A week after the Silicon Valley Bank collapse, a group of venture capitalists wrote to the shocked start-ups they had invested in. It was time, they said, to talk about the “admittedly not so sexy” function of cash management.
Days of scrambling to account for their companies’ funds presented a generation of founders with an uncomfortable fact: for all their efforts to raise funds, few had spent much time thinking about how to raise them. manage.
In some cases, the sums involved were considerable: Roku, the video streaming company, had almost half a billion dollars in SVB at the start of the bank run, a quarter of its funds.
Many others, it appeared, had concentrated all the funding on which their long-term growth plans and impending payroll needs depended in just one or two banks, regardless of whether regulators would insure the first $250,000 in the event of a problem. .
The ‘easy money regime’ of recent years allowed relatively immature companies to amass unusually large sums of cash which were ‘far in excess of what they needed’, the former chief risk officer observes of one of America’s largest banks, who asked not to be named.
“The problem here is that the cash seems to me so outsized relative to the size of the companies,” he said. “Traditionally, people would grow into this over time. Nobody would give a couple hundred million dollars to a 20-person startup” before the venture capital fueled startup boom.
“When the money is flowing, you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains directors and senior executives in risk management. It was not unusual for people who had successfully developed new things to ignore traditional risks, he added: “The risk for them is something separate from what they do in their business. .”
The founders exchanging notes at the South by Southwest festival in Texas last week admitted they received a quick education. “We got our MBA in corporate banking last weekend,” said Tyler Adams, co-founder of a 50-person startup called CertifID: “We didn’t know what we didn’t know and we were all doing different things but making similar mistakes.
Her wire fraud prevention firm, which raised $12.5 million last May, did business with PacWest Bancorp and on Friday rushed to transfer four months’ pay to a regional bank where it had 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 maintaining accounts with two or three banks, including one of the four largest in the United States, they said. Hold three to six months of cash in two basic operating accounts, they advised, investing any excess in “safe and liquid options” to generate more income.
“Getting this right can mean the difference between survival and an ‘extinction level event’,” investors warned.
Kyle Doherty, chief executive of General Catalyst, noted that banks like to “sell multiple products” to each customer, which increases concentration risk, “but you don’t have to have all your money with them.”
William C Martin, founder of the investment fund Raging Capital Management, argued that complacency was the most important factor for start-ups that manage their cash flow irresponsibly.
“They couldn’t imagine the possibility that something could go wrong because they hadn’t experienced it. As a hedge fund in 2008, seeing counterparties fail, we had contingencies, but that didn’t exist here,” he said, calling it “rather irresponsible” than a multi-billion dollar company or a hedge fund. venture capital has no plan for a banking crisis. “What does your CFO do? ” He asked.
Doherty pushed back on this idea. “Things change quickly in the early stages of a business: the focus is on making the product and delivering it,” he said. “Sometimes people got lazy, but that wasn’t an abdication 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 “red flag.” . . that we need to focus more on enterprise risk management. Just as boards had begun to examine supply chain concentration during the pandemic, they would now take a closer look at how assets are allocated, she predicted.
Russ Porter, chief financial officer of the Institute of Management Accountants, a trade organization, said companies need to diversify their banking relationships and develop more sophisticated financial services as they become more complex.
“It is not recommended to use only one partner. . . to pay your bills and do your payroll. But I am not advocating the atomization of banking relationships,” he said.
For example, the IMA itself has $50 million in annual revenue and five people in its finance department, one of whom spends two-thirds of her time on treasury functions. She has cash to cover a year of expenses and three banks.
Many start-ups have taken advantage of the ready availability of private funding to delay rites of passage such as initial public offerings, which Koenig says are often times when founders are told they need to put teams in place. financial more professional.
However, it can be difficult to find finance professionals aware of today’s risks. “There’s a shortage of CFOs with experience working in really tough times. They never had to deal with high inflation; maybe they were still in college or just mid-career during the great financial crisis,” Porter said. “The skill sets required could change quite a bit, from a dynamic, growth-oriented CFO to a more balanced director who can manage and mitigate risk.”
There’s another pressing reason for start-ups to take cash management more seriously, Doherty said: The number of companies switching banks has given fraudsters an opportunity to pose as counterparties. legit by telling start-ups to transfer money to new accounts.
“We’ve started getting emails from vendors with wiring instructions – ‘you need to update your payments and transfer to this account,'” Adams added: “In the coming weeks we’re going to see many scammers say “hey, we can take advantage”.
Kris Bennatti, former auditor and founder of Bedrock AI, a Y Combinator-backed Canadian startup that sells a financial analysis tool, warned of the risk of overreaction.
“To insinuate that we should have optimized our finances in the event of a bank failure is to me absurd. This was an extreme black swan event, not something we should or could have foreseen.”
An idea floated on Twitter last week – by former Bank of England economist Dan Davies – would be for venture capitalists to go beyond offering advice to their investees to offering advisory functions. outsourced cash.
Bennatti was not in favor of it. “Frankly, I don’t think this is a problem we need to address and certainly not a service VCs should be offering,” she said. “Letting a bunch of techies manage my money is far worse than leaving it lying around at RBC.”