From using multiple banks to managing VC relationships, these are the 5 lessons every founder should have learned from the Silicon Valley Bank nightmare
- The Silicon Valley Bank crisis has deescalated and depositors will not lose their money.
- Now is the time for founders to change things to be better prepared for next time.
With the most immediate crises from the Silicon Valley Bank run averted in as elegant a way as possible, founders can wipe the sweat from their brow and focus on what they learned that will protect them in the future.
To recap: On Friday, the bank that famously served the tech startup community with loans and other banking services experienced an honest-to-goodness, It's-a-Wonderful-Life-esq bank run, and was taken over by the FDIC. Thousands of startups lost access to all of their money over the weekend, and many of their VC firm investors — who also used the bank — were in a similar boat. The weekend was a wild ride of analysis, CAPS LOCK PANIC TWEETING and organizing and lobbying, largely by the venture capital community aimed at bank regulators asking for help.
Regulators listened and opted to ensure that every penny that was on deposit in accounts was preserved for the bank's customers, even though most accounts were in excess of the $250,000 FDIC insurance limit.
The FDIC will cover the expense, should it have to, by increasing fees from banks for the FDIC insurance program, it said. (Fees from banks already fund the program) The agency is also searching for a buyer of the bank and short of that it will auction off assets to cover such costs. Stockholders of the bank are getting no help if a sale doesn't materialize, and no tax dollars are being used.
But every founder who experienced the bank failure, or witnessed it, should be using this life-flashing-before-our-eyes moment to look around and make changes. Here's the top lessons that every founder should have learned:
1. Use multiple banks to store cash if your balance exceeds $250,000, the limit of the FDIC depositor insurance. If something happens to one bank, such as a bank run, your company won't face ruin. There are a multitude of options to help manage this, such as Certificate of Deposit Account Registry Service (CDARS).
2. If your bank lender wants you to sign exclusivity clauses requiring your company to store its money at the bank as a covenant of the loan, negotiate that term. Silicon Valley Bank famously required such clauses as CNBC reported, for at least some of its loans.
This allowed it to monitor the financial health of the younger, riskier, companies with less collateral which was a large part of its clientele, and also allowed it to offer sweeter deals to such borrowers. It's also a reason why so many tech startups stashed all their money at SVB, far in excess of the insured amount, and almost lost everything when the bank went under, as many have described. (Why not agree to this? See Lesson No. 1.)
3. A venture capitalist on your board, or among your network, is not a substitute for having an experienced CFO or equivalent expert who understands the innards of financial regulations and can monitor the health of your important financial partners. Many VCs have engineering, operating or marketing expertise, but are not finance and governance experts.
A day of panic spurred the whole situation, largely caused by VCs telling their founders to get their money out pronto. But red flags for the bank's underlying troubles could be seen weeks, even months, in advance for those who were watching, the LA Times reported.
Your company should have someone who is watching, and not rely on folks who are passing along alarm-tinged intel from their network of peers.
4. Running operations on revenue from customers is better than using a stockpile of VC cash. This is, of course, the Catch-22 of the startup world, who must spend to build their products before they can sell them. But startups with thick bank accounts often don't prioritize revenues. The story of the week on the importance of revenue was from venture-backed toy maker and SVB customer Camp, who put all its toys on sale to instantly raise money from customers, allowing it to open an account elsewhere and cover its cash needs.
5. The likelihood of more bank runs remains a scary possibility because of the speed of sharing agitating messages on social media coupled with the speed of making withdrawals. Panicked VCs and founders tweeted wildly on Thursday stoking fears, making this the fastest bank failure in history, reports Insider's Kali Hays. Again, the best insurance for business owners is literal insurance (see lesson No. 1).
One bit of good and often overlooked, news is that, during the SVB fiasco, the Federal Reserve Board announced on Sunday a new loan program for banks where they can borrow cash if they face this kind of sudden liquidity crunch. So while the possibility of more banks failing looms (not good for shareholders of at-risk banks), the possibility of losing depositor money is not crazy high.
Here's a guide to many more lessons learned:
Why Silicon Valley Bank failed: SVB's management surprised the market by unveiling bad news coupled with a planned capital raise that failed, among other factors.
How Silicon Valley Bank imploded: There was lots of blame to go around.
9 startup founders who banked with Silicon Valley Bank share where they're moving their money: traditional large banks are the big winners, but so are a whole slew of newer startup-focused banks.
Silicon Valley Bank's meltdown shows that tech's elites need the government after all. Many tech execs and VCs fight against government regulation in every industry, but those were some of the loudest voices calling for regulators to save SVB.
More of our Silicon Valley Bank coverage can be found here.