A week after Silicon Valley Bank collapsed, a group of venture capital firms wrote a letter to the shocked startups they had poured their money into. It was time, they said, to talk about the “albeit not so sexy” function of treasury management.
Days of struggling to account for their company’s funds presented a generation of founders with an inconvenient fact: Despite all the effort they’d put into raising money, few had spent much time thinking about how to manage it.
In some cases, the sums involved were substantial: Roku, the video streaming company, had nearly half a billion dollars in SVB when the bank run began — a quarter of its funds.
Many others, it turned out, had concentrated all the funding on which their long-term growth plans and their pressing wage needs depended on just one or two banks, disregarding the fact that regulators would only insure the first $250,000 in case of trouble. .
“The easy money regime” of recent years allowed relatively immature companies to amass unusually large sums of money that were “much more than they needed,” noted the former chief risk officer of one of the largest US banks , who asked not to. be called.
“The problem here is that the money seems so outsized to me relative to the size of the companies,” he said. “Traditionally, people would grow into that over time. No one would hand over a few hundred million dollars to a start-up with 20 people in it” before the VC-fueled start-up boom.
“When the money flows, you pay less attention to it,” says David Koenig, whose DCRO Risk Governance Institute trains directors and executives in managing risk. It wasn’t unusual for people who had been successful growing new things to ignore traditional risks, he added: “Risks for them are separate from what they’re doing in their business.”
Founders exchanging notes at Texas’ South by Southwest festival last week admitted they had a quick education. “We got our MBA in corporate banking this past weekend,” said Tyler Adams, co-founder of a 50-person startup called CertifID, “We didn’t know what we didn’t know and we all made different things, but similar mistakes.”
His fraud prevention firm, which raised $12.5 million last May, banked with PacWest Bancorp and rushed Friday to transfer four months of payroll to a regional bank where it had held a little-used account while opening an account with JPMorgan Chase .
The VCs, including General Catalyst, Greylock and Kleiner Perkins, argued for a similar strategy in their letter. Founders should consider holding accounts at two or three banks, including one of the four largest in the US, they said. Keep three to six months’ worth of cash in two core accounts, they advised, and invest 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, general manager of General Catalyst, noted that banks like to “re-sell” different products to each customer, increasing the risk of concentration, “but you don’t have to carry all your money.”
William C Martin, founder of investment fund Raging Capital Management, argued that complacency was the biggest factor in startups managing their money irresponsibly.
“They couldn’t imagine anything could go wrong because they hadn’t experienced it. As a hedge fund in 2008, when we saw counterparties going bankrupt, we had contingencies, but they didn’t exist here,” he said, calling it “pretty irresponsible” for a multibillion-dollar company or venture fund not to have a plan for a banking crisis. “What does your CFO do?” he asked.
Doherty returned to that idea. “In the early stages of a business, things move quickly: the focus is on making a product and delivering it,” he said. “Sometimes people just got lazy, but it wasn’t abdication of responsibility, it was other things taking precedence and the risk was always pretty low.”
For Betsy Atkins, who has served on the boards of Wynn Resorts, Gopuff and SL Green, among others, the collapse of the SVB is a “wake-up call”. . . that we should focus more on enterprise risk management.” Just as boards began 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 professional organization, said companies needed to diversify their banking relationships and develop more sophisticated finance departments as they became more complex.
“It is not best practice to use only one partner. . . to pay your bills and meet your payrolls. But I am not advocating the fragmentation of banking relationships,” he said.
For example, the IMA itself has annual revenues of $50 million and five people in the finance department, one of whom spends two-thirds of his time in treasury functions. It has cash to cover a year’s expenses, and three banks.
Many startups have taken advantage of the ready availability of private funding to delay rite of passage like IPOs, which Koenig noted are often times when founders are told to build more professional finance teams.
However, it can be difficult to find financial professionals who are aligned with today’s risks. “There is a shortage of CFOs with experience in really challenging times. They have never experienced high inflation; they might still be in college or just starting their careers during the Great Financial Crisis,” Porter said. “The skills required may change a bit, from a dynamic, growth-oriented CFO to a more balanced CFO who can address and mitigate risk.”
There’s another compelling reason for startups to take treasury management more seriously, Doherty said: The number of companies switching banks has allowed fraudsters to impersonate legitimate counterparties by telling startups to transfer money. to new accounts.
“We started getting emails from suppliers with payment instructions in them – ‘you need to update your payments and transfer them to this account,’” Adams added: “In the coming weeks we will see a lot of fraudsters say ‘hey, can we do this? taking advantage’.”
Kris Bennatti, former accountant 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.
“I find it absurd to imply that we should have optimized our finances for bank failures. This was an extreme Black Swan event, not something we should or could have foreseen.”
One idea floated on Twitter last week – by former Bank of England economist Dan Davies – would be that VC firms go beyond advising the companies they invest in, by offering outsourced treasury functions .
Bennatti was not in favour. “Honestly, I don’t think this is a problem we should solve and certainly not a service VCs should provide,” she said. “Letting a bunch of tech bros handle my money is so much worse than letting them hang around at RBC.”