A week after the collapse of Silicon Valley Bank, a group of venture capital firms wrote to start-ups shaking the shell in which they put their money. It’s time, they say, to talk about the “recognition of not being a witness” function of treasury management.
The days of scrambling for the company’s fund account gave the founding generation with an uncomfortable reality: for all the effort they put in to raise cash, some have spent a lot of time thinking about how to manage it.
In some cases, the amount involved is huge: Roku, the video streaming business, had almost half a billion dollars in SVB when the bank opened – a quarter of the fund.
Many others, it happens, have concentrated all the funding that their long-term growth plans and salary needs will depend on just one or two banks, not thinking that the regulator will only insure the first $ 250,000 in case of problems. .
The “easy money regime” in recent years has allowed immature companies to accumulate extraordinary amounts of cash that are “more than they need”, said the former chief risk officer of one of the biggest US banks, who asked not to be named.
“The problem here is that the cash I think is getting bigger than the size of the company,” he said. “Traditionally, people will grow at that time. No one will give a few hundred million dollars to a startup with 20 people “before the startup boom filled with VCs.
“When the money is flowing, you pay less attention,” says David Koenig, whose DCRO Risk Governance Institute trains directors and executives on managing risk. It is not uncommon for people who have successfully developed new things to ignore traditional risks, he added: “Risk for them is something different from what they do in business.”
The founders of swapping notes at the South by Southwest Festival in Texas last week admitted that they received a quick education. “We got our MBA in corporate banking last weekend,” says Tyler Adams, co-founder of a 50-person startup called CertifID: “We don’t know what we don’t know and we all make different but the same mistakes.”
His wire fraud prevention business, which raised $12.5m last May, banked with PacWest Bancorp and scrambled there to transfer four months of payroll to a regional bank where it has 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 the letter. Founders should consider keeping accounts with two or three banks, including one of the four largest in the US, they said. Hold cash for three to six months in two core operating accounts, they advise, investing the 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 at General Catalyst, noted that banks like “cross-sell” some products for each client, increasing the risk of concentration, “but you don’t need to have all the money with them”.
William C Martin, founder of investment fund Raging Capital Management, insists that satisfaction is a bigger factor in the beginning of managing cash irresponsibly.
“They can’t imagine the possibility of something going wrong because they haven’t experienced it. As a hedge fund in 2008 saw that counterparties would break, we have contingencies, but that’s not here,” he said, calling it “pretty irresponsible” for a multibillion dollar company or fund ventures do not plan for the banking crisis. “What does your CFO do?” he asked.
Doherty rejected the idea. “It’s a quick move in the early phase of the company: focus on making the product and delivering it,” he said. “Sometimes people are just lazy but not responsible, but other things take priority and the risk is always 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 need to focus more deeply on corporate risk management. Just as boards began to examine the concentration of supply chains during the pandemic, now it will be harder to figure out how assets are allocated, he predicted.
Russ Porter, chief financial officer of the Institute of Management Accountants, a professional organization, said companies need to diversify their banking relationships and develop more sophisticated finance departments as they grow more complex.
“It is not best to use only one couple. . . to pay bills and meet payrolls. But I do not advocate for the atomization of banking relationships,” he said.
For example, IMA itself has $50 million in annual revenue and five people in its finance department, one of which spends two-thirds of his time in the treasury function. Have cash to cover the year’s expenses, and three banks.
Many start-ups have taken advantage of the ready availability of private financing to delay the rite of passage such as the initial public offering, which Koenig notes are often moments where the founders have to put another professional financial team in place.
Finding a finance professional who matches your current risk can be difficult, however. “There is a lack of CFOs with experience working in very difficult times. They have never had to deal with high inflation; they may still be at university or have just gained a career during the Great Financial Crisis,” said Porter. “The skills needed may change quite a bit, from a dynamic and growth-oriented CFO to another balanced one that can handle and mitigate risks.”
There is another important reason for startups to be more serious about treasury management, said Doherty: the number of businesses changing banks has provided fraudsters with the opportunity to imitate legitimate partners by telling startups to send money to new accounts.
“We’re starting to get emails from vendors with wire instructions – ‘you need to update your payment and wire to this account’,” added Adams: “In the coming weeks, we’re going to see a lot of fraudsters saying ‘hey, we can take advantage of this ‘.”
Kris Bennatti, a former auditor and founder of Bedrock AI, a Canadian startup backed by Y Combinator that sells financial analysis tools, warns of the risk of overreacting.
“To suggest that we have to optimize our finances for a bank failure is absurd. This is an extreme black swan event, not something we should have done or could have foreseen.
One idea floating around on Twitter last week – by former Bank of England economist Dan Davies – was for VC firms to go beyond advising investee companies to outsourced treasury functions.
Bennatti disagreed. “Honestly, I don’t think this is a problem that needs to be solved and certainly not a service that VCs should be offering,” he said. “Letting a bunch of tech bros handle my money is worse than letting it go at RBC.”