America has always seen itself as a shining city on a hill, an extraordinary country that doesn’t have to follow the old rules. And since the birth of the modern internet in the mid-1990s, tech exceptionalism has made Silicon Valley an economic city on the mountain – a place where normal rules do not apply.
Giants such as Facebook, Amazon, and Google have become some of the richest companies in history, seen by many as indestructible machines. Even as the nation struggles through the “jobless recovery” after the Great Recession of 2008, Big Tech is the Ayn Randian sector that proves America has capitalism at its best. Technology has been criticized for undermining American democracy, the mental health of youth, and even causing long-term economic stagnation. But the sector says the innovation is remarkable enough to work in its own quasi-libertarian golden state – that regulatory burdens should not apply, and geniuses should be free to work unhindered. He points to the FAANG outperforming the S&P 500 as proof.
For a while, things seemed to work. Built by more than a decade of near-zero interest rates, capital appears everywhere in technology. Then the initial pandemic sent tech stocks soaring higher. But the party ended a year ago, when Mark Zuckerberg’s Meta empire suffered the biggest one-day decline of a publicly traded company in American history. Big tech companies are starting to become exceptional in all sorts of bad ways: other than the once-mighty FAANG companies are seeing record drops in market cap; and tech giants are laying off thousands upon thousands of workers, even as the rest of the economy grows. Meanwhile, the main asset of risk and innovation, cryptocurrencies, has lost roughly two-thirds of its value, as crypto’s “market cap” shrank from $3 trillion to roughly $1 trillion in a year marked by several major crises.
The idea, also, that the big brains of innovators in our startup economy is really exceptional took a beating last week, when the “leaders of thought” that populate the venture capital industry became victims of the most old-fashioned of financial panic. The explosion of the Silicon Valley Bank has been blamed on loose regulations by the Federal Reserve, rules weakened by feckless Trump-era Congress, mismanagement by bank executives, and even, strangely, on “wokeness” or too much remote work. SVB is not a normal bank, and its relatively unstable depositor base makes it very vulnerable, as Nobel laureate Douglas Diamond said recently. fortuneShawn Tully. But the fact remains: Panicked residents of the shining valley tried to withdraw $42 billion in one day. As a joke paraphrasing Zuckerberg going around last week put it: The tech industry is moved to quickly break the bank itself.
It is clear that long before the collapse of the SVB there had been a change in the financial regime – from the “total bubble” of the era of easy money to an unprecedented tightening of global monetary policy. Perhaps now, in the midst of this sober reappraisal, is the moment to question magical thinking about the enormous risks of an age of extraordinary technology, and to extract it from the mainstream of American innovation.
W(h)innovation?
The idea of tech exceptionalism is based on what author Sebastian Mallaby calls the “law of powers,” the belief that investors and inventors can lose in 100 ventures as long as they succeed in the 101st – or as Meta CEO Mark Zuckerberg put it in 2016 , the willingness to “choose hope over afraid”.
That philosophy has led to many risky bets on unprofitable tech stocks, false startups, and directionless cryptocurrencies, as the era of cheap money means investors are happy to gamble on increasingly absurd ventures, from Theranos to Juicero to WeWork. The detritus of this irrational age includes thousands of “zombie” companies and cryptocurrencies, companies that are no longer economically viable but can survive by taking on more debt. And this era leaves us with various other costs to calculate, including what Shosanna Zuboff has called “surveillance capitalism,” as smartphones and social media invade more of people’s time.
“Innovation at all costs is never a long-term strategy,” says Robert E. Siegel, a professor of management at the Stanford Graduate School of Business and a venture capitalist himself. fortune. “It is a strategy at a time when capital is cheap and there is frothiness in the market … the implosion of SVB is a punctuation mark at the end of a supercycle of low interest rates where capital is chasing returns, and where there is a lot of money flowing into high-return assets with high risk like ventures and startups.
The check came due last year with a sharp rise in interest rates to combat inflation that has been hammering technology down. Major companies including Meta, Amazon, and Apple all lost hundreds of billions in market cap last year, while venture capital spending fell 31%.
‘Less stupid business’
Despite the lavishness of self-harming tech which a few years ago, innovation does not have to die in the US It can’t, as the country gears up for big competition from China in everything from AI to climate technology. But the kind of innovation that the tech industry does has to be very different if it wants to survive. That might mean sleeping once and for all the idea of incredible technology.
Mark Zuckerberg of Meta has called 2023 the “year of efficiency,” when Amazon, Google, and other tech companies furiously cut unnecessary departments and jobs – including Quixotic moonshot projects, employees who once asked to work, without thinking about the return on investment.
This pivot to efficiency makes sense in preparation for a possible recession. It may be pruning that America’s innovation sector needs to survive, says Stanford University’s Siegel. “We’re going to see fewer ventures,” he said fortune. “You will see this because there will be less money.
Tech probably doesn’t have to figure out how to innovate more efficiently themselves either, because they have invited DC to come and sort out the mess. It remains to be seen whether Congress or the Federal Reserve is up to the task of overhauling the regulation.
“I’m cautiously optimistic,” Charlie O’Donnell, a partner at New York-based venture capital firm Brooklyn Bridge Ventures, told fortune. About a third of the roughly 70 companies in O’Donnell’s portfolio fall under SVB, and he says he receives some of the wisest oversight in the VC world: “At the end of the day, you just want to know what the rules are,” he said. stability.”
This all means that technology may not return to freewheeling ways anytime soon, but the sector can learn from the trauma of the past year. Despite the challenges ahead, innovation in the US is far from dead. Time to adapt.