So something like from that show Silicon Valley? You stocks went from millions to nothing?
Worse. Our bank account had millions of dollars in cash in it which we use to pay rent, employees, etc. All of that money has been frozen now that the bank has collapsed and the FDIC has stepped in. We can’t access it, use it, or transfer it to another bank.
This has happened to countless companies. Hundreds of companies missed payroll on Friday or will miss payroll over the next few days.
Why would you keep so much in one bank knowing it’s uninsured? Why not buy US treasuries as an alternative?
There’s a lot to dig into here, and arguably this is the most important cultural shift that needs to occur amongst venture-backed companies going forward.
Large companies – and thus more mature ones – absolutely diversify. For that reason, SVBs implosion is mostly hurting small and medium sized startups who maintained all of their capital in SVB. The question is: why were these startups not more proactively defensive? I think there’s a lot of contributing factors.
1) Most early stage startups are founded by and focus entirely on employing non-admin talent, meaning no HR, no finance, etc. In fact, one of our investors (a tier 1 investor with several billion dollar funds) explicitly talked me out of hiring a CFO until we were “50-100 employees”. So, what you end up with is a talent pool of specialists whose strength and focus isn’t in financial risk aversion, but rather in the skills needed to build product, find traction, and drive growth.
2) Focus. In early stage startups, you’re so frantically working to find product/market fit, recruit key talent, close customers, and navigate investors that you quickly deprioritize anything that doesn’t immediately drive revenue or product market fit. This leads to a bunch of blind spots in the business that are easy to take for granted. One is financial risk aversion. There are only so many tasks you can commit your attention to each day, and the purely administrative ones tend to fall by the wayside.
3) Convenience. Take your typical seed stage startup. In 2019, a seed round would be 2 million, plus or minus. In 2021, that same seed stage round could be 4-8. That means 32 bank accounts required to ensure that no more than $250k is present in any account. Amongst all of the other stuff you have to do as both a manager and individual contributor, this degree of oversight feels untenable.
4) Hubris. Probably a bit too strong language, but worth at least mentioning. Startups are inherently risky and financially insecure businesses, but we tend to have faith that our institutional partners — VCs, banks, etc. — are trustworthy and secure. We try to focus on the things we are most in a position to control, and we trust our partners to support us in the gaps. That’s not a good perspective to have going forward.
There are a lot of reasons. Going forward, all startups should probably have CFOs actively protecting cash. That hasn’t been the standard in the past for small companies. It should be going forward.
You weren’t notified of the potential problem before ?
I received an email.at 3:09 ET on Thursday.from.one of our investors saying, “This is probably alarmist, but you might want to move your money out of SVB.” That’s it. I immediately contacted another bank, but by the time the application was submitted, approved, created, and transfer submitted, it was already too late. About 16 hours.
Do you think your company can bounce back from this?
The next few days are critical.
The industry is expecting the FDIC to provide $250k in insurance on Monday. If that miraculously happens, it provides limited relief for the smaller companies, of which mine is one. With that $250k, I can make 2 payrolls. So, that gives me 3 weeks to figure out our next step.
The biggest question is whether or not the government will step in to make all of the depositors whole (meaning ensure companies like mine get access to the cash we already had). Even if that happens, there’s no way to know how quickly that can occur. Many Americans don’t think it should at all.
If that doesn’t occur, then we’ll likely be looking for a new source of capital (probably an investment) and use that to keep the company alive long enough to hopefully find a buyer.
What happens to a company that can’t make payroll?
We held a 2 hour company wide call, during which I explained what happened, what’s next, and the options we have. Then we did breakout sessions with each team. People are understandably concerned, but not because they’re in the dark.
There is a lot of he said/she said going on about when any of this money will be returned. The truth is nobody knows. My plan A is to access (hopefully on Monday) the FDIC $250k insurance to cover my team’s next two payroll cycles. That gives me time to do two things: 1) see if there’s a short-term resolution of SVB that benefits us, and 2) work with our partners in a bridge loan. The latter is the most likely path for any early-stage startup that has the option.
After that, who knows. If it takes months or years for any of the capital to be returned, then probably look for an acquirer so my team has a soft landing somewhere.
Do you think that the failures on the bank should be settled by tax payer money?
It’s a great question. I think the potential reverberating damage of not making the depositors as whole as possible is catastrophic. Not just for those companies, but for the us economy itself and the future of the US as a global innovator. Seeing online chatter, it’s clear to me that most people don’t understand how broad reaching this situation is. It’s MUCH bigger than a few “coastal leftist capitalist millionaires”.
Does that mean that taxpayers should be responsible? No. Ideally the capital would come from another bank acquiring the assets over the coming days/weeks. That seems unlikely, at least at a price that would cover all depositors.
Somebody is getting fucked. It shouldn’t be the depositors who only held cash. And it shouldn’t be the taxpayers. Very difficult situation.
Who do you think will be the White Knight? (Do you believe there will be one?)
Interesting question. No for-profit institution can truly be the white knight. They’re self-interested parties (which is fine) and are going to try to acquire the assets for pennies on the dollar. Meaning whatever is left will be a fraction of what was there before. The govt. Can certainly intervene, but to what end.
Ultimately, I think the question is really: Who is going to get screwed over the most in order to protect the rest.
If the government is the only way to make yourselves whole, what are your thoughts about the government taking equity positions in those companies rather than providing a cash bailout?
We need cash to operate. If that cash is in exchange for equity, I’m generally okay with the idea. In fact, I would personally love a closer relationship between govt and innovation companies. I have long maintained that we need our best people thinking about the biggest problems – govt, education, healthcare, etc. But because public sector salaries can’t compete, we often pool too much top talent in the private sector. A closer relationship between the two might have positive outcomes.
Did you start the company or just rise up to the position?
I started the company with two co-founders. They made salaries first. I started getting paid about a year later.
CEO compensation varies WIDELY by company, stage, and sector. I firmly believe that CEOs at most large corporations are grossly overpaid. That is far from my personal case. I currently make $150k/yr. I’m far from the highest paid employee at my own company. For early stage companies, there is a director correlation between a startup’s likelihood to fail and how much s/he pays him/herself. I made much more at previous companies, but founder/CEOs typically don’t work for the salary. They work for the potential equity outcome.
What were your roles and responsibilities as a CEO for this company.
At my stage, the primary responsibilities are hiring, budgeting, HR, team management, fundraising, and investor relations. After that, each CEO has a unique set of skills based on their background which determine what else they do. My background is in product management, so I also lead the design and development of our software product.
Typically external CEOs are brought into a startup after the company has achieved a certain degree of scale. Maybe the founder is ready to move on, or maybe the company needs someone with more expertise at that growth stage. Typically external CEOs come from within the existing social network, via investor introductions, or through an executive recruiter.