Establishing multiple banking relationships most likely effect for Iowa startups
Leaders in Iowa’s startup community say the failures of Silicon Valley Bank and Signature Bank over the weekend were isolated incidents, but they are likely to affect how Iowa startups and investors approach and evaluate banking relationships.
Next Level Ventures, ISA Ventures and ManchesterStory Group all have portfolio companies that were depositors at Silicon Valley Bank. ManchesterStory is also one of the more than 1,000 investment firms that had capital at the bank when federal regulators took over its assets Friday.
The value of Silicon Valley Bank’s assets dropped dramatically when the Federal Reserve began aggressively raising interest rates. News that the bank was trying to raise capital last week sparked a run on the bank, leading to the second-largest failure of a financial institution in U.S. history.
Anxiety for startups and investors was highest over the weekend before the U.S. government’s Sunday announcement that it would protect all deposits held at Silicon Valley Bank.
ISA Ventures General Partner Eric Engelmann said the venture studio’s team spent the weekend “scurrying” to identify short-term cash options for exposed startups if they would need it.
The intervention guaranteed any uninsured deposits, which made up 93.9% of Silicon Valley Bank’s total domestic deposits, S&P Global reports. The government’s rescue plan taps a deep reserve of bank-funded federal insurance money, not taxpayer dollars, according to officials.
Concerns in the Iowa community have mostly subsided as affected startups regained access to their money on Monday, but some loose ends remain, leaders said.
Craig Ibsen, managing partner at Next Level Ventures, said while deposits have been returned, startups with loans at Silicon Valley Bank still cannot access their lines of credit.
“These companies will likely be the most impacted,” Ibsen said in an emailed statement. “Companies that do have loans with SVB are required to hold all their deposits with SVB due to the terms of the loan. If they move money out, they could be in breach of their contract. … What will happen with the loans is still unknown and the hope is the government will find a buyer to take over SVB assets to resume service of the loans and deposits.”
Many of the companies that can move their money out of Silicon Valley Bank are doing that and setting up accounts and lines of credit at new institutions.
ManchesterStory founding partner Dave Miles and other leaders said establishing multiple banking relationships to mitigate risk will be one of the biggest changes for Iowa companies following the collapse.
“It’s going to be good practice for everybody to have at least two different relationships going forward at a minimum,” Miles said.
Engelmann said ISA Ventures will be working with its founders on having redundancy in their banking relationships.
“We’ve been putting [it] to founders to consider what’s a reasonable balance between sophistication and risk aversion with convenience and simplicity,” Engelmann said.
Jon Kallen, managing partner at Jennings Kallen Advisors and a startup investor, said he encourages local banking relationships for the Iowa-based companies he invests in.
Unlike Silicon Valley Bank, Iowa banks have diversified portfolios and customer bases, John Sorensen, president and CEO of the Iowa Bankers Association, told the Business Record this week.
Kallen said startups are still likely to reevaluate their positioning and should be familiar with their lenders’ chief risk officers and their risk mitigation strategy.
“I think going forward, a lot of these early-stage companies will adopt more aggressive hedging strategies to ensure that they don’t have too much exposure to one bank, whether it’s putting $500,000 here, $500,000 there. [Ensuring] access and liquidity, I think that will probably be the greatest rule of thumb, and to be aware and track what these banks are doing.”
The venture capital perspective of SVB’s fall
Silicon Valley Bank’s announcement last week that it could not fully back customers’ deposits set off a domino effect, leading to the run on the bank and takeover by federal regulators.
Ibsen said some venture capital firms advised their portfolio companies with SVB accounts to withdraw all cash after the announcement. Then concern spread quickly because of the bank’s concentrated client base in the tech sector.
Kallen said venture capitalists’ reaction was also a result of them spotting early signs of trouble before the bank failed. Ibsen said early-stage companies used the cash from their Silicon Valley Bank accounts to operate day to day, and the risk of losing it sparked venture capitalists’ concerns.
More than 300 venture capital firms have signed a letter saying they would be willing to work with Silicon Valley Bank under new ownership provided it is appropriately capitalized.
Here are more comments from leaders in the entrepreneurial community.
On how this will change banking relationships:
“I anticipate the customary ‘runway’ metric for startups will now be accompanied by a ‘liquidity profile’ metric commonly seen in investment portfolio reports. Together the two will state how many months of expenses can the company cover through their funds, and how long (number of days) do they need to wait to withdraw operating capital.” — Tej Dhawan, co-founder of Plains Angels.
“In my circles this has had zero impact so far. But I believe that it will [have impact] as how companies manage their finances is now in the spotlight. Frankly, as long as a company held their deposits in a reputable bank I did not think twice. Now I will have to look at what kind of bank they choose.” — Bernie Stone, managing partner of Strategery Holdings.
“We have well-capitalized banks in Iowa with diversified client bases and no meaningful concentrations in any particular industry, which was not the case with SVB and Signature. We are seeing some of our portfolio companies move to local institutions with these characteristics. Where you bank matters and it was something that was taken for granted before.” — Craig Ibsen, managing partner at Next Level Ventures.
On the effects on the Midwest and Iowa:
“I think the effects of the SVB and Signature failures on Midwest investment firms and companies was minimal, overall. However, there are concerns regarding the banking system in general. Everyone is thinking more critically now about the financial health of their bank and whether their cash is safe.” — Craig Ibsen
“Iowa startups live in a global financial ecosystem. What happens in the valley can happen anywhere and startups continue to show a willingness to learn from good and bad lessons elsewhere. Our physical borders do not insulate us from happenings in a global financial system.” — Tej Dhawan
On what behavior can prevent future crises like this:
“Banks need to be better versed in the cash management needs for startups. They have expertise in working capital management and could more clearly add wealth management to the portfolio of services offered to startups beyond checking and wire services.” — Tej Dhawan
“The behavior I would change is the culture of ‘cool.’ It was ‘cool’ to bank there. They were the ‘it’ bank for startups. Does that add value?” — Bernie Stone