Silicon Valley Bank is no longer Silicon Valley, and OpenAI is no longer Open

Silicon Valley Bank is the youth of many Chinese entrepreneurs.

The most widely circulated story is that Wang Xing showed the media his Silicon Valley Bank account balance in 2011, and the cash balance of more than 60 million US dollars made the young man look particularly strong at that time.

Not only Wang Xing, but to this day, most dollar venture funds and the companies they invest in will prefer Silicon Valley Bank as their main settlement bank in the United States. Taking a dollar technology fund and not cooperating with Silicon Valley Bank is like entering Starbucks and asking a clerk to order a raw coconut Bobo latte.

For no other reason, Silicon Valley Bank understands you. If you can't get a loan from a Wall Street suitor, Silicon Valley Bank can give you.

For a long time, Silicon Valley Bank has established good relationships with major technology funds and has a good understanding of investment itself. As long as entrepreneurs can get financing from first-line funds, Silicon Valley Bank can most likely give you an additional dollar credit. If you're lucky enough, it could also be your next round of investors.

So the dad of the gold owner of technology venture capital takes turns, and only the Silicon Valley bank is not moving. Many of the companies that are now famous in the world's technology rivers and lakes were once small and micro enterprises served by Silicon Valley Bank "peer-to-peer".

After the Silicon Valley bank thunderstorm, some insiders said that more than 80% of VC investment startups will be affected to varying degrees. Due to the weekly salary system implemented by start-ups, some companies may immediately face cash flow disruption and difficult wages to cash. Some of these are new companies whose financing has not yet been available.

Spoiled Silicon Valley with its banks

What makes Silicon Valley Bank unique is its unique model and expertise. Under the financial strategy of "investment and loan integration", companies that others dare not lend to, Silicon Valley banks dare to lend to obtain higher financial returns brought by poor information. This vertical professional and bold and enterprising style of doing things makes Silicon Valley Bank the best link between Silicon Valley and capital.

Despite its reputation, Silicon Valley Bank was still a "small but beautiful" financial company until 2020. That is, its asset scale is still basically matched with the demands of Silicon Valley. In 2018, for example, the total deposits of Silicon Valley banks were less than $50 billion, which is equivalent to the deposit size of today's mainland Jiujiang Bank.

The real flood into the vaults of Silicon Valley banks occurred after the pandemic in 2020. Hot money, which has nowhere to go in a low-interest rate environment, is targeting tech companies under the pandemic.

In addition to doubling the Nasdaq index, startups are also receiving unprecedented amounts of investment. According to PitchBook's tracking data, U.S. tech startups raised $330 billion in 2021, almost double the amount in 2020. Among them, there are nearly 900 U.S. tech startups valued at more than $1 billion, more than in the past five years combined.

The TMT investment spawned by remote work and the investment in bio-innovation in the context of the epidemic are just the housekeeping industry in Silicon Valley. The rapid flow of global capital to Silicon Valley Bank customers has allowed Silicon Valley Bank deposits to quickly double.

In 2020 and 2021, deposits at Silicon Valley banks increased by 66% and 85% year-on-year, reaching a peak of $189 billion, an increase of exactly 3 times compared to before the pandemic.

Deposits poured in so fast that they greatly exceeded the lending capacity of Silicon Valley banks.

Silicon Valley entrepreneurs need time to digest these investments, and the corresponding financing size does not drive the same proportion of loan size as it did in the past. This in itself means that investment in Silicon Valley has overheated, with startups receiving some redundant and inefficient funding.

So despite the hard work of Silicon Valley bank managers, they still can't keep up with the rapidly growing deposits. In 2019, Silicon Valley banks accounted for 46% of their assets. During the financing frenzy in 2021, the share of loans in total assets fell to 31%. The loan business lost the throne of the largest stock asset.

In the U.S. stock financial environment in 2021, the one-year deposit rate was only 0.8%, but the CPI soared by 7%. This means that all cash assets are "original sin". Silicon Valley banks couldn't lend assets, so they bought their deposits into fixed-rate, long-allocation periods. And these assets naturally face short-term floating losses on the books after the Fed raises interest rates.

And with the Fed's further interest rate hikes, the technology bubble was burst.

Originally, the proportion of interest-free deposits in Silicon Valley banks was relatively high, and the bonds could still survive the difficulties when they matured. However, stock prices and valuations have plummeted, technology financing has shrunk sharply, customers have begun to consume deposit funds, and giant technology companies have laid off employees and reduced their balance sheets, resulting in a continuous decline in Silicon Valley bank deposits. Finally, in 2023, the bank had a liquidity crisis, was forced to sell assets, turned floating losses into real losses, and finally went bankrupt.

Source: Wikipedia

So, on the face of it, the bankruptcy of Silicon Valley Bank was a huge failure of its funding strategy. Because management completely misjudged the Fed's determination to raise interest rates, it bet too many chips on seemingly safe wrong assets, and was eventually dragged down by the cold and hot capital market winds.

But if you think carefully about the history of Silicon Valley Bank, with 2020 as a watershed, there is a huge mismatch in the actual role of Silicon Valley Bank.

Before 2020, Silicon Valley Bank was essentially an investment firm that used financial means to promote technological efficiency, a top technology bank in the world. But after 2020, Silicon Valley Bank became a conservative wealth management company that mainly held low-interest bonds.

Conservative wealth management has never been a Silicon Valley bank's specialty. Especially in the era of low interest rates, this is more of a craft job.

OpenAI and Silicon Valley Bank

Before Silicon Valley Bank suddenly took away the headlines of various media, the focus of Silicon Valley was still on OpenAI, and many people were praising Silicon Valley at its peak one second, and anxious to discuss how to "defend rights" with Silicon Valley Bank the next. It's a bit schizophrenic. What is Silicon Valley like now?

In fact, OpenAI and Silicon Valley Bank represent two different forms of Silicon Valley.

Silicon Valley Bank represents the growth environment of start-ups built by venture capital, and the VC bubble boom represented by 900 quasi-unicorn companies has sent Silicon Valley Bank to the peak of business scale. And the ebb of these VC venture capital funds finally brought down the 40-year-old bank.

OpenAI is actually a typical giant game. As soon as he was born, he received the blessing of the world's richest man Musk and other big-name institutions, won a sky-high angel wheel of $1 billion, and burned billions of dollars before running a demo for the mass market.

While Silicon Valley Bank racked its brains to think about how its loans could be converted into Silicon Valley liquidity, Microsoft gently dialed $10 billion of its $100 billion cash reserves, and invested in controlling OpenAI. This "star entrepreneurship project" began with giants and ended with giants.

Therefore, if we continue to delve into the bankruptcy of Silicon Valley banks and the explosion of OpenAI, in fact, the main body of Silicon Valley technology cornerstone investment is undergoing some changes.

Although the investment scale of US stock startups in 2021 is huge, its total of $330 billion is actually just equivalent to the combined net profit of the five major US technology giants (Apple, Microsoft, Google, Amazon, Facebook) that year ($304.4 billion). This means that in terms of cutting-edge technology, giants will maintain a long-term first-hand advantage in all aspects.

What is even less desirable than the size of capital is the stability of capital.

After 2020, the flow of money in Silicon Valley is clearly greatly influenced by the Fed and Wall Street. In a low-interest rate environment, capital flocked to the market, exceeding the carrying range of Silicon Valley itself; Under the high interest rate policy, capital is rapidly withdrawn. These flows and logic have nothing to do with the profitability of the project itself, the long-term judgment of the track, or even the idealistic and innovative spirit that once defined Silicon Valley—Silicon Valley money is not related to Silicon Valley.

A very illustrative silhouette is that when Silicon Valley banks have problems, it is Wall Street that runs the fastest, and many of them not only withdraw funds, but also use short-selling mechanisms to make a fortune. Those who stay put, can't withdraw money, can't pay salaries, but those who bury their heads in work. The latter is the most loyal and committed customer of Silicon Valley Bank, and the main object of praise when people have discussed Silicon Valley.

The combination of Silicon Valley Bank buying most of its dollars in dollar bonds and OpenAI's acquisition by Microsoft is like a Silicon Valley hell joke:

Silicon Valley Bank is no longer Silicon Valley, and OpenAI is no longer Open.

The world has finally changed.

Header image source: Unsplash