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Sili Money

Tech States Sensemaker

Wednesday 15 March 2023

Sili Money

Investigations Editor

Alexi Mostrous

Silicon Valley Bank’s collapse was driven by interest rate changes and mismanagement. It’s possible that more banks which serve the technology sector are similarly exposed, and that the silly amount of money available to tech entrepreneurs over the past decade is finally drying up.

Long stories short

  • Uber and Lyft won the right to treat drivers as contractors in a California court case. 
  • Circle’s stablecoin, USDC, saw a redemption run after its ties to collapsed Silicon Valley Bank became clear. 
  • Vinyl proved more popular than CDs last year for the first time since 1987.

Sili Money

Silicon Valley Bank, the go-to banking partner for tech founders and entrepreneurs, collapsed last week after panicked customers withdrew $42 billion on Thursday alone. Even though swift action by regulators limited the fallout, the bank’s failure raises serious questions about the sector it was set up to serve.

So what? SVB’s collapse is symptomatic of something bigger: a movement of global capital away from high-risk, high-growth companies, thanks in part to rising interest rates. It’s a trend that could hamper tech innovation in the long-term.

What happened? A key cause of SVB’s collapse was its failure to hedge against rising interest rates, while tech companies are particularly susceptible to higher borrowing costs.

  • For decades, cash-burning tech companies raised billions of dollars on the promise of future profits. But when US interest rates started going up last year, such promises became less valuable. Today, many investors prioritise profit over growth.
  • Nowhere is this structural shift in capital more obvious than in energy. In the same weekend that SVB fought for its life, Saudi Aramco posted a record $161 billion profit, the largest ever recorded by an oil and gas company. Other oil majors are doing so well that one analyst called 2022 “the year the empire struck back”.
  • Rising interest rates also make financing operations more expensive. Although that’s not an issue for cash-rich companies like Apple, it increases the risk for younger companies that are burning cash in pursuit of rapid growth.

“Years of quantitative easing and ultra-low interest rates created an environment of optimism, with investors focusing on riskier assets that drive higher returns,” said Benedict Macon-Cooney, a former economist at the UK Treasury. “But inflation and rising interest rates have changed the outlook. SVB’s collapse was caused by a failure to monitor and adjust to a new world.”

Who’s exposed? SVB was a vital cog for 40,000 companies working on ed-tech, life sciences, artificial intelligence and other potentially impactful technologies. Thanks to the creation of a Deposit Insurance Fund to protect US depositors – and to HSBC’s “white knight” purchase of SVB’s UK arm – relatively few of those companies are likely to go bust.

But in the long-term, the bank’s failure could make it more difficult for start-ups to gain access to finance, as others will refuse to lend to them on similarly favourable terms.

“In the UK context, the issue broadly will settle, maybe after some grumbles,” said Huw van Steenis, vice-chair at Oliver Wyman and former global head of banks research at Morgan Stanley. “But bank funding costs are likely to increase, and there will be some tightening.”

In the US, van Steenis foresees that “there will be more innings in the story”. A day after President Joe Biden promised to do “whatever is needed” to protect SVB’s depositors, bank shares around the world wobbled. It’s far from clear that the fallout has been contained.

LIRPing around. High interest rates are far from the only threats to the tech sector. Companies are struggling to figure out the next big thing – whether it’s crypto, the metaverse or AI. While Silicon Valley remains a place of great innovation, commentators like Derek Thompson in The Atlantic are asking the right question: how much of the sector’s genius is a mere “LIRP” – or low interest rate phenomenon?

The collapse of SVB could prove to be the first symptom of a much more pervasive decline.

Apple

Foxconn in India
While planning to more than double its iPhone production near Chennai and set up a chip-making facility in Gujarat, Apple’s manufacturing supplier Foxconn is also behind a landmark liberalisation of labour laws in the Indian state of Karnataka, along with other companies. According to the FT, the new legislation gives Karnataka one of the most flexible working regimes in India, as the country aims to become an alternative manufacturing base to China. The passed amendment allows for 12-hour shifts and eased rules on night-time work for women..

Meta

Further job cuts
Meta is planning additional layoffs over the coming months, marking its second major round of cuts in just four months. These job cuts will roughly match the magnitude of last year’s 13 per cent workforce cut (around 11,000 jobs), according to people familiar with the matter. The WSJ reports that the new wave of cuts are likely to hit non-engineering roles especially hard and will impact some wearable devices that were in the works at Reality Labs, Meta’s hardware and metaverse division. Wall Street seems to welcome the cuts: the company’s improving outlook in its fourth-quarter results sent shares up 18 per cent, perhaps facilitating Mark Zuckerberg’s “year of efficiency” plans for 2023. 

Microsoft

ChatGPT Edge
Microsoft has been exercising caution over the release of AI-powered chatbot ChatGPT after an initial public release led to less than desirable results. Users found that the chatbot would begin to “hallucinate” after prolonged conversations, and showed a tendency to spit out plausible-sounding but completely erroneous statements. But after further testing, Microsoft has seen fit to include ChatGPT feature and new Bing functionality in its flagship browser, Edge. Google recently announced plans to incorporate generative artificial intelligence into its email and documents client. It appears the race to add chatbot features across all platforms is officially on. 

Tencent

Bounceback
Tencent is among the companies driving a recovery in the Hong Kong stock market, after the Silicon Valley Bank collapse caused a slump. Beijing-based biotech company, BeiGene, saw $175 million of its cash caught up in SVB as one of a handful of Chinese companies involved in the bank’s collapse. Before rescue measures settled the market response and depositors were given access to their funds, the uncertainty caused a mini-crash in Hong Kong. Tencent – and rival Alibaba – saw their shares bounce back in early trading this week in a sign that the market was recovering, though analysts have warned that investors will remain cautious in the context of US banking sector instability.  

Google

Cerebral
Cerebral – a telehealth company focused on mental wellbeing – has admitted to accidentally sharing the personal information of its 3.1 million patients with Google, Meta, TikTok and other internet advertising companies, TechCrunch has reported. Among the exposed data points were patient names, dates of birth, insurance info and content from self-surveys on their mental health. Cerebral said that the information had been shared through tracking tools working on its site and app since 2019. This case is another example of how tracking “pixels”, which collect and share information with advertisers, often go overlooked. Cerebral has announced in a statement that it “disabled” any tracking pixels that might cause future exposures. 

Amazon

Non-exclusive
Amazon and Rivian are in discussions to dissolve the exclusivity part of their commercial EV van deal, according to people familiar with the matter. If successful, Rivian would be free to sell its commercial all-electric vans to other customers. Under the terms of a 2019 agreement, Rivian is required to sell all of the vans it makes to Amazon. The agreement gave Rivian an anchor customer and Amazon a key component of its strategy for slashing carbon emissions. The deal had also been viewed positively by investors as an important stabilising factor for Rivian. Despite talks, the WSJ says Amazon confirmed that the exclusivity deal still stands for now, and that Rivian remains an important partner. 

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Alexi Mostrous
@aleximostrous

Serena Cesareo
@SereCesareo