Ben T. Smith IV, a longtime Silicon Valley executive and currently head of the Communications, Media and Technology practice atKearney,speaks toGlobal Financeabout the post-SVB venture capital industry and the pace of innovation.
Global Finance: What does the Silicon Valley Bank (SVB) disaster mean for venture capital and innovation companies in general?
Ben Smith: The most important implication of this is not the fact that there will be a loss of a part of the ecosystem, and innovation investors will have to find alternatives to SVB going forward.
The most important thing, in my view, is the deep mentality shift imposed by this. There was a whole four-day period where everyone in the innovation economy globally had to stop what they were doing and reflect because no money was moving.
That reflection period had everyone thinking: ‘We need to accept this is real and reset our expectations in terms of what’s going to happen over the next couple of years and be prepared to go through this cycle.’ Obviously, this wasn’t such a novelty for many of us, as we had already gone through such a cycle a few times in our careers. However, it was particularly important in the innovation community, as many only started their careers after the [2008] global financial crisis and had never been through that.
Overall, it was a moment to stop and say: ‘We need to clean up our act and get ready for the next wave of innovation.’
GF: Is it much harder to raise money now than it was just a few months ago?
Smith: Absolutely. It is a fundamentally different world. It is as big of a shock as the dot-com bubble. Deals are not getting done, even for companies that are creating revenues.
However, on the flip side, having people understand what happens in a downturn will likely educate the new generation of entrepreneurs.
I spent part of my life as an entrepreneur. It’s really not a fun job. It’s tough. It’s not about going to parties. It’s about taking the trash out because you can’t afford to pay for janitorial services. It’s about paying the admin out of your own pocket because you don’t have any money to pay anybody else.
Everybody looks successful in a hot market, but when the tide goes out, the people who were fake and have not generated real returns usually get exposed. It’s the price we pay for innovation.
GF: How is the venture capital industry going to change?
Smith: When you are funding a company, you want to see the character and the execution of a team over a period of time.
But what happened in the past was that deals were happening so fast that you didn’t have time to establish a pattern. So unless you knew that entrepreneur for a long time and you’d seen them work before, you didn’t have time to evaluate them as deals what happening literally over the weekend.
Well, now we have time; and that will drive discipline into the process. It’s not that people didn’t want to do due diligence—it’s just that they didn’t have time to do it. So I think this will actually clean the system up.
GF: Could this scenario slow down the pace of innovation in the next decade?
Smith: No. The tech industry has had many talented people trapped in a velvet cage for too long, getting paid an enormous amount of money without actually innovating.
As deals become scarcer, those people are gonna be forced to go out and do things that actually matter. Innovation is driven by discipline, and capital constraint is what drives discipline, not free money. In that sense, getting people out of poorly run, inefficient companies is the best thing that could have ever happened to innovation.
Furthermore, I believe that we are witnessing the rise of a technology that will really change the world: artificial intelligence (AI). During my career, I’ve seen four innovations that were really meaningful to the extent I believe AI will be—the personal computer, the client server, the browser, and the iPhone. While I think that it will take some time for AI to come together and really deliver its full potential, I do believe that we are at the start of a new way of thinking.
GF: What do the current bank crashes do to AI?
Smith: AI depends on cheap computing. And part of what cheap capital did was deploy cheap computing, just because it was worth rolling out data centers on the back of net-zero interest rates to eventually get paid for that, regardless of the timeframe.
So there may be a pullback on that. However, the market is likely to adjust from the demand side, pushing prices lower. So I don’t see any reason to believe that computing will become more expensive along with capital costs.
So what I think this crash really does to AI is make people focus so that the innovation will be more disciplined.
GF: Will the SVB crash have an impact on the regional banking system?
Smith: I think there are lots of forms of innovation, and not all of them happen in Silicon Valley. Different parts of the country have different means to innovate, and they need a good bank that understands their business, a bank that has relations with local innovators. A big part of why SVB worked for so long was because it had connections that lasted through multiple companies, built on trust.
The regional banking system is still incredibly important to the larger US banking system and will likely remain so.
I have no doubt that there will be more bank failures, but that doesn’t mean we will see the system as a whole change. On the other side of the equation, I think some of the banks will emerge as ‘superregionals’ as it is not in the best interest of the American economy that we only have four big banks.
GF: Is it possible to democratize innovation in a more disciplined environment?
Smith: I think that regulations and governmental restrains aside, the most important thing is the cultural issue. You have to make heroes out of real innovators. And everything else will follow.
Venture capital is not exactly about giving access to capital; it’s about access to capital that wants to innovate. It’s not exactly about catching fish as much as it is about fishing. Meaning that if you just want to make money, you should go to Wall Street.
Innovation is mission-driven in essence. The only reason you do it is you want to change the world. If you understand finance, exposing yourself to such risks doesn’t make sense. Not that we don’t want to make money while we do it; we all do. But I’m only taking such risks because I believe in the mission. So when I write a check to an entrepreneur, I trust him to bring me a solid return, but that’s not the only reason I do it: I also have to trust his idea.
