A week after Silicon Valley Bank collapsed, a group of venture capital firms wrote to the shell-shocked start-ups they had put their money into. It was time, they said, to talk about the “admittedly not so sexy” function of treasury management.
Days of scrambling to account for their companies’ funds presented a generation of founders with an uncomfortable fact: for all the effort they had put into raising cash, few had spent much time thinking about how to manage it.
In some cases, the sums involved were considerable: Roku, the video streaming business, had almost half a billion dollars in SVB when the bank run began — a quarter of its funds.
Many others, it transpired, had concentrated all of the funding on which their long-term growth plans and imminent payroll needs depended in just one or two banks, with little consideration that regulators would only insure the first $250,000 of it in the event of trouble.
“The easy money regime” of recent years allowed relatively immature companies to amass unusually large sums of cash that were “far in excess of what they needed”, observed the former chief risk officer of one of the biggest US banks, who asked not to be named.
“The problem here is the cash seems to me so outsized relative to the size of the companies,” he said. “Traditionally people would grow into that over time. Nobody would hand a couple of hundred million dollars to a start-up with 20 people in it” before the VC-fuelled start-up boom.
“When the money’s flowing you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains directors and executives on managing risks. It was not unusual for people who had been successful growing new things to ignore traditional risks, he added: “Risk to them is something that’s separate from what they do in their business.”
Founders swapping notes at the South by Southwest festival in Texas last week admitted that they had received a rapid education. “We got our MBA in corporate banking this past weekend,” said Tyler Adams, co-founder of a 50-person start-up called CertifID: “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 $12.5mn last May, banked with PacWest Bancorp and scrambled on Friday to move four months of payroll into a regional bank where it had kept a little-used account while opening an account with JPMorgan Chase.
The VCs, including General Catalyst, Greylock and Kleiner Perkins, advocated a similar strategy in their letter. Founders should consider keeping accounts with two or three banks, including one of the four largest in the US, they said. Hold three to six months’ worth of cash in two core operating accounts, they advised, investing any excess in “safe, liquid options” to generate more income.
“Getting this right can be the difference between survival and an ‘extinction level event’,” the investors warned.
Kyle Doherty, managing director at General Catalyst, noted that banks like to “cross-sell” several products to each client, heightening the risk of concentration, “but you don’t need to have all your money with them”.
William C Martin, founder of investment fund Raging Capital Management, argued that complacency was the bigger factor in start-ups managing their cash 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 going broke, we had contingencies, but that didn’t exist here,” he said, calling it “pretty irresponsible” for a multibillion dollar company or venture fund to have no plan for a banking crisis. “What’s your CFO doing?” he asked.
Doherty pushed back on that idea. “Things move fast in the early phases of a company: the focus is on making product and delivering it,” he said. “Sometimes people just got lazy but it was not an abdication of responsibility, it was that 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, SVB’s collapse is a “wake-up call . . . that we have to do deeper focus on enterprise risk management.” Just as boards had started to scrutinise supply chain concentration during the pandemic, they would now look harder at how assets are allocated, she predicted.
Russ Porter, chief financial officer of the Institute of Management Accountants, a professional organisation, said companies needed to diversify their banking relationships and develop more sophisticated finance departments as they grew in complexity.
“It is not best practice to use just one partner . . . to pay your bills and meet your payrolls. But I am not advocating for atomising banking relationships,” he said.
For example, the IMA itself 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 of 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 noted are often moments where founders are told they must put more professional financial teams in place.
Finding finance professionals attuned to today’s risks can be hard, however. “There’s a shortage of CFOs with experience working in really challenging times. They’ve never had to deal with high inflation; they might have been still in university or just getting their careers going during the Great Financial Crisis,” Porter said. “The required skillset might be changing a bit, from a dynamic, growth-oriented CFO to one more balanced who can address and mitigate risks.”
There is another pressing reason for start-ups to get more serious about treasury management, Doherty said: the number of businesses changing banks has provided fraudsters with an opportunity to impersonate legitimate counterparties by telling start-ups to wire money to new accounts.
“We started getting emails from vendors with wiring instructions in them — ‘you need to update your payments and wire to this account’,” added Adams: “In the weeks to come 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 start-up backed by Y Combinator that sells a financial analysis tool, warned of the risk of overreacting.
“Implying that we should have been optimising our finances for bank failure is absurd to me. This was an extreme black swan event, not something that we should have or could have foreseen.”
One idea floated on Twitter in the past week — by the former Bank of England economist Dan Davies — would be for VC firms to go beyond offering advice to their investee companies to offer outsourced treasury functions.
Bennatti was not in favour. “Frankly, I don’t think this is a problem we need to solve and definitely not a service that VCs should offer,” she said. “Letting a bunch of tech bros handle my cash is so much worse than letting it hang out at RBC.”