Treasury Talent

Startup treasury: lessons from SVB’s collapse

Published: May 2023

As the dust settles from Silicon Valley Bank’s collapse, startup treasury strategy and skills have come to the fore. Avoid concentration risk, especially in banks, know your money market account from your money market fund; get things done quickly – and be a bit scrappy.

Aerial photo of Silicon Valley, California

“The first part of treasury management at a startup is to make sure your bank still has your treasury,” laughs Bill Hunter, President and CEO of California-based Canary Medical, a company making pioneering smart medical implants that provide data insights into patient surgical recovery. But still reeling from Canary having to scramble its finance operation to navigate the fallout from Silicon Valley Bank’s (SVB) collapse last March, Hunter is only half-joking. Canary Medical only had around 5% of its assets with SVB but still stood to lose around US$5m before US regulators came in to guarantee deposits at the stricken lender. SVB’s collapse also caused a hiccup in Canary’s treasury operations. It’s ERP system spanning payroll, invoices, payments and purchase orders all ran through SVB. “Our money was safe, but we had a nightmare restructuring the processes in our IT system,” says Matteo Marchetta, Chief Financial Officer at the company.

Founded in 2011, Canary Medical has a more mature treasury function than earlier stage startupss. But the sudden demise of the tech sector’s favourite bank has shown that even if treasury comprises just a handful of people juggling multiple tasks, the team managing the money behind the scenes are as essential to business success as any celebrated founder.

Concentration risk

Concentration risk of any kind, whether in a single customer, specific employees, or owners in the supply chain, is dangerous for any company. But perhaps the most important lesson in startup treasury revealed in SVB’s collapse is bank diversification. Thanks to a best practice approach to risk and investment management engrained from a decade working for startups in Silicon Valley, Marchetta had ensured that SVB was only one of Canary’s banks.

The company spreads its money between different accounts, distributing the risk. Some is placed in different currencies (to the dollar) and rather than leave it on account with its banks, cash is invested in short-term treasury bills. “We have really worked on our investment policy and risk management,” he says. “In my experience, earlier stage companies might not think it’s worth the time, but when you have a crisis like this, it is.”

But it is a strategy that meant going against the grain. Startups typical relationship with SVB was shaped around borrowing relatively small sums from the bank in a loan agreement that also entailed parking most of their (much larger) assets with the bank to manage. “Most startups would give all their VC money to SVB and leave it there. We know businesses that borrowed US$20m from SVB but handed over US$100m for them to manage,” says Hunter, who like Marchetta, has learnt from experience that bank failures for serial entrepreneurs aren’t that unlikely and it’s important to dig into every loan agreement and seemingly throw away clauses. “I banked with Merril Lynch in 2008 so this is not the first time my bank has gone belly up. Experiencing something twice in a career is not a once in a lifetime thing.”

For Terence Kaplan, COO of Wayleadr, a venture backed B2B software company behind a leading arrival technology that steers motorists to available parking spaces and EV chargers at their office or multifamily location, the crisis also highlighted the importance of banking with diverse lenders. Wayleadr didn’t bank with SVB and is mature enough to have the security, tech expertise and direct relationships with a larger banking cohort, but for most startups this is not an option. “Big banks aren’t interested in banking and lending to startups,” reflects Hunter.

For all the talk of the need for diversity, in a catch-22, startups struggle to find banking partners. Years back, Hunter had to provide guarantor letters and “jump through hoops” to find a bank willing to back a business based in Switzerland, and he says banks in his native Canada are equally reticent to lend to startups. “Banks in the US are far more open to taking your business than any other part of the world,” he reflects. “SVB was an incredible source of investment for startups. It accepted the risk, and the money was cheaper than other sources. Many banks don’t understand startups and can’t distinguish a good or bad company. SVB was filling a niche, but they were the 800lb gorilla in that space. They were the Goldmans of the venture space and within that realm, we’ve lost the anchor tenant.”

As the dust from SVBs collapse begins to settle, some Treasury Today interviewees see new players entering the market. For example, flows to neobanks providing digital-first and often digital-only banking platforms with low or no fee services have spiked. Scott Orn, Head of Startup Accounting & Taxes at Kruze Consulting in San Francisco, believes SVB’s departure will act as a catalyst to neobanks who have already seen a sharp influx of new clients comfortable with the technology. “Founders are self-serving, software people and really like the ease of use of neobanks. The market is moving, and people are going to find alternatives,” he predicts.

Cash management

Cash management is another vital skill in startups treasury. Deciding where and how to put investor money to work before it is sunk into the business is a key focus for Kaplan. “Investors hold us accountable,” he says. “Your resources and capital are limited to what you’ve raised, and how you manage it is critical.”

In one cash management strategy that is a direct consequence of the crisis, Treasury Today interviewees note more companies investing in US government bonds – something Canary Medical’s Marchetta was already doing. Most startups typically put their money in interest bearing money market accounts (as opposed to MMFs) with their banks. Because these accounts are still on the bank balance sheet, these precious assets were also at risk when SVB went down. “Instead of having a money market account at the bank, some companies are buying treasuries directly,” says Orn.

Post SVB, and startup treasurers’ new awareness that insurance from America’s Federal Deposit Insurance Corporation only covers up to US$250,000 of deposits, the number of startups parcelling off small deposits to different banks has turbo charged. The strategy is complicated given many startups have borrowed from their banks on the basis that they keep their cash with the bank, but it is still leading to demand for new products, says Orn.

Like an “insured cash sweep” service whereby a bank breaks large deposits up into chunks and farms them out to multiple banks, freeing small treasury teams from the administrative headache of managing small pots of money behind the scenes. “Under insured cash sweep facilities, treasury can place 250,000 with this bank and 250,000 with that bank which maximises security,” says Orn.

Communication

Another key lesson from SVB’s collapse is communication – for many, the first rule in any crisis. “Communicate with your CEO and your board if you are dealing with something existential,” advises Russ Porter, CFO and Senior Vice President for Institute of Management Accountants (IMA) says that treasury teams have a fiduciary duty to communicate with their boards, a powerful resource in times of stress.

At Wayleadr, treasury’s direct access to the CEO is vital. An open door between the founder and finance team allows a strategic treasury function, distinct from old-fashioned, back office number-crunching. “I see treasury like an advisor to the CEO. It is my responsibility to give our CEO all the insights from the data we have so he can make the best decisions for the business,” says Kaplan for whom communication also involves staying in touch with his treasury network. “Having access to a strong network of peers to bounce ideas off helps me because everyone’s situation is different, and no one size fits all.”

In a crisis treasury is also responsible for communicating the rationale behind financial decisions to other departments. Porter explains that finance in a startup involves communicating the reality of the situation (more, he says, that just ‘hey, we are in a crisis,’) and detailing what action the company is taking with its suppliers and, crucially, employees. “Payroll is 70% of a startups spend,” flags Orn.

Porter’s advice is to pay employees first on the basis that treasury will probably have good enough relationships with suppliers and customers to stretch payments. “It’s never fun to not pay suppliers, but it’s less fun to not pay employees.” It requires a thoughtful process and knowledge of key relationships (time and energy-intensive for a small company) and balancing those that the company is completely reliant upon with those that “will be fine” if they go unpaid for a few weeks. “You have to ask if you don’t pay them, will you break relationship that will hurt you in the long term.”

Skills

Other key advice for startup treasury in the wake of SVB includes investing in people and technology. It means overcoming an instinctive reticent to invest given treasury and finance aren’t a natural priority when resources are scarce, and money is needed elsewhere until the company grows.

Skills to look for include a mishmash of resourcefulness, financial acumen, and the ability to get things done. Startup treasury requires people who can see the big picture and know what the business needs to achieve from a strategic point of view, but also people with the ability to dive into detail and understand the ins-and-outs of day-to-day operation. “You need people with a long-term macro strategic mindset but also the ability to get into the weeds and get stuff done quickly and be a bit scrappy,” says Kaplan.

Startup treasury requires expertise in building financial models and projecting when the company will need capital, continues Orn. “A founder is typically a great engineer or salesperson, but they may not be great with money.”

Scenario planning

Treasury teams say the crisis has also highlighted the need for scenario planning to get a handle of what it looks like if the worst happens. SVB’s collapse was partly a consequence of a change in the macro landscape that was already on Kaplan and the team’s radar. “Before interest rates edged higher, we had written different scenarios about what could happen if there was a banking crisis. We had already run different scenarios in the team to plan for the worst.” Orn also notices more companies drawing up ratified Cash Investment Policy Statements, for the first time clearly outlining where the company invests.

Although Canary is at a later stage and will have access to capital in different segments, how best to finance the business in the coming year is now front of mind. Any debt refinancing will be more challenging; interest rates have gone up and the largest debt provider is no longer in the market, says Marchetta.

Kaplan’s key priority ahead is wise use of scarce resources. He will focus on ways to improve operationality. The company has just seen its strongest quarter of growth and he is determined that treasury will continue to support that through innovation and staying on top of fundamentals. “We are the Number 1 ranked software on the market. We’ve just got started.”

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