Silicon Valley’s broken social responsibility promise

May 25, 2023

When federal regulators took over Silicon Valley Bank’s assets on March 10, the financial world breathed a sigh of relief. Quick actions had averted a devastating bank run, and taxpayers were funding all of SVB’s depositors.

But that relief didn’t trickle down to tens of thousands of people who woke up without a paycheck that morning. Unbeknownst to them, their companies’ payroll firms used systems that relied on SVB’s solvency. What this meant is that one of the authors of this piece, Robert – who leads an investment group’s transition into ownership of a small business – woke up to a phone call from a panicked employee who had not been paid.

A normal payday turned into chaos. No employees received direct deposits because SVB’s closure froze all of the company’s transactions. Like thousands of other small business operators, Robert and the ownership scrambled to track down the disruption and start wiring emergency payments to staff who were at risk of overdrawing their accounts. And the business itself paid several employees twice, reducing cash reserves and forcing the company’s payroll system to do backflips to get everything straightened out.

The failure of Silicon Valley Bank was a symptom of the uninterrupted market leeway the tech industry has enjoyed for the past 25 years. While virtually every other business focuses on long-term growth by reinvesting profits and boot-strapping, many tech companies have had the luxury of using other people’s money to never turn a profit.

Many company valuations are in the range of a couple multiples of recent gross or net revenue showings, but tech startups have routinely seen 10 times valuations despite no track record of regular profitability. That is, until they suddenly and spectacularly implode, taking hundreds or even thousands of innocent investors down with them.

Better accountability needed from tech startups

Tech startup bullishness was already softening when SVB collapsed. Post-pandemic layoffs, startup failures like FTX’s and inflation created investor hesitancy and growth challenges. But while some investors continue to throw money at failed founders such as Adam Neumann, the rest of the investor community can return to sound business basics by demanding more accountability from tech startups.

Companies should release financial forecasts with periodic metrics of success without expecting a blank check that creates unsustainable speculative growth followed by implosion, which hurts direct investors and average people many degrees away. Robert’s staff wasn’t immune to SVB’s failure despite being across the country and in an unrelated industry.

Investors should insist on metrics of success

Companies also should compare past performance to past projections. Like every small business in the rest of the world, company leadership must prove that it is serious about setting realistic goals, establishing metrics of success and executing plans. Only then should investors bring money to the table.

In addition, investors should examine balance sheets, cash and gross margins with an eye toward turning profits and building a sustainable business. This latter part is important, because sustainability will create wealth for all stakeholders, not just investors who got in early and were saved by the government.

These practices don’t have the allure of “business of the future.” They probably won’t create breathtaking returns each year. But they will keep tech companies out of bankruptcy, investors profitable and the public more trusting that today’s tech company will be able to handle tomorrow’s payroll.

For decades, Silicon Valley has promised a social responsibility contract that puts people ahead of profits. But from dot-com bubble bursts to FTX’s cryptocurrency meltdown to SVB’s collapse, average Americans see a divergence of Silicon Valley’s business practices from its self-proclaimed social responsibility ethos.

Markets follow the money, so investors should build a new Silicon Valley culture that combines businesses of the future with a small business ethos.

This piece was originally published by Dustin Siggins & Robert Kuykendall at USA TODAY.

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