again.”
