THE SILICON VALLEY BANK BAILOUT WON’T SAVE THE STARTUP ECONOMY

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THE SILICON VALLEY BANK

The startup economy is not a real economy. It's a marketing term that describes what happens to a company when it gets big enough that venture capitalists start calling up their friends in the press and saying, The reality is that most startups are small businesses started by people who have something they want to sell — and they don't need venture capital because they already have money set aside for marketing and operations. The only reason startups need venture capital is because their business model isn't yet big enough or successful enough for them to be able to sell without VC help.

 

In the last couple of weeks, there's been a lot of talk about how Silicon Valley Bank (SVB) could end up being part of a "corporate bailout" for tech companies. For example, TechCrunch asked: "Can Silicon Valley Bank Save Startups From Bankruptcy?" and Forbes reported that "Silicon Valley Bank will be on hand to bail out startups in case of emergency." This is ridiculous.

 

The SVB bailout won't save the startup economy because it could have happened anyway. The bank was already set up to do exactly this — it had $8 billion in capital from investors like Goldman Sachs and Morgan Stanley, who would have invested in startups if they needed money. And SVB has been created with an explicit mission: to help tech companies raise capital when they need it most. In fact, even before it was formed as a public company, SVB had already provided financing to several high-profile startups, including Twitter and Airbnb. The biggest bank in Silicon Valley, Wells Fargo, is trying to get taxpayers to bail it out. The reason? It says it's "too big to fail," and so it should be able to get taxpayer money when other banks can't.

 

But this argument is absurd. If a company is too big to fail, then it should be allowed to fail. And when your company fails, you shouldn't demand that taxpayers bail you out. You should accept that fate and work on improving your business if possible, or at least finding new opportunities if not.

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To see why this is wrong, imagine that instead of letting Wells Fargo fail and then demanding taxpayers help bail them out, Congress passed a law requiring all banks with more than $500 billion in assets to be bailed out by taxpayers if they fail -- just like we have for insurance companies and automakers who are considered too big to fail.

 

The Wall Street Journal reports that San Francisco-based Silicon Valley Bank has received $1 billion in emergency funding from the U.S. Federal Reserve Bank, with another $2 billion expected to be made available to other financial institutions as well. The loan program will be used to help stabilise "financial institutions that are facing significant liquidity pressures," says Fed Chairman Ben Bernanke in a statement. The idea is that by helping these banks weather the worst of the economic downturn, we can prevent a full-blown crisis from unfolding — but will it work?

 

It's important to remember that when you have a financial institution on the brink of collapse, you don't just replace its leadership and let it resume business as usual; rather, you take over its assets — including its customers' money — and use them to pay off creditors and shareholders before restoring normal operations. In other words, you seize control of all assets without regard for whether they're good or bad investments (or even whether they're worth anything at all).

 

So while it's true that these loans will give some banks breathing room until things get better in America's economy which could take years.

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