[Tech Talk] The Butterfly Effect of the 'Tech Boom'... Toppling SVB

US IT Boom Created by Seohak Ants
SVB Investment Industry Bound by Shackles
Ultra-Fast Bankruptcy in 36 Hours

The bankruptcy of Silicon Valley Bank (SVB), which has shaken not only the United States but also the international financial markets. Various reasons have been pointed out for SVB's collapse, including changes in the macroeconomic environment, reckless corporate management, and lack of regulation, but there is also a reason that has not been well discussed yet.

As COVID-19 infections worsened, developed countries temporarily halted economic activities through lockdowns and supported households and businesses with massive stimulus packages. During this period (2020?2021), the potential of U.S. IT companies was highlighted, leading to a 'tech boom' for a while. However, the money frenzy that tech companies engaged in at that time returned as a butterfly effect that strangled SVB within just over two years.

Deposits Tripled in Less Than Two Years

SVB is a small bank established in 1983 in Santa Clara, California. True to its name, Silicon Valley, it has grown mainly by dealing with innovative U.S. tech startups.

Since its establishment, SVB had steadily increased its asset size along with the U.S. IT boom, but in the early 2020s, it faced a dramatic turning point. Investments in venture capital (VC), startups, and cryptocurrency-related companies poured in like a flood, suddenly propelling it into a giant corporation.

In fact, SVB's total deposits, which were about $60 billion in the first quarter of 2020, soared to $200 billion by the fourth quarter of 2021. This means deposits increased more than threefold in less than two years.

SVB Fueled by the Tech Boom

It was a time when promising startups were attracting massive investments through initial public offerings.
[Image source=Reuters Yonhap News]

2021 was especially a year of tech boom. When news broke at the end of 2020 that the first COVID-19 vaccine had been developed, investor sentiment improved, and there was a growing belief that the non-face-to-face digital industry would become the future trend. In South Korea, headlines were dominated by U.S. startup IPOs, ARK Invest?which mainly handles tech stock index funds?SPAC listings, and especially news about cryptocurrency-related companies.

It was also the time when the new term 'Seohak Gaemi' (Korean individual investors specializing in overseas stock investments) became known, and the U.S. Nasdaq listing of 'Coupang,' which is regarded as having written a new chapter in domestic startup IPO history, took place in March of the same year.

As explained earlier, SVB mainly dealt with U.S. VCs, startups, and tech companies. Tech companies that attracted huge investment funds deposited their money with SVB, and accordingly, SVB enjoyed a boom.

Rapid Growth Is a Double-Edged Sword... Insolvency Rumors Spread

However, a rapid increase in deposits is always a double-edged sword for banks. Typically, banks invest depositors' money in various assets to generate profits. SVB, which saw a sudden increase in deposits, invested the newly acquired funds in Held-to-Maturity securities (HTM).

The problem was that the macroeconomic environment changed rapidly last year. To curb soaring inflation, central banks around the world raised benchmark interest rates and implemented quantitative tightening policies, which caused the market value of SVB's HTM holdings to fall.

In plain terms, SVB was 'caught at the peak.' Also, tech companies that experienced the most dazzling boom during the COVID-19 period underwent the harshest 'correction,' which became a significant burden for banks like SVB.

Eventually, as concerns that SVB might face insolvency spread within the U.S. tech industry, investor anxiety escalated into a bank run, and SVB filed for bankruptcy at lightning speed just 36 hours after the crisis rumors surfaced.

Criticism Grows of Silicon Valley Culture

Silicon Valley is commonly known for its startup culture that highly values founders' visions, connectivity and cooperation among companies, and a high-speed growth strategy that tolerates deficits. Many of today's so-called 'Big Tech' companies rose to their large corporate status through such aggressive business models.

However, the Silicon Valley-style startup culture can be a poison in rapidly changing financial environments like today. "Narcissism, obsession with connections, and a culture and practice of evaluating one's abilities only in ways that are difficult to measure precisely fueled the SVB bank run," wrote venture investor Elizabeth Speers in a cold 'self-assessment' in an opinion piece for The New York Times (NYT) on the 16th (local time).