Silicon Valley Bank headquarters and branch
The last 96 hours have been one of the most manic and momentous in my last decade in venture capital. Silicon Valley Bank, once a stalwart of its namesake Silicon Valley was put into receivership by the Federal Government Insurance Corporation.
What does this mean for its customers? Its investors? The bank? The story continues to unfold.
But one thing is for certain: These failures will change the startup landscape and founder behavior in meaningful ways.
Here are five predictions.
Risk Management Comes To The Forefront
For many startups, it was completely rational, and justifiable to store deposits safely with Silicon Valley Bank. Afterall, they were a top 20 US bank and a cornerstone of the innovation economy.
No longer.
Startups will start to adopt strategies many of the largest players already employ: diversification and risk management in their treasury management function.
What does that mean? While the level of risk management will depend on stage (it is unreasonable to expect a two-person startup to have a sophisticated internal risk management function) and amount of capital raised (which drives the level of exposure) it will be part of the new mindset. Every 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 bank balances are too large. For example, one product, sweep accounts (which systematically spread capital across multiple banks) and money market funds can take capital off-balance sheet, and allow deposits to be bankruptcy remote.
Risk management will expand beyond just bank partners and become a key component for broader startup infrastructure.
Fintech startups that offer risk management will increasingly offer services for this category.
Counter-Party Risk Will Be Examined
For essential functions (banks, but also far beyond), counter-party risk will become a more important decision criteria.
If you’re an InsureTech with insurance partners, you live and die by your insurance partners. How much capacity do they have? What is their track record of consistency in good and bad times? How long have the individual sponsors worked at the bank? How committed are they to the strategy long-term?
If you’re a sales business, you may live and die by your CRM. How long have they been around? Are they profitable?
When a service provider is existential – as in if they stopped existing what would happen – counter-party risk should and will be more carefully examined.
For companies considering partnering with fintech startups: who is backing them? Are they profitable? Who are their partners? This will be a whole new area of resistances startups will need to overcome.
Diversification Where Possible And Practical
For certain providers, sole-sourcing is the only practical option (you would not have two CRMs or two payroll providers). But for many services particularly in the financial stack, redundancy is possible.
In these instances, startups should consider diversification.
As we have seen, banking partners, for the purposes of storing capital, can be easily made redundant with a few partners.
If you’re raising venture capital (of which I am one provider), don’t depend on only one firm. A single venture capital partner may happen to be out of capital the moment you need an emergency round. Having a few players around the table can be great (not just in good times to have multiple folks to support) but also when times are tough. And because staff at venture capital firms can also move around, make sure you meet a few of the partners in any one firm. I expect to see a rise in co-led rounds as a result.
Lastly, diversify your financial stack and capital options beyond equity. Venture debt historically was a key option. But since SVB
VB
The Trust Barrier To Adoption Has Been Lowered
One of the reasons to go to Silicon Valley Bank was that it was Silicon Valley Bank. They were the incumbents in the land of innovation.
That made them the default option for so many products: banking, venture debt, etc. The same is true for many providers in different industries.
But as VCs, portfolio companies and many executives have scrambled for options, they’ve been open to try new ones as well.
This may be a unique opportunity for nimble players, both startups as well as incumbents, looking to serve startups in a tough time.
But even more broadly, SVB has shown that even the safest players are not immune from risk. Already nearly 90% of US consumers have used fintechs. But adoption was slower among corporates.
Subject to overcoming the counter-party risks and diversification needs above, I expect B2B fintech adoption to continue to increase. More people will be willing to experiment with emerging players.
Fintech Payers Coalesce Around One Of Two Stable Points
Where do things end up?
I predict two stable points for the world of banking.
On the one hand, players can be nimble rapid adaptable companies. That’s where fintech’s shine. Already, a number have reacted fast to the unfolding SVB collapse, doing everything from rapid enrolment to creating credit lifelines.
On the other hand, boring, timeless stability will be a feature, not a bug.
Incumbents that thrive will stay true to traditional risk management may see lower short term growth, but enduring long-term survival.
The Silicon Valley Bank story continues to evolve live. But one thing is for certain, the world of fintech and venture will never be the same again.
