“Technology and banking”
The sign outside the now defunct Silicon Valley Bank.
Up until last week I never really noticed the impact banking has on the technology industry, but when I saw the news of the collapse of Silicon Valley Bank (SVB), it had a profound impact on my thinking. As most of you know I work in the technology industry in new product development so I have insight into the costs involved in new product development. For example the servers that I design cost our company around four million dollars to design and produce the first prototype of the product. These are the costs to our company; if we add in the development costs of the Intel processors and various components from other vendors, the ultimate cost of the product development is nearly one billion dollars. Where does the money come from for new product development? It depends a lot on the company in question, but most borrow the development money from a bank, especially if they are a new technology start-up.
SVB was not only the holder of the loans for over thirty technology start-up companies and was the primary investor in most of them, it was also one of only a few banks to offer financial services tailored to the needs of technology start-ups. As mentioned before, a new technology product costs millions if not billions to bring to market and a majority of the funds are needed up front. SVB was also the holder of the deposits for the start-ups it funded. It was not until late on Sunday that the federal government stepped in and promised to cover deposits at the bank, up to the $250,000 FDIC limit and discussion was in the works what to do about the rest. The problem is that some of these technology companies were holding 60-90 days of funds in their accounts to cover expenses of nearly $750,000, meaning they stand to lose $500,000 or more from the collapse of the bank.
Workstream, a data analytics start-up led by Lerer Hippeau, was holding funds from a $7 million seed round at SVB and was unable to withdraw the funds before the collapse. He expects to be able to make his payroll for a few weeks with the $250,000 released to him, but stands to lose everything. There are 750 other start-ups in the seed stage with the same issue after the collapse of SVB, and Healy Jones at Kruze Consulting, an accounting firm responsible for the bookkeeping of these firms, claims that most of them have enough money to make the next payroll and unless something happens they only have weeks to live.
The collapse of the bank not only impacted the stability of these start-ups in the short term, but has long term effects on the technology start-up industry as a whole. The failure of the leading lender for venture capital investments in technology start-ups has caused a panic in investors. If the largest investor in the technology sector, SVB, failed, what does it mean for the small investor? Some in the technology sector say this collapse will impact new technology development for the next decade and put the United States behind other countries in new innovation.
Personally I feel that a large part of the doomsday speech is a last ditch effort to get the federal government to step in and bail out the failed bank. There are plenty of large technology corporations willing to invest in new product development by partnering with small technology companies so there is little fear of a company running with a great new idea finding themselves in a position to have no investors. It may cause some short-term issues and I feel bad for anyone working for a start-up that was holding their investment at SVB as they may either be working without pay short-term, or worse yet, be out of a job. However, it is a risk they all knew going in, working for a start-up. There is a high risk of failure when dealing with new business, especially in the technology industry. Last year even the giants of technology had trouble keeping up with production.
Until next week, stay safe and learn something new.
Scott Hamilton is an Expert in Emerging Technologies at ATOS and can be reached with questions and comments via email to sh*******@te**********.org or through his website at https://www.techshepherd.org.
