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#5: SVB and to Build on the Shoulders of Giants
One of the great strengths of the Silicon Valley ecosystem, and the US in general, is the ease of doing business. Specifically for startups, the American ecosystem limits the degrees of freedom that a founder has to engage: they only have to waste minimal cycles on matters like incorporation, setting up payroll, or handling payments, and can instead focus all their energies on building great products.
The advantages of the US ecosystem — things that a founder doesn’t have to worry about — are difficult to fully appreciate unless you’ve been outside it, but they are colossal. Many advantages come from legislation and regulation, i.e. the public sector:
Straightforward, inexpensive1 processes for incorporating and maintaining corporate entities;
Well-understood corporate law, especially for Delaware C corporations and LLCs;
Well-understood securities law and broadly permissive regulations that enable fundraising with little overhead;
Except in egregious circumstances, employees are shielded from the liabilities of their businesses;
Broadly, a functioning government with an absence of corruption and bribery.
However, there are also many advantages that come out of the private sector:
Well-developed corporate credit and venture financing markets;
Well-developed corporate insurance markets;
Fast private arbitration processes for resolving disputes;
Well-established startup service providers: banking, legal, accounting, payment processing, insurance, etc.
Finally, there are some advantages that are communal or cultural:
The world’s largest homogeneous addressable market — one language, currency, and legal system;
A culture of angel investing and paying forward small favors;
Equity as a material part of compensation;
Tried-and-true playbooks for building certain types of businesses, e.g. B2B SaaS;
A high density of, or magnetic attraction for, talent.
Most countries have almost none of these. Some countries have a few. But virtually none come close to what the US has. American entrepreneurs get to stand on the rare shoulders of giants. Their friends can tell them how to build a B2B SaaS business. They don’t need to put up $25,000 to incorporate an entity. They don’t have to pay bribes. It takes only a few days to get a tax number, bank account, and they’re ready to start receiving payments. Early-stage fundraising is so simple that they may not even need a corporate lawyer, and if they do, the law firm will probably discount the first few hours as part of their startup package anyway.
By global standards, this is objectively amazing. The US provides extremely good infrastructure for building businesses, which abstracts away the tedious barriers that a founder would have to navigate in other environments. For example, I know several founders living in Africa who run startups that are incorporated in Delaware, running payroll through Deel, raising on SAFEs, and taking payments through Stripe. And if you glance at the public markets for even half a second, it’s obvious that this is a huge domestic and foreign policy win for the US.
What’s important is that this infrastructure is a tripartite success between the public sector, private sector, and the community in general. Other countries that try to create their own “Silicon Valley” often try to create some of the public sector infrastructure, but miss on the private sector items, let alone the community.
This brings us to Silicon Valley Bank (SVB), which collapsed at the end of last week, after being a trusted partner to thousands of startups, mature businesses, and venture funds over 40 years. As a bank, it was unique in its depth of understanding for, and products available to meet, the needs of startups and startup executives: an important part of the private sector ecosystem. Its collapse means two things:
A small, but important, part of the infrastructure has disappeared;
A degree of freedom to running startups has been re-introduced.
For a decade up until 2022, founders barely had to think about macroeconomic circumstances or interest rate risk. Now they do. That’s a degree of freedom that was previously controlled, and now it’s part of the game again. As of this weekend, evaluating counterparty banking risk is back on the menu as well. I’m sure that other infrastructural items that “just worked” previously will shortly start getting second-guessed, too. Every degree of freedom that gets added back into the operational concerns of a startup will ultimately cause some number of businesses to fail, and a larger number of businesses to not get started because the perceived barriers to entry are rising. This is a very harmful thing.
The role of a responsible regulator in this domain is to (1) recognize the importance of the private sector infrastructure that has been developed and (2) ensure that this infrastructure survives.2 Unlike public sector infrastructure, it cannot be willed into existence by passing a piece of legislation. It is the product of decades of irreplaceable slow building. The American tripartite startup infrastructure is globally unique. The more that we can do to strengthen it, and the more degrees of freedom we thereby abstract away from the operational concerns of startups, the more we enable founders to stand on the shoulders of giants and reach for prosperity.
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Generally on the order of a few hundred to low thousands of dollars a year
Note that I am stopping short of recommending that this private sector infrastructure gets nationalized. Other folks are asking why we don’t have, for example, government-run banks that fulfill the same roles as SVB while not posing the same counterparty risks — these are fair questions, but I don’t have answers in this domain.