Many didn’t think twice about where they parked their money before SVB’s collapse. They are now — and big banks might be the big winners.
The saying about not putting all your eggs in one basket took on a new meaning last week after Silicon Valley Bank’s implosion harshly reminded entrepreneurs to diversify their cash holdings.
As founders adjust their strategies to help cope with recent volatility, they’re looking for safe places to store their cash. Enter the top players of the U.S. financial system: Bank of America, JPMorgan Chase, Wells Fargo, and Citibank, institutions that are seen as too big to fail — not many years after they came close.
Eighty-two percent of startups said that they would move funds to a more “dominant” financial institution, according to a recent survey from Startup Snapshot, a data-sharing platform based in Tel Aviv, Israel. “We saw a 40-year [old] bank unfold in 36 hours, and it seems very unlikely that a top four bank would do the same,” says Cody Barbo, the founder of San Diego-based estate planning company Trust & Will.
Barbo had banked with SVB for more than a decade. The day before the Federal Deposit Insurance Corporation (FDIC) shuttered SVB and placed it in receivership, Barbo had initiated an eight-figure wire transfer. “That made me terrified, I’ve never sent an eight-figure wire before,” Barbo says.
The next morning, it landed in his account at Mercury, a fintech that has attracted other founders amid the calamity. It was a waiting game, Barbo explains. And while he was relieved to transfer some of his funds out, he had still left a “pretty sizable seven-figure position in SVB.”
Now, Barbo and his team have decided to open an account with a major bank since, in his view, it’s the safest place to park funds. Many others seem to agree, with Bank of America scooping up more than $15 billion worth of deposits in the wake of SVB’s closure, Bloomberg reported on Wednesday.
Nearly 60 percent of founders say that they will “definitely” diversify company funds, while another third of respondents are “potentially” weighing diversification, per the Startup Snapshot survey. One drawback of banking with multiple institutions, of course, is that you incur more fees — which is more difficult for smaller companies to stomach. Although not as difficult as not being able to access your money, which happened to many businesses last week.
“There is a lot of investment you put into building relationships with a bank,” says Sandeep Dahiya, a professor of entrepreneurship at Georgetown University. While he acknowledges the struggles that micro-businesses will encounter with fees, “it’s very clear that it’s good to have at least two primary banking relationships.”
Out of your two banking relationships, at least one should be a systemically important bank, Dahiya says, or one that the government will not let fail. Like the big four, though there are obviously more options than that. But he points to credit unions and community banks as founder-friendly options — both tend to offer more competitive rates and lower fees compared with larger counterparts. “They may not have the whole razzmatazz of fintechs [or] the bells and whistles, but they do a very good job of delivering basic banking.”
But here’s a question posed by Osso VR’s Justin Barad, one that many other founders are likely mulling over: How much diversification is the right amount? “I think that’ll be sort of the question du jour,” says Barad, the founder and CEO of Osso VR, a San Francisco-based immersive surgical training platform. “Up until now, the banking strategy was to just work with SVB. And there were a lot of incentives to keep you at SVB and keep all of your banking in one place.”
Barad doesn’t forecast a huge change in strategy for his company, but plans to double down on making sure that Osso has certain financial planning in place, specifically in terms of the company’s interest-bearing accounts and loan facilities.
The process of changing banks, as many are finding out, can be time-consuming and costly — there’s a high switching cost, in economic terms. An S&P Global survey found that 13 percent of mobile banking users switched banks for their main checking account between May 2021 to April 2022.
Osso has switched to Pinnacle Financial Partners and Valley National Bank, with Barad citing reputation, speed, and high-level relationships as the mix that helped draw the company in. Above all else, a general feeling of stability helps, he says.
Stability is something that Praful Saklani, co-founder and CEO of contract management system firm Pramata, is also looking for. While he hates to admit it, he thinks that SVB won’t be the last bank to face a run. In the U.S., 563 banks failed between 2001 to 2023, according to the FDIC.
So for the next six months, Saklani’s largest priority is safety — entrepreneurs juggle problems on a daily basis, after all, and the last thing a founder wants, he says, to find is a frozen bank account.
“Startup teams are used to dealing with risks, but there’s just a whole new vector of risks that people weren’t talking about a week ago,” he says.
Still, the Biden Administration has maintained that the banking system is resilient and the government has deployed significant measures to contain a contagion. Despite the scare, entrepreneurs can take comfort that their funds in SVB won’t be lost thanks to the government’s decision to backstop depositors beyond the $250,000 FDIC insurance limit.
And even though markets reflect wobbly ground for bank stocks, the government’s actions — for now, at least — have prevented SVB from snowballing. “This could have sent us into a spiral for the next one to two years that we really would have had to dig ourselves out of,” Barbo says. “I feel a little more peace of mind about the overall economy with the actions that were taken with SVB.”
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