SVB shook the world of start ups this weekend. The epicentre, Silicon Valley, where disruptors find a kind home, a VC firm to parent them, and send them onwards to pivot and scale and find their way in the world till they are worthy of true value. This is a journey that seems almost cultish to those outside the world of angels, and seeds, and rounds and Series A, B and more. Of table stakes and cap tables.
They have a language of their own. They seem to have a world of their own where the rules of normal business do not apply. It is as if it is a world that belongs to the rich. It certainly creates many riches, and these riches have been known to be thrown at more chances to become rich. Some of it is a money game for sure. But that is merely the shadow game to what really happens there. Just like it’s cousin south of the state, Hollywood, where stories make up a world of dreams, here too, around the hallowed halls… errrrr…garages of the Bay area, tech dreams are brought to us. Some of them have changed our world. Some of them have created every bit of the path that enables me to write this and you to read it today. This is true value. It is real.
And yet it seems to be the playground of the rich, with easy money being thrown at ideas that really are not the game changers that one used to expect out of Silicon Valley. There are true gems there, sure. And then there are those with marginal efficiency gains. Some startups with look alike improvements, each a different version of the solution, competing with another to survive to scale. Or was it scale to survive. It is a merry go round there for sure, with entries and exits. But it is not just a game.
This is that part of the playground that we call the sandbox. (They literally have ‘sandbox’ as a term in their jargon). This is where ideas come to play, come into play, are tried out with both fear and favour. Some survive. Others do not. This is where the progress of civilisation is tested. Where technologies that change the notions of neighbourhood, of privacy, of community, of sharing, of feeding our families and so much more are developed. No wonder they have an arrogance of their own, a crushing self belief that seems inexplicable to us outsiders. Or near outsiders.
This work of innovation used to belong to rich mavericks. Or funded geniuses. It still does. The steam engine. Reading glasses. Dentistry. All sorts of improvements were gradually and steadily funded by rich people in society and improved our lives. Not all, but most.
Then came the big guns of funding – government and large businesses. Government, it has been shown, has been the largest investor in innovation in the past century. The classic example is tech work done for NASA has spawned so many household goods today. Innovation seemed to be done in private and university labs was really funded by big money, indeed our taxes.
The other way innovation happened was in large firms. Capitalism spawned the need for the next, and the next invention. The next product was the future of the firm to help it survive the next industrial revolution and more. Smart big companies found that innovations were not easy to do as a part of regular production operations – they were too process and rule bound. To create new things you had to think differently. Small changes, smart ops, efficiencies were all very well from the shop floor (and these are innovations too), but big new products needed a safe space to grow. They needed a safe space to have ridiculous, courageous thoughts funded till they began to make sense.
Big ridiculous courageous thoughts are a risk. They are a chance. An exploration into what is possible. All of them cannot be right, nor can they even work out. At best, this space will be littered with failures, many failures leaving a germ of possibility for the future, others dying out even without that spark. Then there will be others that we adopt and they thrive as businesses.
Once the idea is established as a viable business, I can accept that as capitalism. (or a social version of it with ownership with government, societies or co-operatives). The question I have is about the infant and toddler stages of this enterprise. This is where Silicon Valley (and its equivalents across the world) come in – the ones who maintain the sandbox. Now this sandbox, we have noted is quite fragile. It is a high risk place. And yet, this is a space where we innovate to grow great futures for all. A place of discovery. A safe space to make mistakes. A place where the sperm of an idea fights to survive against great odds. Is this purely a capitalist endeavour?
Hmmm. yes and no. Some ideas get the support of governments because they are clearly for the greater good. I shall not call them public goods, but we can explore that thought too. Others get the support of investors, even speculators because they are clearly merely commercial. Both will emerge from the spawn pond of ideas, fighting to be seen, to grow, and it is this that is the most vulnerable stage. Without this you do not have the world of startups. This spawn pond is not a pretty sight even as pitch decks build narratives of great glory ahead. We know that this is the start of a very vulnerable journey.
SVB is an episode we shall soon forget, we hope. Just in time for Monday morning, the Fed has announced a support package for depositors. We hope it will be enough to calm the run on the bank. Sure, they were stupid to allow a duration mismatch – they were smart people surely, but the smartest of us get caught out with bad timing sometimes. The bank was not big enough to be considered too big to fail – and enough people out there will agree that as a pure capitalistic enterprise it could really be allowed to fail. That’s how it works – the strong win, the weak fail. Brutal, eh? Yeah.
I am not even going to argue about the unfairness of saving the big guys and letting the small guys fail. Small regional banks are not different in principle, and the contagion effect of big banks seems almost like a position where they can blackmail their way to support in ways that small guys cannot. That is an argument for another day and another person. I’m also not going into the duration mismatch, though as an ex investment banker I am wondering at how this was allowed to happen – what were the bank’s treasury and risk officers doing! Sure mistakes like this have a cost – and I have no comments to offer on the individual case of this bank being saved or allowed to fall.
But I do have a question about saving the ugly but critical spawn pond. The ones who support the pond where ideas that will build are future are valuable to us as a people and as a civilisation. These spawn ponds, or valleys – silicon or otherwise, need to be protected. Like the bees, their survival is a part of our evolutionary story. The ones who fund them will be vulnerable sometimes too. And for the sakes of our future, these should be reinsured better than they currently are-as this episode shows. A Federal reinsurance agency (and equivalents in all countries that have a strong start up culture) that supports the unique risk profile of those who fund this playground where ideas are nurtured, given a sandbox to play in and allowed to grow. This is how we as a society enable our inventors and innovators in their journey of discovery.