What Will Startups Do Now?

The last 96 hours have been one of the most geeky and serious of my 10 years in venture capital. Silicon Valley Bank, once a Silicon Valley heavyweight of the same name, was brought under the control of the Federal Insurance Corporation.

What does this mean for the customer? The investor? Bank? The story continues to unfold.

But one thing is certain: these failures will change the startup landscape and founder behavior in meaningful ways.

Here are five predictions.

Risk management at the forefront

For many startups, it made perfect sense and justification to keep their deposits safe in Silicon Valley banks. After all, they were one of America’s top 20 banks and a cornerstone of the innovation economy.

more than this.

Startups will start adopting strategies that many of the biggest players have already adopted. They are decentralization and risk management in financial management functions.

what do you mean? The level of risk management varies by stage (it would be unreasonable to expect two startups to have sophisticated internal risk management functions) and the amount of capital raised (which governs the level of exposure) but it will be part of a new project. way to think. All startups can use multiple banks. Deposits should be spread across multiple providers if they are on the bank’s balance sheet. If you have too many bank balances, you can use off-balance sheet solutions. For example, single products, sweep accounts (which spread capital systematically across multiple banks), and money market funds can keep capital off-balance sheet and keep deposits away from bankruptcy.

Risk management will not be limited to banking partners, but will become a key component of the broader startup infrastructure.

Fintech start-ups offering risk management will increasingly offer this category of services.

the other party risk is considered

For essential functions (functions well beyond banks), counterparty risk becomes a more important decision criterion.

For InsureTech with an insurance partner, the insurance partner can be the difference between life and death. What is their track record of consistency in good times and bad? How long have individual sponsors been with the bank? How committed are they to the strategy in the long term? Are you doing it?

For sales businesses, CRM can be the difference between life and death. how long have they been around? are they profitable?

If the service provider exists, i.e. as if it has ceased to exist, the counterparty risk should be considered more carefully.

For companies looking to partner with fintech startups: Who is supporting them? Will they be beneficial? who are their partners? This will be a whole new area of ​​resistance that startups will have to overcome.

Possible and Practical Diversification

Sole sourcing is the only viable option for certain providers (you can’t have two CRMs or two payroll providers). But many services, especially in the financial stack, allow redundancy.

In such cases, startups should consider diversification.

As we have seen, bank partners can easily overlap with a few partners for the purpose of storing capital.

If you’re raising venture capital (I’m one of those providers), don’t rely on just one company. A single venture capital partner may happen to be short on funds at the moment an emergency round is needed. Having a few players around the table is great (not just in the good times when you have multiple people to support) but also helps in tough times. Try to meet a few of the partners in one company so you can. We expect to see more co-led rounds as a result.

Finally, diversify your financial stack and capital options beyond equities. Venture debt has historically been an important option.But since SVB
VB
was one of the leading venture debt providers, but in the future, availability from them will no longer be taken for granted. New alternative capital solutions, such as revenue-based funding, are beginning to emerge at the startup front. Further investigation of new capital types will be conducted.

Barriers to trust for hiring have been lowered

One of the reasons I go to Silicon Valley Bank is It was Silicon Valley BankThey were incumbents in the land of innovation.

That’s why it’s the default option for so many products, including banking, venture debt, and more. The same is true for many providers in various industries.

But with VCs, portfolio companies, and many executives vying for options, they are also willing to try new options.

This could be a once-in-a-lifetime opportunity for agile players, both startups and incumbents looking to serve startups during difficult times.

But more broadly, SVB shows that even the safest players are not immune to risk. Nearly 90% of his US consumers are already using fintech. However, adoption among companies was slow.

Subject to overcoming the above counterparty risks and diversifying needs, we expect the adoption of B2B fintech to continue to grow. More people will be willing to try new players.

Fintech payers converge on one of two stable points

where do things end?

I foresee two stable points in the banking industry.

On the one hand, players can become agile and quickly adaptable enterprises. That’s where fintech shines. Many companies have already responded quickly to the ongoing collapse of his SVB, doing everything from speedy registrations to creating credit lifelines.

Boring and timeless stability, on the other hand, is a feature, not a bug.

Incumbents that remain faithful to traditional risk management may see lower growth rates in the short term, but may survive in the long term.

The story of Silicon Valley Bank continues to evolve live. But one thing is certain: the fintech and venture worlds will never be the same again.