Editor’s note: Investor and entrepreneur David Gardner is founder of Cofounders Capital in Cary and is a regular contributor to WRAL TechWire.


CARY – Having lived through the bank failures of 2008, I am embarrassed to admit that the sudden failure of Silicon Valley Bank took me by surprise.  There’s nothing like getting a frantic call from one of your CEOs early on a Sunday morning saying that a $200K payroll is due on Monday and the bank won’t release the cash to cover it!  A lot of early stage companies used SVB including some of our portfolio companies.  I’m happy to say that after some scrambling everyone got paid and eventually all funds have been retrieved but there are some important lessons here for startups.

David Gardner (Cofounders Capital photo)

How it Happened

Most people seem to believe that SVB failed because it was making risky loans to startup companies but that is not the case.  SVB was particularly at risk because it was very heavily invested in bonds which decreased in value as interest rates continued to rise.  If it had been able to hold the bonds to maturity, it would have gotten its money back with interest but when its clients started to panic, it created a run on the bank as depositors all tried to withdraw their cash at once.  The bank was then forced to sell its bonds at a loss leading to its insolvency.  There were other mismanagement issues as well, but its lack of diversification was by far the main factor.

A run on a bank is an unfortunate and avoidable phenomenon.  It reminds me of the ridiculous segregation thinking in the 1960’s when a minority couple moved into an all-white neighborhood.  A significant number of homeowners, fearful that their property values might drop, would put their house up for sale.  The property values did drop but not because of the minority couple moving in but rather the foolish actions of so many houses going on the market at the same time in that neighborhood.

Raleigh-based First Citizens Bank reportedly considers buying Silicon Valley Bank

Protecting your Company

Self-fulfilling prophecy or not, possible bank failures are something every CEO has to think about.  The guidance we published to our portfolio companies is to never have all of their cash in a single bank.  Losing deposits is not the biggest concern.  The government has historically always stepped in and guaranteed deposits even those above the $250K FDIC insured limits.   Even in the 2008 crash not a single depositor was left hanging.  The real concern is that access to that cash could be restricted for a time causing a business to miss a payroll which can be catastrophic.   Simply having money in at least two different banks reduces this risk to almost insignificant.

Some argue that a company is protected if it simple opens a lot of accounts at its current bank with no more than $250K in any one of those accounts but as aforementioned, the biggest risk is lack of timely access to capital.   Spreading your working capital across even multiple FDIC insured accounts at the same bank does not mitigate this risk.

As a venture grows it can be unwieldy to manage cash across multiple banks and bank accounts but there are ways to ease some of that pain.  Automatic sweep accounts can help keep money spread across banks at the same bank and there are clearinghouse-like services that will automatically distribute cash across multiple banks for you.

Startups often fail but let it never be for something as avoidable as a missed payroll because a bank did something stupid.