Silicon Valley Bank: banking tips as a startup founder

by Cornelius Harmon

The news of Silicon Valley Bank’s (SVB) rapid collapse sent shockwaves across the U.S. as Americans woke up on the morning of March 10, 2023. Though concerning to regulators, investors, and the banking sector as a whole, it was also particularly alarming to the many startup founders who had chosen to deposit company funds with SVB. This is because SVB largely focused on one sector of the economy: venture capital and startups. Because of a recent surge in startup funding, SVB ultimately took on more deposits than it should have, and many founders feared they had lost hundreds of thousands, or even millions of dollars when the initial news broke. Luckily, after a tumultuous and uncertain weekend, the FDIC ultimately transferred all deposits to a new entity, a bridge bank that would protect both insured and uninsured depositors. Such uncertainty has prompted many founders to rethink how they manage their cash reserves that are important to the health of their business. Here are a few things to keep in mind when banking as a startup founder.

Though investing-minded folks hear this all the time, many people do not think about the need to diversify where they keep their cash reserves. Many of those founders who operated in this way were able to breathe easy even after the initial news broke if they had less than $250,000 at SVB, as this was the amount of deposits that the FDIC stated would be insured. While smaller, regional banks like SVB offer unique advantages, no founder wants to wake up and discover critical company funds can’t be accessed, which is why storing funds at multiple institutions can protect from the possibility of not being able to make payroll due to liquidity problems. Keeping some portion of cash reserves at a larger bank that is less likely to experience a collapse like SVB will ensure that even if a smaller bank where other cash is stored fails, there are still funds available to keep the lights on.

Due to SVB’s deep ties to the VC/startup world, they accepted a large influx of deposits over the past several years, as funding rounds inflated and more VC money was poured into startups than ever. As startup founders were concerned about their cash reserves, so too were the VC investors that had provided a portion of that to them. Startup founders can expect that going forward, VCs will more carefully scrutinize their cash balances before writing a check. Being able to present a diversified banking strategy and a strong grip on cash management can help assuage VC decision-makers and make raising a larger round more likely.

Though not every startup has the luxury to be able to afford a great CFO, doing so could be a great way to accomplish the previous two actions listed above. Not every founder is a financial guru, and they’re not meant to be, hence the need for a CFO at some point. Not only can a CFO help a founder make a decision as to how to properly manage cash, but also serve as a reliable, trustworthy source of all a startup company’s financial information during conversations with investors. While this job certainly becomes more difficult as company cash gets spread across different locations, it also becomes more important. With such a large amount of deposits being uninsured at Silicon Valley Bank, many founders found themselves in the same boat after it was shut down by federal regulators. However, those founders that took steps to protect themselves were able to sleep a little easier knowing their company funds were safe. 

Our team at Hyperspace Ventures is always up-to-date on best practices for startups, whether for product design, development, or even cash management. 

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