A CFOs SVB Post Mortem
Assessing the hurricane's damage, and what we learned
Whew! What a whirlwind of a week. Having assessed the hurricane’s damage, we found the lawn chairs, the roof is still intact, and the internet should be back on by dinner. But, damn, it wasn’t without its grey hairs.
CFO’s on Wednesday:
CFO’s on Sunday:
For those of you who missed what happened:
Reflecting on my most recent post - SVB and the Looming Bank Run Contagion
Janet Yellen pushed us out of the eye of the storm.
But, to be clear, this isn’t a government bail out (per say) - banks pay into an insurance fund on a regular basis as a backstop for situations like this.
So the solution isn’t coming out of tax payer’s pockets; it’s coming out of this fancy US bank insurance policy thing that will now be like super depleted (so please, no other banks get any clever ideas in the 18 months).
So that’s good. But this doesn’t mean everything is up-and-to-the-right…
Yes, depositors have access to the money in their accounts (which was most important to quell the possibility of more bank runs and a tech collapse)
But it’s still TBD what will happen to all the SVB employees who got a shit hand - it sounds like the European entity was purchased by HSBC for literally a dollar
The bank’s debt and equity holders have been straight up gassed
And there are still some payroll runs and marketplace transactions that are lost in the upside-down world
As a CFO, here’s what this most recent boondoggle enforced:
STRONGLY consider the terms of your venture debt deals
What many people don’t realize is the primary reason why so many startups had their cash balances with SVB is because it was a condition of their venture debt loans. In other words, for SVB to loan them [$5M] in the form of either a term loan or revolving debt facility, they had to make the bank their #1 banking partner, and move all excess cash there as collateral.
A lot of founders were faced with a hard decision on Thursday - rip their cash out of SVB, and be in material breach of their debt covenants, or let it ride. I’m glad I didn’t have to make that tough decision.
Going forward, CFOs are going to closely consider the parameters of their loans. To let you behind the curtain, here’s the game behind the game - Banks like SVB get their talons in around the time of a company’s Seed round with a simple, founder-friendly, cheap term loan… and then expand their services over time.
And then you wake up six years later, you’re raising your Series F, you have hundreds of millions stashed across multiple SVB accounts, and you’d have an easier chance ripping out Workday or negotiating your way out of your WeWork space than moving on from SVB.
And even when you do decide to bite the bullet and breakup with SVB, they offer you a $75M working capital revolver at 3% that’s too good to turn down. It’s kind of like when you try to unsubscribe from Hulu and the pop up offers you 73 months free.
Just when you think you’re out… they pull you back in.
Dig into who your payroll provider works with
Perhaps the scariest sub plot of this fiasco: major payroll providers got caught in the hurricane’s wake. A bunch of startups, who didn’t even bank with SVB, got jammed up because they used a payroll provider who did.
A lot of tech companies use Rippling as a payroll provider, who experienced issues over the weekend.
My friend, and paid subscriber of the newsletter “Marcus Aurelius,” uses Rippling, and his semi monthly payroll just went poof. It got lost in the upside-down world. So he had to scrape together and schedule a second payroll run. No bueno.
As a CFO, it’s your responsibility to understand not just how cash enters and leaves the building, but what your cash does in-between hitting it’s ultimate destination.
Diversify your banking partners
Having done a short, yet illustrious, stint as Treasurer (a stamp on what my friend Paul Barnhurst the FP&A Guy calls “your CFO passport”) I learned the importance of diversifying our bank network. At the most basic level, it’s a good idea to have:
A treasury partner - where you park the majority of your excess cash, like a JP Morgan, who may be able to offer higher yield. And to be 100% honest - is too big to fail.
A daily banking partner - someone like a Bank of America to help you pay your vendors, receive customer payments, and schedule payroll runs. The table stakes for running a company.
A debt partner - someone who can come up with flexible, non dilutive solutions; ideally this is their bread and butter - what they do every day. You want to work with debt wizards who aren’t afraid to draw up a “3x trailing three month gross profit revolver”
A local partner - if you have a legal entity in, say, Israel, it’s probably a good idea to work with the likes of Bank Leumi so you can quickly adapt to changes within the country’s borders and always make local payroll
An FX trading partner - if you are international, you’ll need to exchange USD to currency XYZ periodically throughout the year so you can pay vendors and your employees. You get very close with this person (some people do it all online in a portal, but I always liked checking in with my guy to hear what he was thinking about the markets (and lock in a favorable rate). Although the portal was faster, I always felt “Joe” made me smarter on what was going on beyond US borders.
In my simple mind, I think of this as my “treasury stack”. It’s all the institutions I work with, all of whom can also pick up another partner’s capabilities pretty well if shit hits the fan. You want redundancy as a feature, not a bug. Speaking of features and bugs…
The $250K limits are an unfortunate feature, not a bug
A lot of naïve people said “Well, why would you ever keep more than $250K in a bank if it’s not FDIC insured? That’s so stupid. They should lose their money!”
You see, it’s not that simple. Here’s an email I received from paid reader “Short Seller Sam” over the weekend:
Here is a story you can use as anonymous.
We banked with Boston Private for over 15 years since they were the most conservative bank in Boston. They got bought by SVB in 2021. We run all our accounts via ACH to get paid; hence the switching cost is enormous.
We now have a checking account that must have over $250K to run payroll.
Everything is at SVB Private and there is no way you can run a business with less than $250k in a bank.
This is the reality many of us face. We were and are not gamblers.
-Short Seller Sam
To reflect on what he said:
He was an SVB client by acquisition, not by choice
You can’t realistically run a business of any semblance of scale using accounts with less than $250K
The switching costs are enormous
Neo Banks: Weigh the Sexy with the Scary
I’ve had really great experiences with up and coming banks. I’ve also had terrible experiences where I couldn’t get my money back.
Actually, I’ll take this moment to express umbrage with Bank Novo. Back when I tried to start a company and fell flat on my face, I opened a checking account. It made me feel like I was a REAL entrepreneur.
But when life drop kicked me in the teeth and I went to shut down the business and pull my remaining ducats out to cover the (sad face) closing costs, I found myself locked out. The company’s original email associated with the account was no longer active (because, you know, we went out of business).
That’s when I discovered there was literally no phone number to call, just a periodically staffed, generic email inbox that routed to the aforementioned upside-down world. If you’re reading, Bank Novo (more like no-dinero), and have received my 93 inquiries, it’s me!
But to put my positive hat on, there are also innovative solutions coming out of new banking partners. We’re seeing new entrants commonly associated with expense management tools.
For example, Brex is finding creative solutions to get around the $250K insured conundrum we discussed above, using their partner bank program. The image below speaks for itself:
So although you have to evaluate up and coming banks with more scrutiny, you should also weigh the potential benefits. Here’s what I ask myself when weighing an option like Brex:
Does this allow me to bank within a single finance stack?
Can I see the spend linked to cash leaving the building better?
Can I link both digital and physical cards to the account?
Can I better manage expenses and reimbursements?
Am I able to integrate with areas of my financial network that were previously single player tools?
Will someone pick up the phone when I call?
Can I still earn some yield?
I think the last point here is key - yes, you want to earn some yield. But you shouldn’t be playing Dale Day Trader as a startup CFO. Your job is NOT to optimize for yield.
Your investors have given you money to run the business, not to beat the bond market. Sure, it’s great if you can make enough money on the side to fund one or two more engineers for the year. But if your investors wanted to blow the doors off treasuries, they’d stick the cash with a professional.
What I’ve Been Reading
I’m a student of the newsletter game. More broadly, I’m a student of business growth. So it was only natural that I became obsessed with Chenell Basilio’s newsletter about… newsletter growth.
It’s called Growth in Reverse. She takes the time to carefully deconstruct the growth levers behind the hockey stick growth writers like Packy McCormick, Justin Welsch, and Codie Sanchez experienced. I try my best to incorporate some of her tactical observations.
Quote I’ve Been Pondering
“I’m good at rolling dice, no good at standing still.”
-Erik Church, Hell of a View
Mostly archives:
*Today’s post is sponsored by Brex.*
I think they should only be allowed to require one third. That might make them lend less, but it’s a safer option for everyone when you think of the system in totality
Do you think the following might be legislated against to remove this requirement: "What many people don’t realize is the primary reason why so many startups had their cash balances with SVB is because it was a condition of their venture debt loans"?
This is literally what caused mortgage defaults in the UK in the last recession and in subsequent years regarding endowment mortgages.