The collapse of Silicon Valley Bank (SVB) on March 10th has sent shockwaves through the tech industry, with thousands of startups losing access to large amounts of their money over the weekend. The collapse, triggered by a bank run, led to the bank taken over by the FDIC. The aftermath of the SVB collapse left many entrepreneurs scrambling to recover their funds and save their businesses, highlighting the importance of taking proactive measures to protect their businesses from unexpected financial crises. Here are five crucial lessons that can be learned from the SVB collapse:
Lesson 1: Diversify Your Banking Relationships
One of the key lessons from the SVB collapse is the importance of diversifying your banking relationships. If your cash balance exceeds the maximum amount covered by the FDIC’s deposit insurance ($250,000), it’s essential to spread it out across multiple institutions. This way, if a catastrophic event like a bank run were to occur, your business would be better protected. Fortunately, tools like the Certificate of Deposit Account Registration Service (CDARS) can help entrepreneurs manage risk by spreading their funds across multiple banks.
In addition to managing risk, utilizing local firms to diversify your assets can also be beneficial, as Paul Davidson, Assistant Director of Student Ventures at Johns Hopkins University, shared: “I am also a big proponent of utilizing local firms when and where that is possible. For example, if your venture is in Baltimore, using local services can help spur reinvestment in other area businesses, but also when you build more personal connections, bankers and leaders can recommend financial products that are beneficial and relevant for your specific venture.”
Lesson 2: Negotiate Exclusivity Clauses with Lenders
Entrepreneurs should be cautious when signing exclusivity clauses with lenders. SVB was known for requiring these clauses, which allowed the bank to monitor the financial health of its borrowers and provide preferential terms to those with riskier businesses or less collateral. However, when SVB failed, several software companies almost lost everything because they had deposited more funds with the bank than it was insured to hold.
To protect themselves, entrepreneurs should negotiate exclusivity clauses carefully and be aware of the potential risks involved. It is essential to understand the terms and conditions of any agreement with a bank or lender and seek legal advice if necessary to ensure that the interests of the business are protected.
Lesson 3: Hire a Seasoned CFO or Financial Expert
Having an experienced chief financial officer (CFO) or a financial expert who is well-versed in financial rules and can monitor the financial health of significant partners is crucial for entrepreneurs. This is often preferable to having a venture investor on your board or in your network, as many venture capitalists may not have expertise in finance and governance, but rather in other areas such as engineering, operations, or marketing. Designating a watchdog role, rather than relying solely on people within your company’s social circle to disseminate potentially alarming information, can help ensure that you have someone who can actively monitor and manage financial risks.
As Josh Ambrose, Director of Student Ventures at FastForward U, advises, “”Don’t put all your eggs in one basket!” is solid life advice I’ve continued to find! At FastForward U, we do our best to surround our students with multiple advisors, mentors, and opportunities–especially those who are local and grounded in area ecosystems.” By seeking diverse perspectives and advice, entrepreneurs can make more informed decisions and manage risks effectively.
Lesson 4: Prioritize Revenue Generation Over Relying on VC Funding
Customer income is an asset for startups, surpassing the allure of a large pile of venture capital funds for operational sustainability. Startups often find themselves caught in a Catch-22 situation, where they need to invest in product development before they can generate profits. However, some startups with significant financial reserves tend to overlook the importance of generating income.
Entrepreneurs at FastForward U are aware of this lesson, as highlighted by Josh. “We’ve always prioritized revenue generation and will continue to do so! This is part of the reason I’m so bullish on Baltimore and its future – we’re a place where startups can stay lean and focus on what matters most, instead of high cost of living, etc. Having customers, generating revenue, creating an actual business is what this is all about…and ultimately is what brings investment dollars in and allows founders to navigate that in a position of strength, vs desperation.”. Josh emphasizes the importance of revenue generation and building a solid business foundation, which attracts investment and enables founders to navigate their entrepreneurial journey from a position of strength.
Lesson 5: The Importance of Literal Insurance Against Bank Runs
The prospect of more bank runs remains a frightening potential because of the rapidity with which agitated messages may be spread on social media and with which withdrawals can be made. It was the quickest bank failure in history due to the panicked tweeting of founders and venture capitalists on Thursday. Having actual insurance is the best protection for company owners.
The collapse of SVB highlights the need for entrepreneurs to plan and take preventative measures to protect their businesses. By following these lessons and being prepared for potential risks, entrepreneurs can mitigate uncertainties and safeguard their businesses against unforeseen events. Lanre Ogungbe, a strategic advisor at FFU and CEO of IdentityPass advises, “Entrepreneurs must reduce events or business decisions that may cause panic among customers and partners… If there is even the slightest doubt regarding particular business decisions, it should be addressed quickly.”. The SVB event taught us that in today’s fast-paced and linked business ecosystem, risk management and the security of one’s own operations must be top priorities for any business owner.
