Startups are learning the hard way how to manage cash after the SVB crash

A week after the collapse of Silicon Valley Bank, a group of venture capital firms wrote to the shock startups they had invested their money in. They said it was time to talk about the “admittedly not very exciting” job of running the Treasury.

The days of struggling to account for their company’s money presented an uncomfortable reality for a generation of founders: For all their efforts to raise money, few of them had spent much time thinking about how to manage it.

In some cases, the sums involved were large: Roku, the video streaming company, had nearly half a billion dollars in SVB when it started running the bank — a quarter of its money.

Many others, it turns out, have concentrated all the financing on which their long-term growth plans and impending salary needs depend in just one or two banks, with little concern that regulators will insure only the first $250,000 of it in the event of trouble. .

The “easy money system” in recent years has allowed relatively immature companies to accumulate extraordinarily large amounts of cash that were “much more than they need,” noted the former chief risk officer of one of the largest US banks, who asked not to be its name.

“The problem here is that cash seems to me to be too big for the size of the companies,” he said. “Traditionally, people will grow into that over time. No one would hand over a few hundred million dollars to a startup with 20 people in it” before the venture capital-fueled startup boom.

“When money is flowing in, you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains managers and executives in risk management. He added that it was not uncommon for people who were successful in growing new things to ignore traditional risks: “The risk they take is something separate from what they do with their business.”

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The founders sharing notes at the South by Southwest festival in Texas last week admitted they had a quick education. “We got our MBA in corporate banking last weekend,” said Tyler Adams, co-founder of a 50-person startup called CertifID. “Similar mistakes.”

His online fraud prevention firm, which raised $12.5 million last May, banked with PacWest Bancorp and on Friday scrambled to transfer four months of payroll to a regional bank where he kept a little-used account while opening an account with JPMorgan Chase.

Venture capital, including General Catalyst, Greylock, and Kleiner Perkins, have called for a similar strategy in their letter. They said the founders should consider holding accounts with two or three banks, including one of the four largest in the United States. They advised keeping three to six months’ worth of cash in two primary operating accounts, and investing any excess into “safe and liquid options” to generate more income.

Investors warned that “getting this right could be the difference between survival and an ‘extinction-level event’.”

Banks like to “sell” many products to each customer, which increases concentration risk, Kyle Doherty, managing director at General Catalyst, noted, “but you don’t need to have all your money with them.”

William C. Martin, founder of investment fund Raging Capital Management, said inaction was the biggest factor in startups managing their money irresponsibly.

“They couldn’t imagine the possibility of something going wrong because they hadn’t experienced it. As a hedge fund in 2008 that saw counterparty bankruptcies, we had contingencies, but that just wasn’t there here,” he said, calling it “highly irresponsible” for a company. Or a multi-billion dollar investment fund that has no plan for a banking crisis.” “What does your CFO do?” he asked.

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Doherty backed away from that idea. “Things move quickly in the early stages of the company’s business: the focus is on making and delivering the product,” he said. “Sometimes people were just lazy, but that wasn’t an abdication of responsibility, other things took priority and the risk was always fairly low.”

For Betsy Atkins, who has served on boards including Wynn Resorts, Gopuff and SL Green, the collapse of SVB is “a wake-up call . . . that we have to focus deeper on managing enterprise risk.” She predicted that just as boards began examining supply chain focus during the pandemic, they would now look more seriously at how to allocate assets.

Ross Porter, chief financial officer at the Institute of Management Accountants, a professional organization, said companies need to diversify their banking relationships and develop more sophisticated financial departments as their complexity grows.

“It is not a best practice to have only one partner . . . to pay your bills and meet your payroll. But I am not advocating the fragmentation of banking relationships.

For example, the IMA itself has $50 million in annual revenue and five people in the finance department, one of whom spends two-thirds of his time in treasury functions. She has money for a year’s expenses, and three banks.

Many startups have taken advantage of the ready availability of private funding to delay rites of passage like initial public offerings, which Koenig noted are often moments when founders are told they should create more professional financial teams.

However, it can be difficult to find financial professionals who are attuned to today’s risks. “There’s a shortage of experienced CFOs working through really tough times. They’ve never had to deal with high inflation; they may still be at university or just getting their job through the great financial crisis,” Porter said. “The skill set that is required may change a bit. , from a dynamic, growth-oriented CFO to a more balanced CFO who can address and mitigate risk.”

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There’s another compelling reason for startups to get more serious about treasury management, Doherty said: The number of companies changing banks has provided an opportunity for fraudsters to impersonate legitimate parties by telling startups to transfer money to new accounts.

Added Adams: “We’ve started receiving emails from sellers with wire instructions – ‘You need to update your payment and transfer it to this account.'” In the coming weeks we will see a lot of scammers saying “Hey, we can take advantage of this.”

Chris Benati, a former auditor and founder of Bedrock AI, a Y Combinator-backed Canadian startup that sells a financial analysis tool, warned of the danger of overreacting.

“The insinuation that we should have improved our finances in order for the bank to fail is absurd to me. This was an extreme black swan event, not something we should have anticipated or expected.”

One idea floated on Twitter last week — by former Bank of England economist Dan Davies — is for venture capital firms to go further than advising their investing firms to offer offshore treasury jobs.

Banati was not in favor. “Honestly, I don’t think this is a problem we need to solve and certainly not a service that venture capitalists should be providing,” she said. “Letting a bunch of techies handle my money is far worse than letting it hang around at RBC.”

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