In 1880, 43-year-old J.P. Morgan turned down 31-year-old Thomas Edison’s request to finance Edison’s plan to electrify a one-quarter-mile-square section of lower Manhattan. Morgan’s domineering father and senior partner, Junius, had publicly dismissed electricity as “a fad.” Edison went ahead anyway, using funds he raised by selling off his patent portfolio.

Edison made sure his Pearl Street Station generating plant’s service area included J.P. Morgan’s home and the offices of the New York Times. Invited to join Morgan and watch Edison throw a switch to get current flowing to the 85 customers who had signed up, a Times reporter filed a detailed but reserved account of the event. Editors published it as “Miscellaneous City News”:

“The 27 electric lamps in the editorial rooms and the 25 lamps in the counting rooms [of the Times] made those departments as bright as day, but without an unpleasant glare. . . . The light was soft, mellow and grateful to the eye, and it seemed almost like writing by daylight to have a light without a particle of flicker and with scarcely any heat to make the head ache. The electric lamps in the Times Building were . . . tested by men who have battered their eyes sufficiently by years of night work to know the good and bad points of a lamp, and the decision was unanimously in favor of the Edison electric lamp as against gas.”[1]

Commercial innovation and private capital exist in constant tension with one another. Obituaries for Silicon Valley Bank hailed the bank for creating and sustaining an equilibrium between these opposing forces. And for being a pillar of the Silicon Valley ecosystem. Tech industry observers have written optimistically about reviving SVB’s business.

For example, Pitchbook’s Andrew Woodman’s wrote last Friday, “Eventually, we will see a new version of SVB emerge—albeit under the auspices of new management that will likely have different priorities, and perhaps different values, than its predecessor. . . . The concern is that any potential new owner, particularly a large, established bank, may not have the skill set, the inclination or even the risk appetite to cater to the specific needs of SVB’s startup clientele.”[2]

SVB’s success began with its location in Silicon Valley. Among startup companies, SVB had pick of the litter. SVB touted its cultural affinity with VCs and their portfolio companies. Other banks tried but failed to replicate the SVB business model. PNC, for example, created VentureBank@PNC in 1998. After the Dot-Com bubble burst in 2001, PNC closed the venture and wrote off its loans and investments.

SVB’s business model was different. Most banks earn most of their money on the spread between interest charged on loans and interest earned on deposits. For this reason, loans to customers typically represent 60-90% of total assets.

Although SVB’s loans were just 30% of its assets, the bank also made money by acquiring from business loan customers the right to buy stock at favorable prices if the businesses succeeded. Cashing in these rights was a steady contributor to SVB’s earnings until late last year.

When SVB said it needed to raise more capital, venture capitalists believed nobody would provide it because the bank’s investment portfolio was, at today’s prices, in a loss position that exceeded the bank’s total capital. They also believed everybody would behave as they did—demand their money immediately. That arithmetic said the last $30-40 billion deposits were uncovered.

A new and improved version of SVB is unlikely to emerge for four reasons. First, the SVB business model is broken. There will be no earnings from sales of equity investments in startup companies for an indeterminate period. The inherent constraint of having startup businesses as loan customers—a loans to assets ratio of just 30%— means such a bank cannot achieve a competitive return on equity. That no bank emerged to buy SVB when regulators offered it for sale ten days ago suggests a buyer will not be found. Banks that considered acquiring SVB likely wanted the U.S. Treasury to pay the banks to take SVB. Treasury apparently said no, so potential buyers left the table.

Second, the regulatory environment for banks has turned dark and will stay that way. Public finger pointing now underway will disincline regulators to approve any business model that is the least bit non-standard. Silicon Valley moguls are unlikely to fund a restart of the SVB business model because they have no interest in having federal authorities pore through their personal finances, which any restart effort would entail.

Third, a non-bank lending firm taking up the mantle of SVB is not feasible because to offer loans priced at bank loan rates, the enterprise would need to lend out 8-10 times its capital. No non-bank financial company can attain that degree of financial leverage without taking deposits. At that point, the business meets the legal definition of a bank and is subject to regulation as such. See reasons one and two above.

Last, the culture of banking and the culture of venture capital are too different. Banks take small risks. As an accounting reserve for potential loan losses, they generally set aside one percent of the total loans they make. If their loss ratio reaches five percent in a recession, that’s a big number. Venture capitalists take larger risks. They need multiple investments in a fund to pay off; but they do not generally need eight or nine of ten investments to be winners. Venture capitalists do not want to think like bankers. Bankers who think like venture capitalists do so at their peril. SVB proved that.

Junius Morgan was wrong about electricity being a fad. Yet it was only after Edison and Westinghouse proved generating and distributing electricity was commercially viable and safe—and millions of Americans visited the 1893 World’s Columbian Exhibition in Chicago, which was lit by electricity—that the House of Morgan, and federal, state and local governments, electrified the nation.

The objects of the game have changed. Its most basic rules have not.

[1] https://ethw.org/w/images/a/ae/Edison_and_Pearl_Street%2C_Text%2C_031410.pdf

[2] https://www.pitchbook.com/news/articles/svb-successor-banks-new-management