Banking and finance have dominated headlines in the last month. From the collapse of Silicon Valley Bank (SVB) to the crisis at Credit Suisse, and impending crises at other big-name banks, banking news has filled the front pages. External events can sometimes make the difference between startup success and failure.
If you’re following banking news, you’d be forgiven for needing some time to catch your breath. But these headlines are equally critical for tech startup founders. The collapse and run on SVB had immediate consequences for science and technology startups that were banking with the institution. Within weeks, what started as one bank’s collapse drew attention to other startup-friendly banks.
While regulators are analyzing what went wrong, it’s worth taking a look at the bigger picture, including the external circumstances surrounding the crisis. There are a few lessons to be learned here.
Tl;dr – Three Lessons UK Startups Can Learn From the SVB Collapse
- Understand who you’re banking with and how secure those funds are.
- Even with the most conscientious planning, you may not anticipate everything.
- Your funding round is only complete when the money is in your account.
What SVB’s Collapse Means for Startups Around the World
Up until a few weeks ago, Silicon Valley Bank was far from being a household name – unless you were a startup or investor in the U.S. science and technology field. For those founders, newer, smaller banks like SVB were vital. According to research by the New York Times, nearly 50% of all venture-capital-backed tech and science startups across the country banked with SVB.
That made SVB the equivalent of a big fish in a small pond. It also made the bank essential to founders and early-stage companies that managed all of their financial transactions through its channels. Within hours, company CEOs found themselves worrying about making payroll as their money became inaccessible following the bank’s collapse.
At the same time, startups close to signing off on their next funding rounds suddenly had to face supposedly done deals being pulled off the table. Startup funding has been harder to come by for over a year now, with investors digging deeper and asking tougher questions of founders. Add to that the layoffs across the tech sector, and it’s easy to see why the industry is hoping for a year of bouncing back. That looks unlikely now.
A Closer Look at External Circumstances
So, what happened at SVB? Over the past few weeks, banking regulation has received almost as much attention as the initial collapse. How could federal regulators not notice impending problems at the bank?
As I’m writing this, stories are surfacing that make it clear that SVB’s problems didn’t just suddenly appear. The bank had spent a large part of 2022 under federal review. Regulators highlighted risky banking practices and warned the bank that it was flying close to the fire. Six citations prove that the Federal Reserve Bank of San Francisco knew that SVB was struggling to access cash easily should the bank require it.
Now, that is a sign of risky banking practices. The San Francisco Fed warned the bank that its models predicting business performance in case of interest rate rises were flawed. They were simply not aligned with reality. Does that mean the writing was on the wall? Yes and no. Three things still needed to happen to trigger a collapse:
- No changes in the bank’s risk management practices
- Interest rate increases
- Loss of trust and a run on the bank’s money
In early March, these three factors came together. Note how two out of three are out of the bank’s immediate control.
What UK Startups Can Learn From the Past Few Weeks’ Events
Why does a banking collapse on the other side of the Atlantic matter to UK-based startups? If you hadn’t noticed yet, the collapse of Silicon Valley Bank sent ripples through the global banking industry. Credit Suisse required a bailout, and even Deutsche Bank’s risk management strategy was questioned.
Plus, SVB had a UK arm. Limited as this firm’s reach may have been, it prompted the Bank of England to apply for a court order to place the bank into insolvency. This is the first lesson: understand who you’re banking with and how secure those funds are. Granted, startups may not always be able to choose who provides their funding, but it pays to split your finances across different financial institutions.
Lesson number two is further reaching: despite all forward planning, you may not have anticipated everything that’s headed your way. Think of your journey as a startup like a car journey (yes, I do like metaphors to do with movement). No matter how attentive you are, you can’t look around the next corner or beyond a blind summit.
Instead, it’s only a matter of time until someone comes around a corner taking up part of your side of the road. Bang – you’ve crashed, and you need the means to deal with the fallout. That’s when an emergency fund and rigorous financial information are priceless.
Lesson number three covers startup funding: even if you’ve shaken hands on a funding round, the deal isn’t done until the funds are in your account. The uncertainty surrounding SVB led to questions for other small and medium-sized banks. It also caused startups to lose the funding they had counted on. Coming right on the back of 2022, this banking collapse just turned 2023 into a tricky year to secure more funding.
And the Takeaway?
Don’t shy away from looking at worst-case scenarios, financially and operationally. Being prepared for the worst outcomes enables you to deal with anything between them and your best-case scenario. Understand your financial situation. You don’t need to be an accountant or a finance director to evaluate the risks you’re facing and how you’re mitigating them.
Do everything you can to put your startup or early-stage company in a position where it doesn’t rely on one single source of funding or a single banking relationship. Establishing strong financial relationships is critical, but trust your startup to have enough promise to attract more than one source of investment as soon as possible. Talk to us if you would like to know more.