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The Closing of SVB: Lessons for Founders

Who would have thought that one of the banking mainstays in the U.S., an institution with over $200B in assets, would suddenly close without barely any notice. What happened two weeks ago with SVB is an awful reminder of just how challenging entrepreneurship can be.
 
Fortunately, the federal government stepped in that following weekend to prevent a banking collapse. And while all depositors remained whole, it does beg the question as to how can a startup best position itself to mitigate these sort of risks. But first, let’s revisit the circumstances…
 
What Happened
  • Silicon Valley Bank (SVB) was the 18th largest bank in the US with >$200bn in assets. It was focused on serving startups and claimed to do business with 50% of venture-backed companies.
  • On Wednesday, it announced that it had taken a large loss in its investment portfolio (as a reminder, banks take deposits and then make investments with a portion of those funds.)
  • This scared a portion of its depositors, who sought to quickly withdraw their funds.
  • Because all banks need to hold a certain amount of their assets in liquid cash, this meant SVB had to sell more securities to find that cash.
  • As the Fed has increased interest rates in recent months, the value of their bonds has been declining (interest rates and bond prices are inversely related.)
  • When SVB went to sell those bonds, it posted larger losses (those bonds have decreased in value because of the Fed’s action.) And the cycle repeats on itself.
  • On Fri March 10, SVB announced that it was being taken over by the FDIC.

 

Why It Happened
In an oversimplified summary, it was bad optics at the wrong time.
 
  • While in the long term, SVB looked relatively healthy and would have been good, in the short term, they had a difficult leverage / liquidity solution. Here’s an insightful summary from Bob Elliott, a former Bridgewater exec and an expert on this topic.
  • With a banking system that is ultimately based on trust, if a banking institution loses that, even just for a quick minute and even if not true longer-term, the system will still collapse on it.
  • In addition, here’s a great summary from Lulu Cheng Meservey on how human and PR choices also contributed to things going awry for SVB

 

What It Meant
  • If the U.S. government hadn’t announced that it would insure all deposits regardless of size, then companies who had a bank account at SVB would have been limited to the FDIC’s $250K insured limit, with the remainder is at least partially recoverable over time as the FDIC solds assets of SVB.
  • Stay Patient: Still, it’s often best not to panic as things can change quickly in times like these — as it did with the government bailing it out. As we know, startups are an important part of the economy
  • Build contingency plans: while this scenario worked out, it’s still smart to have alternative plans for when they don’t. Examine where you are most exposed and start from the worst-case scenario (which is, fortunately, the most unlikely) and work backward. If there hadn’t been a bailout, what would you have had to do if your uninsured money was never repaid? What would you do if it took one month? What about one year? Having thought through this, you will be in a better position to make decisions if there is a next time.

 

What Every Founder Can Do Now
  • Assure your team and customers: Be transparent. Assure all of them of your financial status, the plans you’ve made to mitigate this risk in the future and share it with them early and often
  • Account for your cash: What bank is it at and do you have more than $250K there? Amounts above $250K per account type are not insured. Keep in mind that each category of account is protected by FDIC for a given depositor. As such, if you have two banks with a checking and savings account each, your theoretical maximum insured amount is $1MM. But if you have two checking accounts with the same institution, you’re only insured $250K.
  • Invest amounts >$250k: Consider putting these in short-term securities like Treasury bills (which are backed by the U.S. government) and insured up to $500K. For instance, Meow.co offers treasury/cash management accounts that allows one to get their own, non-discretionary account at BNY Mellon Pershing, a $2T custodian and a stalwart in the space.
  • Deposit all of your outstanding checks: Sooner is better than later
  • Contact your payroll company: Confirm that their banking partners & payment processes are still running properly before the next pay cycle
  • Rethink & reassess your plans for raising capital. Markets are likely to be constrained in the near term. Develop a plan for the contingency that you cannot raise capital (debt or equity) in the next 3-6 months
  • Consider moving funds to the most liquid, traditional banks like Bank of America, Wells Fargo, JPM, etc.
  • Consider drawing down your credit lines. If there is a chance might need capital to fund the business (payroll, etc.), in situations like these it is often better to do this sooner vs. later (and then pay back what you don’t need once the dust settles)