Silicon Valley Bank Headquarters and Branches
The past 96 hours have been one of the most frantic and momentous of my last decade in venture capital. Silicon Valley Bank, once a giant of its namesake Silicon Valley, was put into receivership by the Federal Government Insurance Corporation.
What does this mean for its customers? its investors? Bank? The story continues to unfold.
But one thing is certain: These failures will change the startup landscape and founder behavior in meaningful ways.
Here are five predictions.
risk management comes to the fore
For many startups, it was perfectly logical and justified to safely store deposits with a Silicon Valley bank. After all, they were a top 20 US bank and a cornerstone of the innovation economy.
Startups will begin to adopt the strategies many of the biggest players are already employing: diversification and risk management in their treasury management work.
What does it mean? While the level of risk management will depend on the stage (it is unreasonable to expect a two-person startup to do sophisticated internal risk management work) and the amount of capital raised (which drives the level of risk) it will be part of the new approach. Each startup can use multiple banks. Deposits, if on the bank’s balance sheet, should be diversified across multiple providers. Off-balance sheet solutions can be used if the bank balance is very high. For example, as a product, sweep accounts (which systematically spread capital across multiple banks) and money market funds can take capital away from balance sheets, and allow deposits to become insolvent.
Risk management will expand beyond just bank partners and become a critical component of the broader startup infrastructure.
Fintech startups that offer risk management will increasingly provide services to this category.
Counterparty risk will be examined
For essential operations (bank, but also beyond), counterparty risk will become a more important decision criterion.
If you are an insuretech with insurance partners, you live and die by your insurance partners. What is their capacity? What is his track record of consistency in good times and bad? How long have individual sponsors worked with the bank? How committed are they to the long term strategy?
If you’re a sales business, you can live and die by your CRM. How long have they been there? Are they profitable?
When a service provider is in existence – as in what would happen if they ceased to exist – counterparty risk should and will be examined more carefully.
For companies considering partnering with fintech startups: Who is backing them? Are they profitable? Who are his companions? This will be a new area of resistance that startups will need to overcome.
Diversification where possible and practical
For some providers, sole sourcing is the only practical option (you won’t have two CRMs or two payroll providers). But for many services, redundancy is possible, especially in the financial stack.
In such cases startups should consider diversification.
As we have seen, banking transactions can easily be made redundant with some partners, for the purposes of capital accumulation.
If you are raising venture capital (of which I am a provider), don’t rely on just one firm. The moment you need an emergency round, a single venture capital partner may run out of capital. Having a few players around the table can be great (to support multiple people not only in good times but also when times are tough). And because employees at venture capital firms can also move around, make sure you meet some of the partners at one of the firms. I expect to see an increase in co-led rounds as a result.
Lastly, diversify your financial stack and capital options beyond equities. Enterprise credit was historically an important option. But since SVB VB was one of the primary enterprise loan providers, carry forward availability from their side is no longer a given. New alternative capital solutions, for example revenue-based financing, are beginning to come to the fore for startups. We will see more exploration of new capital types.
Lowered the trust barrier to adoption
One of the reasons I went to Silicon Valley Bank was because it was a Silicon Valley bank. They were the incumbents in the land of innovation.
This made them the default choice for so many products: banking, venture loans, etc. The same is true for many providers in various industries.
But as VCs, portfolio companies and many executives scramble for options, they are open to trying out newcomers as well.
This can be a unique opportunity for agile players, both startups as well as existing ones, who want to serve startups in tough times.
But more broadly, SVB has shown that even the safest players are not immune to risk. Already nearly 90% of US consumers have used fintech. But the rate of adoption among corporates was slow.
Subject to overcoming the above counterparty risks and diversification requirements, I expect B2B fintech adoption to continue to increase. More people will be willing to experiment with emerging players.
Fintech players tend to coalesce around one of two stable points.
Where do things end?
I predict two stable points for the world of banking.
On the one hand, players can be agile rapidly adaptable companies. That’s where fintech shines. Already, many have reacted swiftly to the unfolding of the SVB collapse, doing everything from speedy enrollment to creating a credit lifeline.
On the other hand, boring, timeless consistency would be a feature, not a bug.
Incumbents who remain true to traditional risk management may see short term growth, but maintain long term survival.
The live development of the Silicon Valley Bank story continues. But one thing is certain, the world of fintech and venture will never be the same again.