As startups and investors take stock of the SVB collapse and dramatic rescue, there’s one key question cropping up in post-mortems: why on earth did so many startups have just one bank account?
In the UK, just over a third of startups had access to no other banking facilities other than SVB UK, according to a survey by the UK Business Angels Association.
Founders say that difficulty in opening accounts at high street banks — and investors’ cosy relationship with the bank — all fed into the over-reliance on SVB UK.
VCs were blinded by the SVB referral pipeline
First off, opening accounts with traditional banks can often require companies to have historical records, which early-stage startups don’t have, explains Reshma Sohoni, founding partner at London-based early-stage investor Seedcamp.
High street bank accounts can also take longer to open due to additional checks for these risky-seeming and unprofitable businesses; an unwelcome delay when startups have VCs ready to wire them capital, she says.
A document compiled by VC group Phoenix Court Group this week for portfolio companies put the process of opening an account — even amid the SVB crisis — from as little as 24 hours to as much as four to six weeks at Barclays.
“A lot of the early-stage tech sector is characterised by a cash burn profile that most banks seek to steer clear of,” adds one investment banker. “But there was a risk for a long time that SVB was the only bank that really took the time to understand tech — very few other banks have ever really tried, because they thought they had bigger fish to fry elsewhere.”
Industry voices tell Sifted that the startups most likely to hold their funds solely in SVB were at earlier stages, as companies tend to ‘graduate’ from SVB UK as they scale and open up further bank accounts. At later stages, startups are also likely to have a dedicated finance function that would be well-versed in the need to have multiple bank accounts and ways of putting their cash to work.
But there are still many newer banks out there — like Tide and Wise — that were more friendly to startups opening a business account. What might make a startup choose SVB UK over one of those, however, was how many investors also banked with SVB.
That meant that when startups raised money from VCs, the investors — already customers of the bank — were very likely to refer them to open an SVB bank account. The cash for that $5m seed round just got transferred from Investor A’s bank account at SVB to Generic Gen AI startup’s account at the same bank.
VCs relied on SVB for their own funding structure
There are other reasons for VCs’ cosy relationship with SVB.
The structure of venture capital funds means that when they raise money from LPs, they can’t access cash straight away. So when they needed to close a startup funding deal, they could take out short-term loans from SVB to invest in a company, while waiting for their LP to transfer the funds (a capital call line).
What’s more, the rules of the venture game often mean that a VC firm’s general partners (GPs) are required to put some money into their fund, in order to have skin in the game. Investors tell Sifted that GPs would often take loans from SVB to fund that process, too.
“When you have a world where one bank provides the funds for GPs, LPs, portfolio companies and even some payments banking, you’ve got a huge concentration of risk in one bank,” says another investment banker.
“I think what happened in the UK is that it just became too easy to give it to SVB, which wasn’t through any fault of SVB as they’d been so successful. But there was a systemic risk building up in the tech system.”
CFOs need to open up new bank accounts, pronto
One European VC partner told Sifted that, while the SVB saga teaches us a lesson as old as time, most founders just don’t like to concern themselves with the important nitty gritty financial details.
“It's what your grandma said, ‘Don't put all your eggs in one basket,’” he says. “Founders regard all of this financing stuff as something that gets on their nerves. That's probably not the right way to think about it. You have to have a proper head of finance who’s not just doing your accounting but who’s really on top of things.”
One head of a European network of scaleups tells Sifted he wasn’t surprised by early-stage startups not having a diversified set of banking clients, but that later-stage companies in that position need to ask some questions of their CFOs: “It doesn't surprise me for seed stage or Series A companies. But when you get a CFO — Series B-plus — you really have to look at that closely.”
Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here.
Tim Smith is senior reporter at Sifted. He tweets from @timmpsmith.
