One perspective, what have we learned about our banks after the crash of SVB, Silicon Valley Bank.

It was early on Friday; March 10^th and I was on my way to Tahoe listening to music instead of my normal financial news looking forward to a weekend of skiing when my phone began to explode. I picked up and a friend of mine who is an investment banker from my old firm asked, “What is going on with SVB? They just failed!” In a flash, my weekend plans needed to change. As expected, we had some genuinely concerned CEO’s, Board Members, and alike! Like you, we at Silicon Valley Finance Group (SVFG) had to move quickly to figure out what happened, find answers, and quick solutions. It was a long weekend of texts, emails, calls, and Zoom meetings to assist everyone with their concerns about the failure.

It has now been a few months since Silicon Valley Bank failed on March 10^th, 2023. What have we learned and what are some takeaways?

1. In an unprecedented move, the Federal Reserve stepped in to protect bank deposits by guaranteeing all balances above the FDIC limits.
2. Banks are still working in this country.
3. This is not our first financial/banking crisis. 

Before this 2023 bank failure, we have lived through other financial crises; the 2008 subprime mortgage crisis, the dot-com bubble crisis (2000), the Savings and Loan Crisis in the late 80’s, and others all impacting our financial well-being in the US. It will happen again. 

There were several issues that impacted the failure of SVB. The quick rise in interest rates from lows not seen since the late 1950’s ⁽¹⁾, the slowing of venture investment ⁽²⁾, the investment strategy of SVB to invest in longer-term treasuries ⁽³⁾, and the run on the bank by VC’s and their companies. All these contributed to a perfect storm for the bank’s demise. Fortunately, the Federal Reserve intervened, and we survived this event. Yet we still have concerns and with the sale of First Republic the worry about the viability of smaller banks continues. Although I have several suggestions for the FED and banks, today we are focusing on smaller corporations.

Here are some suggestions and improvements we have implemented at Silicon Valley Finance Group (SVFG) for our clients. In the past, suggestions like these were often ignored due to more pressing concerns and priorities. Companies have often treated banks as an afterthought even though cash is often a company’s largest asset. We are hopeful that in the future companies will address policy issues up front and follow them.

Implement Policies. A few rules could save your company future headaches.

We have asked our clients to have banking and Investment policies in place. That sounds obvious, but often early-stage companies do not put in place written policies. Follow the three B’s when writing your policies!                 

1. Be short yet complete.
2. Be approved by both the CES and Board of Directors
3. Be reviewed and updated often, at least annually.

We have updated our policies and recommend separate policies for both banks and investments. Some of our policy highlights include:

Banks                                   

• Use top tier banks. 
• Keep balances in the bank accounts limited to short-term needs such as payroll, taxes, rent and bills due within the next 30-60 days (about 2 months). 
• Be mindful of FDIC limits but realize you may have to exceed this amount.
• Diversify banking relationships, maintain at least two different bank relationships.
• Be prepared to move from one bank to another quickly.
• Interest rates are up, ensure you are receiving appropriate compensation for your idle cash. 

Investment Accounts

• If you have excess cash, open an investment account
  • Use top tier investment firms. 
• Make sure the advisor focuses on corporate cash management
• Open an account with a money market portal
  • This offers many MMF (Money Market Funds) fund options to choose from
  • Easy online access to move funds to/from bank accounts
• Place excess cash in Institutional Money Market Funds that
  •  Invest only in US Governments
  • Maintain a dollar in dollar out, (no NAV fluctuation) 
• Purchase Treasury ⁽⁴⁾ securities with short maturities for excess cash not needed immediately.
• Ensure maturities occur before projected cash flow needs.
• Deposit maturities of Treasuries into the MMF (Money Market Funds) as soon as maturities take place.

Venture Debt

                Use a facility other than your bank for Venture Debt. Keep all the major parts of your finances separate. If you have venture debt with a bank, they may require all your cash at the bank as well. This may not be to your company’s advantage. Although it may be more expensive, we would recommend keeping these venture debt and bank accounts separate, so the bank does not have potential control over the company’s largest asset, cash.

Before closing it is important to realize that not all small banks are problem banks. Yet if high-net-worth individuals and companies stop trusting smaller banks, small banks will continue to close and / or fail. We will end up with the oligopoly of the chosen few super banks. I am not convinced that is what we want for our future. Most of the banks in the US were not in trouble like SVB and a few others, yet it looks like a few bad apples could take down many good independent banks. 

Key Points/Takeaways

1. Bank failures are inevitable, SVB was not the first or last.
2. Stay prepared by making policies for your Banks and Investments and keep them up to date.
3. If the added expense is reasonable, keep your venture debt and bank relationships separate.
4. There are mounting concerns regarding small banks due to the collapse of SVB and the recent sale of First Republic. But do not forget small banks play a vital role in our financial system, one being the avoidance of an oligopoly of super banks.

If you are interested in developing your own policy, contact your SVFG relationship manager or you can reach out to me directly at sgoldenberg@svfg.com. We would love to hear from you. Please send your questions or comments to sgoldenberg@svfg.com.

1. https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
2. Global VC Funding Falls Dramatically Across All Stages In Rocky Q1, Despite Massive OpenAI And Stripe Deals (crunchbase.com)
3. 0000719739-23-000021 (d18rn0p25nwr6d.cloudfront.net) (Page 65)
4. Introduction to Treasury Securities (investopedia.com)