A week after the Silicon Valley bank collapse, a group of venture capital firms wrote to shell-shocked start-ups in which they had put their money. It was time to talk about the “admittedly not so sexy” job of treasury management, they said.
Days of accounting for their companies’ funding presented a generation of founders with an uncomfortable fact: For all the effort they put into raising cash, few spent much time thinking about how to manage it.
In some cases, the sums involved were significant: Roku, the video streaming business, had about half a billion dollars in SVB when the bank run began — a quarter of its funding.
Many others, it turned out, had focused all their funding on just one or two banks for their long-term growth plans and immediate payroll needs, with regulators only insuring the first $250,000 of that in the event of trouble. .
The “easy money regime” of recent years allowed relatively immature companies to raise unusually large amounts of cash “much more than they needed,” observed the former chief risk officer of one of the largest US banks, who said not to. to name
“The problem here is that I think the cash is so big relative to the size of the companies,” he said. “Traditionally people would grow into it over time. Before the VC-fueled start-up boom, no one would give a hundred million dollars to a start-up with 20 people.
“You pay less attention to money when it’s flowing,” says David Koenig, whose DCRO Risk Governance Institute trains directors and executives on managing risks. It was not unusual for people who were successful in growing new things to ignore traditional risks, he added: “The risk to them is something that is separate from what they do in their business.”
Exchanging notes at last week’s South by Southwest festival in Texas, the founders admitted they’ve learned fast. “We did our MBA in corporate banking this past weekend,” said Tyler Adams, co-founder of a 50-person start-up called Certified: “We didn’t know what we didn’t know and we were all making different but similar mistakes. ”
His wire fraud prevention business, which raised $12.5m last May, banks with PacWest Bancorp and on Friday scrambled to move four months’ worth of payroll to a regional bank where he kept a little-used account while opening an account with JPMorgan Chase.
VCs including General Catalyst, Greylock and Kleiner Perkins advocated a similar strategy in their letter. Founders should consider having accounts at two or three banks, including one of the four largest banks in the US, they said. Keep three to six months of cash in two core operating accounts, they advised, investing 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, managing director of General Catalyst, noted that banks like to “cross-sell” many products to each client, which increases concentration risk, “but you don’t have to keep all your money with them”.
William C. Martin, founder of investment fund Raging Capital Management, argued that this is the biggest factor in start-ups mismanaging their cash.
“They can’t imagine the possibility that something could go wrong because they haven’t experienced it. As hedge funds saw counterparties collapse in 2008, we had contingencies, but they don’t exist here,” he said, calling it “very irresponsible” for a multibillion-dollar company or venture fund to have no plan for a banking crisis. “What would your CFO do? Is it?” he asked.
Doherty pushed back on that idea. “Things move quickly in the early stages of a company: the focus is on building the product and delivering it,” he said. “Sometimes people just get lazy but that 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, Gopf and SL Green, SVB’s collapse is a “wake-up call. . . That we have to focus more deeply on enterprise risk management.” Just as boards began scrutinizing supply chain concentration during the pandemic, they will now look harder at how assets are allocated, she predicted.
Russ Porter, chief financial officer of the Institute of Management Accountants, a professional body, said companies need to diversify their banking relationships and develop more sophisticated finance departments as they increase in complexity.
“It’s not a best practice to use just one partner . . . to pay your bills and meet your payroll. But I’m not advocating nuclearizing the banking relationship,” he said.
For example, IMA has $50mn 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 start-ups have taken advantage of the ready availability of private financing to delay rites of passage such as initial public offerings, which Koenig notes are often moments where founders are told they should put in more professional financial teams.
However, finding finance professionals suited to today’s risks can be difficult. “There is a shortage of CFOs with experience working in really challenging times. They have never had to deal with high inflation; They were probably still in university or just starting their careers during the Great Financial Crisis,” Porter said. “The skill set required may change slightly, from a dynamic, growth-oriented CFO to a more balanced one who can address and mitigate risks.”
Another important reason for start-ups to be more serious about treasury management, Doherty said: The number of businesses switching banks has provided fraudsters with an opportunity to mimic legitimate counterparties by asking start-ups to withdraw money into new accounts.
“We started getting emails from sellers with wiring instructions — ‘You need to update your payments and wires to this account,'” Adams adds: “In the coming weeks we’ll see a lot of fraudsters saying, ‘Hey, we can take advantage of this. ‘.
Chris Bennati, a former auditor and founder of Bedrock AI, a Jay Combinator-backed Canadian start-up that sells financial analysis tools, warned of the risk of overreaction.
“The implication that we should have optimized our finances for the bank to fail is absurd to me. This was an extreme black swan event, not something we should or could have anticipated.”
An idea floated on Twitter last week – by former Bank of England economist Dan Davies – would be for VC firms to move beyond advising their investee companies to offering outsourced treasury functions.
Bennati was not in favor. “Frankly, I don’t think this is a problem we need to solve and certainly not a service that VCs should be offering,” she said. “Letting a bunch of tech bros handle my cash is a lot worse than letting them hang out at RBC.”