According to Damien Greathead of QuickBooks, the unexpected collapse of Silicon Valley Bank has taken the tech industry into unfamiliar territory. As a result, venture capital firms are now seeking more stability in their investment targets.
The collapse that occurred March 2023 was heard by many. However, the impact and those affected were not known initially. Looking back at the 2008 financial crisis, banks like Washington Mutual were directly impacted, and it mostly affected individuals with home loans through different banking organizations.
It was noted that the current collapse is different as it involves Silicon Valley Bank, which primarily focuses on business banking. Specifically, SVB specializes in serving small and medium-sized businesses across the country, with a laser focus on technology companies.
The collapse of the bank would directly impact the small and medium-sized businesses that used Silicon Valley Bank for their operating and funding accounts. Some of these businesses even used the bank for payroll distribution.
The situation was seen as uncharted territory, given the potential business impact it would have on the tech space in the United States and around the world. The exact fallout of the collapse was still being learned, and there was hope that there would be no casualties in Australia or the US.
It was mentioned that it seemed like a bullet had been dodged, but it also reflected the economic mood, especially in the tech industry. Prior to going on air, there was a discussion about the significant number of job redundancies in the tech space. Numbers were added up, revealing that Amazon had let go 18,000 people, Microsoft around 10,000, and meta potentially another round of layoffs equal to the one before Christmas, which had resulted in 11,000 job losses.
The question was raised about the mood in the tech industry and the phenomenon of these large-scale redundancies. It was suggested that there might be a couple of things contributing to this trend.
Workforce Challenges in the Tech Industry: Balancing Forecasted Demand with Actual Growth
In the tech industry, companies have a reputation for constant scaling and growth, driven by the need to meet sales and support demands as per their forecasts. Unlike many other industries, tech companies tend to hire more employees than they currently need, anticipating future demand.
The suggestion was made that companies often hire salespeople, customer success personnel, and engineers based on forecasted demand promised to investors. However, when these forecasts do not materialize as expected, it may result in an excess workforce that was hired in anticipation of projected growth. This could lead to the need to normalize the workforce based on the actual growth achieved, rather than the growth that was promised to the market or investors.
There appears to be a scaling back of expectations among larger firms, and the impact of this on smaller startups, including those that were previously associated with Silicon Valley Bank, is a topic of interest. Even before the layoffs that occurred just before Christmas and at the end of 2020, there seemed to be a slowdown in capital and venture capital flowing into startup firms. This may indicate that venture capital and investment firms are taking a step back and looking for more sustainable and self-sustaining growth from potential investment targets before proceeding with raising A rounds, B rounds, and C rounds.
Insights on Oversight, Confidence, and the Role of Accountants in Uncertain Economic Times
Silicon Valley Bank needed oversight to prevent things from going south quickly. Podcasts and news reports over the weekend expressed concern about the potential flow-on effects of the bank’s failure. Small technology startups looked to Silicon Valley Bank as a beacon of tech startup banking, and losing it could have a knock-on effect, making businesses more cautious and focused on sustainability.
Lessons to be learned include the need to be able to function, pay bills, and support customers even in uncertain economic environments with potential rate rises and increased costs. Advisor support is more important than ever with cash flow and tax impact assessments, discussing scenarios of rate rises and cost increases. These conversations could ease anxiety and provide valuable insights for businesses, making it a great opportunity to seek accounting advice during this uncertain time.
While it may not be an easy time for businesses, it presents an opportunity to seek accounting support by gleaning from their broad financial insights and having meaningful conversations about financial strategies and scenarios, helping them plan and prepare for potential challenges ahead.
And for businesses facing distress, the recurring advice is to communicate regularly with your accountant. The importance of talking to your accountant cannot be overstated, especially during challenging times. Feel free to reach out to Fullstack.
