Surviving the Silicon Valley Bank apocalypse: Multi-Bank Management for Startups

Cash management (or effective treasury management) can often be the deciding factor for the success or failure of tech startups. To achieve success, it is crucial to manage cash flow, particularly the "burn rate," which refers to the rate at which money is spent before reaching profitability. To operate safely and efficiently in every stage of growth, companies need the right mix of liquidity options and a range of treasury management products and services.

The background

The recent collapse of Silicon Valley Bank (SVB) sent shockwaves through the startup community, leaving many founders scrambling to find alternative safe havens for their funds. SVB, once the go-to bank for startups to store their capital, has been a crucial partner for tech companies that preferred convenient banking solutions tailor-made towards their industry. The bank's sudden fall from grace has exposed the vulnerabilities within the banking system and the potential havoc that can befall businesses that do not diversify treasury management.

The impact of SVB's collapse on the startup ecosystem has been significant, with many fearing that it will lead to a tighter cash position and a significant strain on cash flows in an already challenging macroeconomic environment. As a result, founders are now forced to diversify their banking relationships and explore alternative banking options, making innovation and growth more challenging than ever before. The demise of SVB serves as a stark reminder of the importance of due diligence and risk management when it comes to securing the financial position of startups.

What was the impact?

Even minor interruptions in cash flow can have significant repercussions for individuals, corporations, and entire industries. While it was highly probable that uninsured depositors would eventually be reimbursed, the pressing issue was that they could not access their funds.

The most pressing consequence was the impact on payroll. Numerous individuals were worried about whether their next paycheck will be delayed. For some, the news was already confirmed, as payroll providers informed their clients that certain payments would be delayed due to the SVB collapse. This delay in payment resulted in difficulties for employees, such as being unable to pay rent or mortgage, as well as covering expenses for groceries, fuel, or child care.

This does not imply that venture debt was insignificant at SVB. In fact, one of the primary reasons why SVB became the favored bank was due to its venture lending practices. The bank had amassed a loan portfolio of approximately $74 billion, which included its venture debt offerings.

What did most startups do in this situation?

To mitigate these risks going forward, many companies resorted to opening multiple bank accounts and distributing their funds across them. This approach allowed them to reduce their exposure to any single bank and avoid potential disruptions to their business operations and cash flow in the event of a bank failure.

However, this also meant that treasury management and controls on cash in startups immediately became much more complex and difficult. While it is becoming an increasingly common practice among startups seeking to protect their financial stability, this exercise does come at a cost.

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What does treasury management at startups usually look like?

During the early stages of a company, daily banking needs focus less on transactions and more on managing liquidity. Venture-backed startups, for instance, usually manage three separate cash baskets, consisting of core operating cash, reserves for unexpected expenses and short-term burn, and a third category for long-term investments.

Optimizing the use of cash through longer-term investments is common, and liquidity options are typically chosen based on investment policies. Some of the common treasury management solutions used during early-stage growth include:

• Liquidity solutions that combine checking and money market checking accounts, money market mutual funds, and managed fixed-income portfolios.
• Online banking systems that provide easy-to-use browser-based access to account information and transaction initiation, including Bill Pay, Wire Transfers, and electronic payments via the Automated Clearing House (ACH).
• Check Positive Pay to prevent fraudulent checks from being processed in the startup's account.
• ACH Positive Pay to prevent unauthorized electronic debits from posting to the company account while processing only authorized payments.

The Impact of SVB's Collapse

The current wave of decentralization of company funds will have many implications, some of them immediate and some of them over the longer term.

Short Term:

• Treasury operations and controls become super difficult to manage for startups. It's hard enough to manage one central banking platform that needs to integrate with your card spends and accounting books - now imagine something like FIVE bank accounts!
• More time needed for administrative tasks such as approvals, reconciliation and expense matching. This will be driven by two factors - more complexity as a default, and greater diligence simply due to tighter cash positions and slower economic conditions in general.

Long Term:

• No consolidated payment methods - payments will have to be made based on where the funds are, not based on what is most efficient/cost-effective.
• Trade-offs on payment capabilities and costs - the most popular destinations of funds are the legacy, older banks. While extremely stable, they do not give competitive payment terms, and end up being a costly choice for AP and payments in general.

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How we are making sense of this

At Nanonets, we faced a similar issue - having to move our own funds to new destinations in the wake of this crisis.

Here's what helped us come out on the other side with our AP process protected (and even improved, in some aspects!):

• Setting up one dedicated bank that is the sole source of payments for AP - it is best to pick a bank here that has the right balance of being safe, as well as being flexible in terms of money movement and transaction charges
• Setting up internal controls for spending - through our startup-oriented platform Flow, we were able to set up financial controls like separation of duties, duplicate detection and fraud prevention mechanisms

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