Start-ups learn the hard way how to manage cash after SVB’s collapse
A week after the Silicon Valley bank collapsed, a group of venture capital firms wrote to the shocked startups in which they had invested their money. It’s time to talk about the “admittedly not-so-sexy” role of treasury management.
Days of searching for accountability for their company’s funds presented a generation of founders with an uncomfortable fact: Despite all the efforts they had put into raising money, few had spent much time thinking about how to manage it should.
Some significant sums were involved: Roku, the video streaming company, had almost half a billion dollars in the SVB when the bank run started – a quarter of its funds.
Many others, it turned out, had concentrated all of the funding on which their long-term growth plans and upcoming salary needs depended in just one or two banks, without considering that regulators are only insuring the first $250,000 of it in case of trouble would .
“The easy money regime” of recent years has allowed relatively young companies to amass unusually large sums of cash that “far exceeded their needs,” noted the former chief risk officer of one of the largest US banks, who asked for not to be named to do so.
“The problem here is that the cash seems so oversized to me relative to the size of the companies,” he said. “Traditionally, people would grow into it over time. Nobody would give a startup with 20 employees a few hundred million dollars” 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 executives on how to manage risk. It’s not uncommon for people who have successfully developed new things to ignore traditional risks, he added: “For them, risk is something separate from what they’re doing in their business.”
Founders, who exchanged notes at the South by Southwest festival in Texas last week, admitted they had received 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. ”
Its wire transfer fraud-prevention business, which raised $12.5 million last May, went into bankruptcy with PacWest Bancorp and on Friday attempted to move four months of payroll to a regional bank where it maintained a little-used account had while opening an account with JPMorgan Chase.
The VCs, including General Catalyst, Greylock, and Kleiner Perkins, advocated a similar strategy in their writing. Founders should consider maintaining accounts with two or three banks, including one of the top four in the US, they said. Hold three to six months’ worth of cash in two core operating accounts, they advise, and invest excess in “safe, liquid options” to generate more income.
“Getting this right can mean the difference between survival and an extinction level event,” warned investors.
Kyle Doherty, managing director at General Catalyst, noted that banks like to “cross-sell” multiple products to each customer, which increases concentration risk, “but you don’t have to have all your money on you.”
William C. Martin, founder of the investment fund Raging Capital Management, argued that complacency is the bigger factor in start-ups being irresponsible with their money.
“They couldn’t imagine that anything could go wrong because they hadn’t experienced it. When hedge funds saw counterparties fail in 2008, we had contingencies, but we didn’t have them here,” he said, calling it “rather irresponsible” that a billion-dollar company or venture fund doesn’t have a plan for a banking crisis. “What does your CFO do?” he asked.
Doherty dismissed that idea. “Things move quickly in the early stages of a business: the focus is on making and delivering products,” he said. “Sometimes people just got lazy, but it wasn’t a relinquishment of responsibility, it was that other things took priority and the risk was always pretty low.”
For Betsy Atkins, who has served on boards such as Wynn Resorts, Gopuff and SL Green, SVB’s collapse is a “wake-up call”. . . that we need to focus more on enterprise risk management.” Just as boards had begun examining supply chain concentration during the pandemic, they would now look more closely at asset allocation, she predicted.
Russ Porter, chief financial officer for the Institute of Management Accountants, a professional organization, said companies needed to diversify their banking relationships and develop more sophisticated finance departments as they grew in complexity.
“It’s not best practice to use just one partner. . . to pay your bills and meet your paychecks. But I’m not advocating atomizing banking relationships,” he said.
For example, IMA itself has $50 million in annual revenue and five employees in its finance department, one of whom spends two-thirds of his time in treasury functions. It has cash to cover a year’s expenses and three banks.
Many startups have used the ready availability of private financing to delay rites of passage like IPOs, which Koenig says are common moments when founders are told they need to employ more professional finance teams.
However, it can be difficult to find financial professionals who are prepared for today’s risks. “There is a shortage of CFOs with experience working in really challenging times. You’ve never had to deal with high inflation; They might still be in college or just getting their careers off the ground during the Great Financial Crisis,” Porter said. “The skills required may change a little, from a dynamic, growth-oriented CFO to a more balanced one that can address and mitigate risk.”
There’s another pressing reason for startups to get more serious about treasury management, Doherty said: The number of companies switching banks has given scammers an opportunity to pose as a legitimate counterparty by using startup prompt ups to transfer funds to new accounts.
“We’ve started getting emails from vendors with transfer instructions – ‘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 benefit from that’.”
Kris Bennatti, a former CPA and founder of Bedrock AI, a Y Combinator-backed Canadian startup that sells a financial analysis tool, warned of the risk of overreacting.
“To say that we should have optimized our finances for the bank collapse is absurd to me. This was an extreme black swan event, something we should not have or could not have foreseen.”
One idea floated on Twitter last week – by former Bank of England economist Dan Davies – would be that VC firms should go beyond advising their investee companies and offer outsourced treasury functions.
Bennatti was not for it. “Honestly, I don’t think this is a problem that we need to solve and definitely not a service that VCs should be offering,” she said. “Having a bunch of tech bros handle my money is so much worse than having it hanging around at RBC.”