A Year After SVB’s Fall, Cash Management Remains in Focus for Startups

A Year After SVB’s Fall, Cash Management Remains in Focus for Startups

By: Tyler Brown

March 12, 2024

Cash management received a boost in attention just over a year ago across the startup community, after many scrambled to cover payroll in the wake of Silicon Valley Bank’s (SVB’s) collapse. The moral of the story was that companies should be careful about how they manage their funds. In particular, since then, there’s been greater emphasis on ensuring cash positions are approached strategically and are as diversified as possible.

Principles for how to accomplish this actually predate the collapse of SVB (and others) by years. According to a Wharton Magazine article from 2014, there are four cash management tenets startups should follow:

Capital preservation: Minimize risk in making financial investments.
Liquidity: Ensure the ability to make withdrawals quickly.
Cost management: Minimize the cost of cash management and payments.
Counterparty risk: Pick robust providers you are confident in.

Business checking accounts offered by licensed financial institutions (FIs) under normal circumstances satisfy these tenets: Interest paid is low, but the principal is safe; withdrawals are on demand; fees typically are low; and deposits up to $250,000 are insured by the Federal Deposit Insurance Corporation (FDIC). That paradigm changes when the institution holding the deposits puts capital preservation, and therefore liquidity, in doubt. That is what happened last March, pushing startups to proactively protect their cash, and calling into play the fourth tenet in a big way.

For financial services providers — either FIs or fintechs operating through a licensed partner — there are two primary ways to help startups with this imperative (and make themselves more attractive in the process):

Using networked deposits: Deposit networks allow banks and fintechs (via their bank partners) to sweep deposits to other participants. This can increase customers’ total FDIC insurance and spread risk across multiple institutions.
Offering access to liquid, risk-free securities: Government money market funds are essentially free of risk, and it’s quick to deposit and withdraw cash from them. Larger companies may manage those securities directly.

Another large piece of this is education. Providers need to help customers understand the mechanisms available. In addition, cash management should be part of accelerators’ Finance 101 and ongoing support from investors. Both banks and fintechs can then provide the right products and services to a customer base primed to embrace them.

To a degree, this is already happening: SVB, under the ownership of First Citizens, offers products that include a prominently advertised cash sweep program and money market account, for example, while fintech Mercury offers business banking services for startups, including networked deposits and short-term fixed income funds. JPMorgan Chase, meanwhile, markets commercial banking services for startups under the JPMorgan and First Republic brands. Such services are designed to assuage concerns about the wider system; positioned to tap into a battered but still-promising audience; and equip startups with tools to better control their future.