A week after the collapse of a Silicon Valley bank, a slew of venture capital firms wrote off the shell-shocked start-ups they had put their money into. It was time, he said, to talk about the “admittedly not so sexy” function of Treasury management.
The days of scrambling to account for their companies’ funds presented a generation of founders with an uncomfortable fact: For all the effort they put into raising cash, few spent much time thinking about how to manage it. Go
In some cases, the sums involved were considerable: video streaming business Roku held nearly half a billion dollars in SVB when the bank began operations – a quarter of its funds.
It turned out that many others had focused all their funding in just one or two banks, depending on their long-term growth plans and impending payroll needs, with little consideration given that only the first $250,000 could be released in the event of regulatory trouble. Will insure ,
The “easy money regime” of recent years allowed relatively immature companies to hoard unusually large amounts of cash, which was “far in excess of what they needed”, said the former chief risk officer of one of the largest US banks. Saw, who asked not to be nominated.
“The problem here is that the cash seems to me to be very large relative to the size of the companies,” he said. “Traditionally people would grow into that over time. Before the VC-fueled start-up boom nobody would give a hundred million dollars to a start-up with 20 people.
“When the money flows you pay less attention to it,” said David Koenig, whose DCRO Risk Governance Institute trains directors and executives on managing risks. It was not uncommon for people who were successful in developing new things to ignore traditional risks, he said: “The risk to them is something that is different from what they do in their business.”
The founders acknowledged that they’ve been a fast-paced learning, exchanging notes at the South by Southwest festival in Texas last week. “We didn’t know what we didn’t know and we were all making a difference,” said Tyler Adams, co-founder of a 50-person start-up called Certify. But same mistakes.
His wire fraud prevention business, which raised $12.5 million last May, tied up with PacWest Bancorp and on Friday scrambled to transfer four months’ payroll to the regional bank, where it opened an account with JPMorgan Chase for little- Sa used account was kept.
VCs including General Catalyst, Greylock, and Kleiner Perkins advocated a similar strategy in their letter. He said founders should consider having accounts in two or three banks, including one of the four largest banks in the US. Keep three to six months’ worth of cash in two main operating accounts, he advised, investing any excess in “safe, liquid options” to generate more income.
Investors warned, “Getting this right could be the difference between survival and an ‘extinction-level event’.”
Kyle Doherty, managing director of General Catalyst, said banks like to “cross-sell” multiple products to each customer, increasing the risk of concentration, “but you don’t need to keep all your money with them”.
William C. Martin, founder of the investment fund Raising Capital Management, argued that complacency was a big factor in start-ups irresponsibly managing their cash.
“They couldn’t imagine the possibility that something could go wrong because they didn’t experience it. We had contingencies, as in 2008 seeing counterparties collapse as a hedge fund, but that didn’t exist here,” He called it “quite irresponsible” for a multibillion dollar company or venture fund to have no plan for a banking crisis. “What’s Your CFO Doing?” He asked.
Doherty pushed back on that idea. “In the early stages of a company things move quickly: the focus is on building a product and delivering it,” he said. “Sometimes people get lazy but that wasn’t an abdication of responsibility, it was that other things took priority and the risk was always low enough.”
For Betsy Atkins, who has served on boards including Wynn Resorts, Gopf and SL Green, SVB’s collapse is a “wake-up call”. , , We have to have a deeper focus on enterprise risk management.” Just as boards began examining supply chain concentration during the pandemic, they will now take a closer look at how assets are allocated, he predicted.
Russ Porter, chief financial officer of the Institute of Management Accountants, a professional organization, said companies need to diversify their banking relationships and develop more sophisticated finance departments as they grow in complexity.
“It’s not a best practice to use only one partner . . . to pay your bills and meet your payroll. But I’m not advocating atomizing the banking relationship.”
For example, IMA has $50mn in annual revenue and has five people in its finance department, one of whom spends two-thirds of his time on treasury tasks. It has cash to cover a year’s expenses and three banks.
Many start-ups have taken advantage of the ready availability of private financing to delay rites of passage such as initial public offerings, which Koenig has often observed in moments where founders are told they need to hire more professional finance teams. Needed
However, finding finance professionals attuned to today’s risks can be difficult. “There is a shortage of CFOs with experience of working in really challenging times. They never had to deal with high inflation; They may still be in university or pursuing their careers during the great financial crisis, Porter said. “The skills required may change slightly, from a dynamic, growth-oriented CFO to a more balanced one who can address and mitigate risks.”
There’s another pressing reason for startups to get more serious about treasury management, Doherty said: The number of businesses turning to banks has spurred fraudsters to legitimately use startups to wire money into new accounts. Provided an opportunity to impersonate the counterparties.
Adams continued, “We started getting emails from vendors with wiring instructions — ‘You need to update your payments and wire this account’.” , we can take advantage of it.
Chris Bennati, a former auditor and founder of Bedrock AI, a Canadian start-up backed by Y Combinator that sells a financial analysis tool, warned of the risk of overreacting.
“To say that we should have had to optimize our finances for a bank failure is absurd to me. This was an extreme black swan event, not something that we should have or could have foreseen.
An idea floated on Twitter last week by Dan Davies, a former Bank of England economist – would be for VC firms to go beyond advising their investment firms to offer outsourced treasury functions.
Bennati was not in favor. “Frankly, I don’t think this is a problem we need to solve and certainly not a service that VCs should be offering,” she said. “Letting a bunch of techie brothers handle my cash is far worse than hanging out at RBC.”
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