Start-ups are learning the hard way how to manage cash after SVB’s collapse
A week after Silicon Valley Bank collapsed, a group of venture capital firms wrote to the shell-shocked startups they had put their money in. It was time, they said, to talk about the “admittedly not-so-sexy” function of treasury management.
Days of scrambling to account for their companies’ funds left a generation of founders with an uncomfortable fact: For all the effort they had put into raising money, few had spent much time thinking about how to manage it.
In some cases, the amounts involved were significant: Roku, the video streaming business, had nearly half a billion dollars in SVB when the bank run began ̵[ads1]1; a quarter of the funds.
Many others, it turned out, had concentrated all the funding on which their long-term growth plans and imminent salary needs depended in just one or two banks, with little regard for the fact that regulators would only insure the first $250,000 of them in case of trouble.
“The easy money regime of recent years” allowed relatively immature companies to accumulate unusually large amounts of cash that were “far in excess of what they needed,” observed the former chief risk officer of one of the largest US banks, who pleaded not to. be named.
“The problem here is that the cash I think is so large relative to the size of the companies,” he said. “Traditionally, people would grow into it over time. No one would give a couple of hundred million dollars to a startup with 20 people in it” before the VC-driven startup boom.
“When the money is flowing, you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains directors and managers in managing risk. It was not uncommon for people who had successfully grown new things to ignore traditional risks, he added: “Risk to them is something separate from what they do in their business.”
Founders exchanging notes at the South by Southwest festival in Texas last week admitted they had a quick education. “We got our MBA in corporate banking this past weekend,” said Tyler Adams, co-founder of a 50-person startup called CertifID: “We didn’t know what we didn’t know, and we all made different but similar mistakes.”
His wire fraud prevention business, which raised $12.5 million last May, deposited money with PacWest Bancorp and on Friday attempted to move four months of salary to a regional bank where it had held a little-used account while he opened an account with JPMorgan Chase.
The VCs, including General Catalyst, Greylock and Kleiner Perkins, advocated a similar strategy in their letter. Founders should consider having accounts with two or three banks, including one of the four largest in the United States, they said. Keep three to six months of cash in two core operating accounts, they advised, and invest any excess in “safe, liquid options” to generate more income.
“Getting this right could be the difference between survival and an ‘extinction level event,'” the investors warned.
Kyle Doherty, CEO of General Catalyst, noted that banks like to “cross-sell” multiple products to each customer, which increases the risk of concentration, “but you don’t have to have all your money with them”.
William C Martin, founder of investment fund Raging Capital Management, argued that complacency was the biggest factor in start-ups mismanaging their cash.
“They couldn’t imagine the possibility of something going wrong because they hadn’t experienced it. As a hedge fund in 2008 when we saw counterparties go bust, we had preparedness, but it didn’t exist here,” he said, calling it “quite irresponsible” for a multibillion-dollar company or venture fund to have no plan for a banking crisis. “What does your CFO do?” he asked.
Doherty pushed back on that idea. “Things move quickly in the early stages of a company: the focus is on making product and delivering it,” he said. “Sometimes people just got lazy, but it wasn’t an abdication of responsibility, it was that other things took priority and the risk was always quite low.”
For Betsy Atkins, who has served on boards including Wynn Resorts, Gopuff and SL Green, SVB’s collapse is a “wake-up call . . . that we must focus more deeply on risk management for companies.” Just as boards had begun to scrutinize supply chain concentration during the pandemic, they would now look harder at how assets are distributed, she predicted.
Russ Porter, chief financial officer at the Institute of Management Accountants, a professional body, said companies needed to diversify their banking relationships and develop more sophisticated finance departments as they grew in complexity.
“It is not best practice to use only one partner . . . to pay your bills and meet your payroll. But I’m not advocating atomizing banking,” he said.
For example, IMA itself has $50 million in annual revenue and five people in its finance department, one of whom spends two-thirds of his time on treasury functions. It has cash to cover a year’s expenses, and three banks.
Many startups have tapped into the readily available private funding to delay rites of passage like initial public offerings, which Koenig noted are often moments when founders are told they need to put in place more professional finance teams.
However, it can be difficult to find financial professionals who are attuned to today’s risks. “There is a shortage of CFOs with experience of working in really challenging times. They have never had to deal with high inflation; they may have continued on to university or just got their careers started during the Great Financial Crisis, Porter said. “The skills required may change slightly, from a dynamic, growth-oriented CFO to a more balanced one who can manage and mitigate risk.”
There’s another pressing reason for startups to get more serious about financial management, Doherty said: the number of businesses switching banks has given fraudsters an opportunity to pose as legitimate counterparties by telling startups to transfer money to new accounts.
“We started getting emails from suppliers with wire instructions in them – ‘you need to update your payments and transfer to this account,'” Adams added: “In the coming weeks, we’re going to see a lot of scammers saying ‘hey,’ we can take advantage of this.”
Kris Bennatti, a former auditor and founder of Bedrock AI, a Y Combinator-backed Canadian start-up that sells a financial analysis tool, warned of the risk of overreacting.
“To suggest that we should have optimized our economy for bank failure is absurd to me. This was an extreme black swan event, not something we should have or could have predicted.”
One idea floated on Twitter in the past week – by former Bank of England economist Dan Davies – would be for VC firms to go beyond offering advice to their investees to provide outsourced treasury functions.
Bennatti was not in favor. “Honestly, I don’t think this is a problem we need to solve and definitely not a service that VCs should be providing,” she said. “Letting a bunch of tech bro handle my money is so much worse than letting it hang out at RBC.”