The last 72 hours has been a whirlwind in startupland. With the collapse of Silicon Valley Bank (SVB), the largest financial institution for startups is no more. SVB worked with half the VC-backed companies in the United States, and according to PitchBook, there are 130,000 such businesses. That’s right, an astounding 65,000 startups are SVB customers. As of Friday morning, the first $250,000 of demand deposits are guaranteed and monies in excess of that are dependent on winding down the bank and not guaranteed. Current rumors range from 50% of deposits will be made available on Monday to takeover by a bigger bank with minimal disruption to deposits. Yet, nothing above the first $250,000 is guaranteed.
Startups that bank with SVB will have a long weekend waiting to see what ultimately is shared on Monday. My guess is that startups will get all their deposits back, but it might take some time to do so depending on whether or not the government steps in.
Now, regardless of being venture backed or an SVB customer, there are a few bank hygiene takeaways for startups:
- Two Bank Relationships – Treasury management is clearly mission critical to the business. By having standard bank accounts with two different banks, a backup is ready to go in case the primary bank struggles. In addition, it’s valuable to negotiate better rates and terms whereby the banks compete against each other. Just like having geographically independent data centers to host your app for redundancy, do the same for your banking. Consider putting your excess cash in a mega bank that’s too big to fail (> $250B in assets).
- Insured Cash Sweeps – Ask your bank if they offer Insured Cash Sweeps where your balance is split automatically behind the scenes across many banks such that each bank has no more than $250,000 and the entire amount is fully insured by the FDIC.
- Treasury Bills – Park cash that isn’t immediately needed directly with the government via Treasury Bills at TreasuryDirect These are the safest investments possible because the U.S. government prints the actual money, the risk of default is as low as possible (if it defaults, we have bigger problems!).
- Automated Cash Management – Services like Max https://www.maxmyinterest.com/ and Vesto https://www.getvesto.com/ will automatically move money around to get the best interest rates and spread the cash across multiple banks as well as treasury bills based on rules.
The immediate next steps are to have two banking relationships and a strategy to have deposits over the FDIC $250,000 amount either insured across multiple banks and/or in ultra short term government T-bills. Bank failures are extremely rare, but with a little work, the tools and systems are already available to minimize any potential exposure.
2 thoughts on “Bank Hygiene for Startups”
Normally I’d agree with the advice to park excess cash in Treasuries but, with the current environment of rising yields, it’s precisely what took SVB down given their bond portfolio kept losing value as interest rates rose.
Great article. Lessons learned for sure , as painful as it might be. Getting a CFO is probably another lesson learned. We had 80% of our cash at SVB . Long weekend indeed.