Moving forward

Banking principles for founders

Cherry Ventures
Cherry Ventures
5 min readMar 15, 2023

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In light of the Silicon Valley Bank developments, we wanted to take the moment to reflect on the situation and, in the spirit of moving ahead, better advise our founders on banking principles to guide them across stages in the future. Yet, this advice is also applicable to all founders. Below is a copy of what we sent.

Together with our tech peers, we could breathe a little more easily at the start of this week.

HSBC’s purchase of SVB UK and the US government recovering all SVB deposits were extremely positive outcomes in light of what unfolded last week — especially considering that it could have gone very differently. We are disappointed by the loss of a trusted banking partner in our ecosystem, yet swift government intervention has, at least, resulted in founders worldwide being able to access their funds in total.

While we had limited exposure across our portfolio, we weighed up the various paths for affected companies and individually advised them on the specifics of their situations. We also reminded our broader portfolio, as a matter of best practice, to extend their banking relationships across institutions.

But the lessons from the past week go beyond diversification. In reviewing the countless phone calls, meetings, and more from the past week, we’ve highlighted a few additional points of guidance for founders, regardless of whether they are early or late stage.

1. Think about treasury management earlier. This may be the most important lesson of all. Treasury management in its basic form should aim to (i) safeguard cash and maintain capital in your business, (ii) allow sufficient amounts of cash to be liquid to absorb unexpected financing needs, and (iii) create investment opportunities for any excess cash to generate additional yield. While some later-stage companies have their own treasury expertise, this important function is often deprioritized at the early stage. The fallout from the failure of SVB is a reminder of the worst that could happen, but — regardless — in today’s high-rate environment it is especially important to consider what can be done to strengthen, preserve, and protect company capital.

To make banking diversification more concrete, we believe that any early-stage company should start with at least two bank relationships, including larger, non-regional banking institutions. Pick institutions that will grow with you and can offer you a wide variety of services from basic deposit accounts to multi-currency accounts in different jurisdictions up to more sophisticated cash management solutions that offer more attractive yield. As you expand, consider diversifying to more banks according to your specific needs.

2. Optimize for yield, but don’t sacrifice flexibility. Investing excess cash into fixed-term deposits with your core banking relationships can offer attractive additional yield in the current interest rate environment. Yet, it’s important to highlight that fixed-term deposits will render the cash inaccessible during the given maturity. We recommend utilizing such products only for cash that is not needed to finance operations within the next 10 months. In other words, do not absorb large amounts of risk (by restricting cash) for marginal extra yield.

3. Diversify cash management beyond banking. Cash is the lifeblood of your business and the combination of shifting monetary policy, rising rates, economic uncertainty, and bank failures calls for a rethink of cash management in the tech world too.

  • Investing part of your cash in money market funds (MMFs) run by large financial institutions can help navigate these conditions to achieve capital preservation, liquidity, and yield (in that order).
  • Such MMFs provide some of the advantages that deposits offer in terms of daily access to liquidity, while also offering more attractive yields from prudent and diversified government-risk portfolios (depending on currency, currently between 250bps and 480bps gross annualized yields). Through this strategy, you add more diversification but avoid concentrated counterparty bank exposure.
  • Institutions like BlackRock, Goldman Sachs, and Fidelity offer a wide range of money market funds through their cash management services to suit both short- and medium-term liquidity needs. They will typically accept funds exceeding $1–2 million.
  • We only recommend investing cash via this strategy that is not needed to finance operations in the next 6–9 months (revisit this allocation on a quarterly basis)

4. Reassess all counterparty risk. The events of the last few days have proven the obvious: relying on a single relationship is needlessly risky. The collapse of a banking partner is of course an unlikely event, but this should serve as a timely warning. Push to diversify whatever risks you can control: suppliers, service providers, stakeholders, and customers. When beginning new relationships, expand KYC to assess their exposure to these same risks. It may not be enough to worry only about your own banking relationships and cash management set-up, for example.

5. Recalibrate venture debt expectations. The European venture debt landscape will be very different for the foreseeable future. SVB was the preferred creditor for many venture-backed companies and lending to the tech ecosystem at attractive prices was a cornerstone of their business model. The last couple of years had seen several banks expanding into this asset class and a number of new specialist funds launching. We expect lenders to be more cautious and to price in higher compensation for their risk.

We, like all of you, took what unfolded over the last few days very seriously. The list of lessons could go on and on. In addition to the guiding principles outlined above, the last few days reminded us of the importance for founders to weigh up the pros and cons of smaller banking providers with long-established players, to take care not to breach credit covenants when moving capital between banks, to consider exploring later-stage treasury management products, such as repo and MMF sweeps, and more. But we hope these five major lessons serve as a helpful reminder for banking practices now and in the future.

Lastly, the responsibility is not just on you, but on us too, as a VC — namely your VC — to remind you of risks and guide you through challenges so that you build a resilient business for the future.

Founders first,
Team Cherry 🍒

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