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It’s too early to fully anticipate all of the consequences of Silicon Valley Bank’s collapse. But there is one prediction I am ready to make: Bank diversification is going to be a much higher priority for startups from now on. — Anna
A mostly ignored best practice
Whether you are an individual or a company, it makes sense to have more than one bank. Yet, many startups don’t.
“Using more than one bank in and of itself could be revolutionary for some startups,” our own Natasha Mascarenhas wrote. She recalled a recent comment from Brexton Pham, CEO of fintech startup Series, who said during a podcast episode that this is the first time startups have “remotely considered opening up multiple bank accounts with multiple different banks.”
‘BRB, storing my money in gold’: Founders scramble to figure out which banks are safe
It’s not just startups that didn’t have this need in mind. In a Twitter thread, early-stage SaaS VC and managing partner at Point Nine Capital Christoph Janz acknowledged that investors overlooked this, too, when talking to founders.
“We spend enormous amounts of time discussing runway, burn, and financing with founders. But how safely stored our cash is — I’ve never asked, and I don’t remember hearing that question from any other VC either,” Janz wrote.
French startup Memo Bank has been an outlier on that front, despite being a business bank itself — or perhaps precisely for that reason. When it hears that one client closed all of its other accounts, it takes it as a risk factor, CEO Jean-Daniel Guyot told TechCrunch+.
“From the beginning, we have advised our clients to rely on several banking partners at the same time, and never to put all their eggs in one basket,” the bank restated in a blog post following SVB’s collapse.
“If all your deposits are concentrated in one bank,” it continued, “we advise you to split them between different banks. For your information, our clients have an average of 2 to 4 banks, including Memo Bank.”
Memo Bank’s clients are SMEs, not startups per se, but the advice still stands, and so does the reasoning.
Why diversify?
Guyot gave TechCrunch+ some reasons why businesses should use multiple banks:
“Having several banks makes it possible to limit operational risk (in case of IT unavailability of a bank, for example) and financial risk (in case of financial difficulties of the bank itself, like SVB),” he said. “It also protects against changes that are common in the life of banks: An account manager’s departure can call into question an overdraft authorization, for example. Finally, SMEs that have several banks obtain financing more easily, because they can spread their financing among several banks.”
VCs will have a role to play in bringing this best practice to founders’ attention and at the right time.
“You want your money to be as safe as possible, but the setup needs to be manageable. My recommendation for seed-stage startups is to have accounts at two banks and keep most of your cash at a large bank,” Janz said in an email to TechCrunch+.
Investors and other partners will also need to provide guidance to entrepreneurs on what exactly bank diversification should look like. For instance, Memo Bank recommends that businesses split their cash unevenly, in part because it will also give them negotiation leverage with their bankers.
How to diversify?
Janz didn’t just tweet out a mea culpa: He wrote an entire post directed at founders to share “easy-to-implement tips and tricks to keep your money safe.” It is worth reading even if your startup is further along its journey.
For example, Janz advises startups beyond a certain stage to look past deposit accounts and “use T-Bills [treasury bills] or similar top-rated government-issued short-term securities, or a money market fund that invests in these securities, to store cash that you don’t need in the short term. Most seed startups don’t have to do this, but if you have millions of dollars in cash, I would consider it.”
Janz will likely not be the only VC to give very practical banking advice in the wake of SVB’s demise. Paul Bianco, the CEO of Graphite Financial, which provides startups with accounting services and CFO support, said he anticipates that “VCs will be thinking about treasury management within their portfolio more than ever.” Here’s what he had to share with TechCrunch+ on the topic:
“It’s likely VC term sheets will begin to call for very explicit controls around not just treasury management, but the finance function as a whole — even at an early stage. On top of better and more real-time financial reporting, this may include multiple bank accounts, and specify account types (such as sweep accounts with increased FDIC coverage).
Even if we live in a world where we believe bank deposits are 100% protected beyond the FDIC limits, a bank failure can cause serious short-term liquidity issues, specifically around payroll, even if cash is unavailable for just a few days. At a bare minimum, I would expect more companies to have a second or third account that can cover 2+ payroll cycles.
It’s also possible VC rounds will be committed, but actually wired to the startup over a period of time based on cash needs or other operational milestones. VCs will then call capital from their LPs as-needed, who already have robust treasury management functions of their own.”
Of course, founders might retort that finding startup-friendly banks is no easy feat in the first place. They may also ask how to fight back when a bank is seeking to have them sign exclusive banking deals, as Silicon Valley Bank sometimes did. But that last question may be one for regulators to look into.
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