Startup Banking Best Practices in the Wake of the SVB Collapse

For decades, Silicon Valley Bank was the financial institution of choice for tech startups and venture capital firms. As a result, the bank’s collapse on March 10 has left many startup founders scrambling to figure out what to do next. 

On March 16, Founders Network partnered with Wilson Sonsini Goodrich & Rosati to help those members directly impacted by the collapse prepare for their next move. At the event for Founders Network members, WSGR partners Lang Liu, Jim Jensen, and Kathleen Rothman shared insights on the future of SVB and recommendations for SVB clients. They also shared key security considerations for establishing new bank accounts and updating wire transfer information. 

Here’s a look at some of the startup banking best practices WSGR recommends in the wake of the SVB collapse.

State of SVB

After the SVB collapse, the Federal Deposit Insurance Corporation stepped in to take control. Ultimately, the FDIC announced it would be backstopping SVB and providing full access to all depositors to their funds. And, on March 13, they transferred all bank deposits—both insured and uninsured—to a newly created, full-service FDIC-operated “bridge bank.”

The bridge bank, Silicon Valley Bank, N.A., is a fully operational national bank. However, SVB N.A. will be operated by the FDIC on an interim basis while it markets SVB to potential bidders. Companies are allowed to move their funds to other institutions unless they have loan agreements with SVB. 

Startup founders who have accounts with SVB and other stakeholders in the startup ecosystem are still looking for clarity on the future of the financial institution. They also want to know what it means for startup funding. According to WSGR, despite the impact the SVB collapse has had on venture capital firms, the venture market is not at a complete standstill. There are still a lot of lenders in the venture space who haven’t been impacted, and term sheets continue to come in.

To learn more about startup banking, see if you qualify for membership to join Founders Network.

Cybersecurity Considerations

While SVB looks stable for the moment, many startups are understandably hesitant to continue doing business with the bank. As a result, the SVB collapse is causing a surge in new bank account openings and increased wire transfer activity. According to WSGR, this environment creates a perfect storm of opportunity for hackers and wire transfer fraud.

WSGR says startups should never accept new wire transfer information by email alone because email accounts can be spoofed or hacked. Instead, it’s important to speak to someone you know by phone, on a phone number that you know and can verify or by a video conference call. 

For startups who banked with SVB and are establishing a new account, WSGR says it’s important to make sure you send clear instructions to your vendors, partners, and customers about how to verify that they have received the correct information through established channels.

Cash Management Best Practices

In addition to cybersecurity considerations, there are some important cash management best practices startup founders should take away from the SVB collapse. 

Initially, many startups were concerned about being able to make payroll with a third of Y Combinator companies reporting they wouldn’t be able to make payroll in the next 30 days. Under federal and state law, companies are required to hit payroll on time or face penalties, personal liability, and even criminal risk. For this reason, WSGR recommends diversifying your assets and having multiple banking relationships with at least one payroll cycle worth of funds in different banks. 

WSGR recommends startup founders have an established cash management policy in place, even in the early stages, because investors require at least a basic blueprint. WSGR also recommends having an established crisis management plan that includes not only your communication plan in the event of a crisis, but also information like your cash position and how you plan to cover a payroll gap.

Overall, the SVB collapse is a symptom of what’s going on with the larger economy. It should serve as a warning to startup founders to get their financial houses in order. With interest rates rising this means putting your money into low liquidity assets, but also reserving some of your financial resources so that you have cash on hand. 

Want to learn more about startup banking best practices? Check out WSGR’s insights and resources and additional information on the SVB collapse.