SVB Teaches Tech Startups A Crucial Lesson About Cash

(Bloomberg Opinion) -- If you were the founder of a tech startup in the United States or Europe, you may have gone to bed on Friday with the onset of an ulcer and woke up on Monday in a state of pure relief. 

Over the weekend, banks, regulators and governments swooped in to contain the fallout from the collapse of Silicon Valley Bank, a lender of choice for technology startups in the US, UK and parts of Europe. Unable to access funds, many depositors feared they’d be unable pay invoices or even their own staff in the coming weeks. On top of the ongoing tech rout and increased scrutiny venture capital firms have been giving to startups, this was going to be the mother of all curve balls.  

But on Sunday night, the US Federal Reserve said it would guarantee the deposits of US startups who banked with SVB. And early Monday morning, HSBC Holdings Plc said it would buy SVB’s British arm for £1 ($1.22). The speed at which governments on both sides of the Atlantic moved to facilitate either a backstop or a corporate deal has left many founders of small companies in awe, not to mention grateful. 

Around half of active tech startups in the UK held money with SVB’s British unit, often because it was seen as a “startup-friendly” bank that didn’t try to saddle customers with hidden fees. Ironically, the network effect that made Silicon Valley Bank so successful in the tech startup ecosystem also led to its downfall. 

By lunchtime last Thursday in London, as news spread that SVB needed to shore up its liquidity base, startup founders who were part of WhatsApp messaging groups here started saying that “just to be cautious” they were going to pull their money out of the bank and put it elsewhere. VC firms tried to calm nerves, to no avail. Over the weekend, some VC funds offered no-interest bridge financing to help shore up the startups who were nervous about making payroll. Now it seems those measures won’t be necessary.

But the mini heart-attack this weekend came with a long-term lesson: Spread your cash. 

One founder of an education technology startup in London said that 85% of his company’s cash assets were tied up in SVB, leaving him wondering on Sunday night if his company would still be around in the next few weeks. The bank’s collapse “has taught us a valuable lesson about cash diversification over the long-term and monitoring our banks’ risk exposure,” said Toby Mather, co-founder and CEO of Lingumi. 

Contrast that with Dev Amrati, co-founder and CEO of nPlan, a startup that uses machine-learning software to forecast construction projects, who said his company’s cash was held across 11 different banks in the UK and US. Only about 12% of nPlan’s assets were held at Silicon Valley Bank. Amrati said he’d used a cash management service called Akoni Hub Ltd. to help open multiple accounts at once. 

Startups live and die on money they’ve managed to raise from VC firms. Fundraising rounds often happen every one or two years, and each time, the company will get a large tranche of capital. You could argue that bank runs and even the temptation for startups to burn through cash — a la WeWork’s notorious parties — could be avoided if VC firms didn’t provide that money all at once. They could, for instance, hand it out as and when startups need it, like a credit line.

But imagine one VC firm doing that for a portfolio of 50 or even 100 startups, and you have a single point of failure if that firm can’t give startups the liquidity they need. The current system works fine, but tech startups do need to think more carefully about diversifying where their cash lives. SVB’s collapse should nudge them to do that, just as it should be a wake-up call for central banks about the risks of pressing ahead with rate hikes after so many years of being near zero.

The SVB debacle also underscores the pros and cons of being part of an insular world. Silicon Valley Bank became so successful among startups and VCs because both frequently recommended it to one another. That networking effect create a social contagion that helped kill the bank too. In the UK, many founders are part of WhatsApp groups aimed at sharing ideas and tips for running their companies. Several say they got spooked because they saw others’ messages about taking money out of SVB. 

On Monday morning, participants of these groups were singing a different tune, suddenly offering robust support for SVB and pledging not to move their money. That is all well and good, but they shouldn’t walk away as if nothing has happened. The next bank failure might not have such a happy ending. Spread your cash while you can.

More From Bloomberg Opinion:

• Bank Failures Are Common. SVB Clients Must Have Forgotten: Marc Rubinstein
• SVB Backstop Revives the Specter of Moral Hazard: Chris Hughes
• A Full Banking Crisis Isn’t Apparent in the SVB Wreckage: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Parmy Olson is a Bloomberg Opinion columnist covering technology. A former reporter for the Wall Street Journal and Forbes, she is author of “We Are Anonymous.”

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