Looking around the SVB corner: what will startups do going forward?
Looking around the SVB corner: what will startups do going forward?
The future of innovation is global. We discuss it here.
SVB, SVB
The last week 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.
In my Forbes column, I outline five predictions. The first is below:
Risk management comes to the forefront
For many startups, it was completely rational, and justifiable to store deposits safely with Silicon Valley Bank. After all, 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 program) and 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.
Good SVB reads
So much has been written about SVB that I do not want to pile on. And after a crazy week, perhaps I also want to start to move on. But I will share a couple particularly thoughtful ones, with an eye to the international implications.
Great analysis about the current situation, whether it creates moral hazard, and what will come. To tease a much longer article, a compelling explanation about why SVB was particularly susceptible to the crisis: was it because they “took imprudent duration risk, ignored objections, and it blew them up[?] I think that answer is fine. A more complicated answer would be that they took duration risk, as banks generally do, but their real sin was having a concentrated set of depositors who were uninsured, quick-moving, well-informed, herd-like and very rates-sensitive in their own businesses: If all of your money is demand deposits from tech startups who will withdraw it at the slightest sign of trouble and/or higher rates, you should not be investing it in long-term bonds. This is a more subtle answer than “just hedge your rate risk bro,” and it is arguably more understandable that SVB’s executives would get it wrong.”
We are definitely not out of the woods, and this is definitely true internationally. SVB’s failure has contributed to jitters in the broader system, including in Europe (and of course in a variety of regional banks with some tech exposure here in the U.S.). More emerging markets will be hit harder still. In Africa for instance, “A significant amount of venture capital… comes from US-based investors, who mandate that these startups domicile the funds in U.S. bank accounts. They have until now recommended SVB because of its history with tech businesses and the incentives and benefits the bank provides to startups that are hard to find in other financial institutions.” This will in my view be a rocky few months until a new normal is reached (and likely post a purchase of SVB).
I also spoke with Fox Business about the current market, its implications for startups both domestically and globally.
That was a lot about but banks. Fun simplified thread about what banks actually do.
Interesting discussions
What strategies are startups taking to avoid failure? Important in any time, but relevant in this time. “When the venture-capital financing market began to sputter last year, investors told their portfolio companies to make swift changes or risk going under. Roughly a year later, a picture is emerging of what type of belt-tightening occurred and what worked best. Startups made a variety of cuts to survive, investors say. Some made traditional moves, such as trimming new product offerings. Others took more unconventional paths.”
Chat GPT-4 came out. Great piece on how it may destabilize white collar work. “In the next five years, it is likely that AI will begin to reduce employment for college-educated workers. As the technology continues to advance, it will be able to perform tasks that were previously thought to require a high level of education and skill…While it is difficult to predict the exact extent of this trend, it is clear that AI will have a significant impact on the job market for college-educated workers. There you have it, I guess: ChatGPT is coming for my job and yours, according to ChatGPT itself.”
We may be in the calm before the storm in startup land: this piece explores four funding scenarios, much less common in the last decade, that are bound to re-appear. These include the quiet wind-down, acquisitions, VC-led matchmaking and recapitalizations. “They are appearing and they will be contagious. Investors who have been subject to them in one portfolio company will introduce them at another. And as investors invest more capital than they had reserved to protect their earlier investments, they will shift reserves from one company to another inducing the vicious cycle.”
One of the big themes for me right now is vertical software, particularly for SMEs, with embedded fintech. In that vein, resonated with this thoughtful article explaining which it will be a fruitful decade. “Over the past several years, a Cambrian explosion of vertically focused companies have emerged aiming to transform the last bastions of pen and paper, fax machines, and error-prone manual tasks that can not only be done better but also faster and cheaper through technology.”
Movie of the month
In my end of month issue I share a book of the month. This month I wanted to share the excellent Wirecard documentary.
For context: Wirecard was the once high flying jewel of the German technology scene and European fintech scene, until it came crashing down. Watch the fascinating thriller of a story.