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A CFO’s SVB post mortem


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CJ-headshot

CJ Gustafson

Tech CFO

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Tech CFO CJ Gustafson writes Mostly Metrics, a weekly business newsletter for anyone who cares about company performance that’s read by more than 20,000 of your favorite finance leaders, startup operators and VCs. Subscribe to get smarter on business metrics, financial operations, and monetization models today.

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Background #f4f4f4
CJ-headshot
CJ-headshot

CJ Gustafson

Tech CFO

Twitter LinkedIn

Tech CFO CJ Gustafson writes Mostly Metrics, a weekly business newsletter for anyone who cares about company performance that’s read by more than 20,000 of your favorite finance leaders, startup operators and VCs. Subscribe to get smarter on business metrics, financial operations, and monetization models today.

"Whew! What a hurricane of a weekend. 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."

— CJ Gustafson

Reflecting on my recent post

SVB and the Looming Bank Run Contagion

  • Janet Yellen pushed us out of the path of the eye of the storm.

  • But, to be clear, this isn’t a government bail out (per se) - 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 taxpayers’ pockets, it’s coming out of this fancy US bank insurance policy thing that will now be like super depleted (so 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

  • And there are still some payroll runs and marketplace transactions that are lost in the upside-down world

As a CFO, here’s what these most recent events confirmed:

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 decision.

Going forward, CFOs are going to closely consider the parameters of their loans.

Dig into who your payroll provider works with

Perhaps the scariest sub plot of this fiasco were the payroll providers that 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.

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 its ultimate destination.

Diversify your banking partners

Having done a short 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.

  • A daily banking partner - someone like a Bank of America to help you pay your vendors, receive your 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, or what they do every day, to make sure you are getting the best structure from the debt wizards.

  • 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 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.)

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 the other 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 pose a challenge for some

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.

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 a client by acquisition, not by choice.

  • You can’t realistically run a business of any semblance of scale using accounts with less than $250K.

Neobanks: 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 round-house 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.

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:

A chart illustrating the how Brex cash works

Source: Brex Partner Bank Program

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 a business account 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 Doug 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.

This post originally appeared on mostlymetrics.com.

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