The breathless press about SVB’s demise and resurrection over the last two weeks has focused almost entirely on the impact to startups and investors, but another important stakeholder has been damaged, the US government and every American. ~50% of the VC backed ecosystem banked with SVB and directional estimates suggest that same number applies to the startups who sought to contract with the government. These numbers rise meaningfully when the other banks currently in focus are added. So what does the collapse of America’s most startup friendly bank mean for ~600,000 small government contractors that compete for ~$150B in contracts each year?
First, let’s acknowledge that running a startup is extraordinarily hard. Founders are expected to simultaneously be visionaries, technologists, salespeople, operations managers, HR experts (to name but a few required hats they wear) all without formal training. Finance is often an afterthought, as Carta, a popular operations platform for startups, points out that only 18.1% of companies with post-money valuations up to $50M (which is a lot of them) have any finance personnel at all. This shouldn’t be a punishment; they should be able to rely on the safety of their cash in a bank account. As we debate the future of startup banking, I would propose a few considerations, hardly exhaustive by any stretch, which likely became immediately obvious to any deep tech company working with the federal government over the past two weeks:
- How patient will we be towards contract reward inefficiency?
Companies need to know their customer will honor their contracts and pay on time. In the absence of deposits, cash flows save the day and the hypothetical issues on government payment cycles and continuing resolutions turn into fatal flaws if a startup cannot rely on the contracts they have won to be paid on time.
- How far and through which channels is the government willing to go to protect existing critical contractors?
Yes, the FDIC, Treasury and Federal Reserve saved the day for deposits, but could the defense department, DOE etc. have enacted similar policies or forward-paid existing contracts and protected companies they had already designated as mission critical? These policies do not exist now formally, and while they have started in the last few weeks in response to our current contagion, without a formal procedure they will be pointlessly slow when needed. Remember- Credit Suisse, a multibillion-dollar international bank was wiped out in less than 48 hours.
- Is $250K enough insurance for government focused startups?
That standard, set for individual account holders, is supposed to be sufficient for two weeks of operations. That is two weeks' coverage to include salaries, equipment, vendors (the list goes on) for again, very expensive companies. The fact that so many banks offer sweep accounts, where multiple $250K accounts are set up for the same entity to take advantage of the FDIC limit would suggest to me the policy itself is worth revisiting. Harvard Business School Professor Mihir Desai even proposes the establishment of special “Payment Banks”, a completely separate structure of bank that is designed to do nothing more than process business payments. No matter what, the answer needs to be simple. Our incentive structure should do as much as responsibly possible to reward good innovation, not just savvy CFOs.
- How efficient is our foreign capital tracking in emergency situations?
A lot of companies from a lot of countries banked with SVB and other banks that are in the crosshairs right now- but U.S. tech is widely considered some of the most attractive globally. For 72 hours, countries that normally have a hard time getting access to leading American innovation saw the SVB panic as an opportunity to buy great companies at a steep discount (read: at all) and we can expect this trend to continue. It is difficult to qualify all of this as predatory or just opportunistic, but from the founder's perspective as I said on another news outlet, “if only one person is throwing you a life raft you don’t stop to look at the flag on the side”. Not every one of these companies is backed by an informed investment fund who sees how badly this could end up and that the US interpretation of foreign investment is murky, at best. If we truly believe in making a better environment for trusted capital, we quickly need better rules and contingency plans for emergencies to block nefarious actors.
In the end, we are surviving this existential moment for American innovation but there are few who feel safe as a result. The outcomes we are seeing do little to mask the glaring process and procedural issues that were revealed in the last few weeks. Let’s keep debating how best to harden the American economy, but lets be impatiently mindful that central to that debate must be a consideration of the small innovative companies that are trying to protect our national security, environment and every other foundational service that the government provides.
