Startups and VCs Change Banking Practices After Recent Turmoil

Startups and venture capital (VC) firms are changing how they bank after recent industry turmoil.

Although tech industry players were relieved by Sunday’s announcement by federal regulators that depositors at the failed Silicon Valley Bank will be made whole, they see a need to make changes, The Wall Street Journal (WSJ) reported Monday (March 13).

Among those who were interviewed, founders and investors said they are diversifying bank accounts, moving to bigger banks, opening insured cash-sweep accounts and making certain their balances are under the threshold insured by the FDIC, according to the report.

They’re also scrutinizing other banks with which they do business — looking for signs that they could fail as quickly as Silicon Valley Bank did — and anticipating taking part in board meetings at which they will have to answer questions about what they’re doing to improve their handling of risk, the report said.

The federal regulators’ announcement about deposits at Silicon Valley Bank came faster than many in the industry expected, and companies had been scrambling to gather cash to pay their bills, expecting a weekslong or monthslong delay before hearing a decision on the fate of their funds at Silicon Valley Bank, per the report.

That has served as a wake-up call around cash and risk management practices.

The digital asset industry in particular has found itself unbanked after the collapses of three institutions in five days: tech startup focused Silicon Valley Bank, crypto-catering Silvergate Bank and crypto-friendly lender Signature Bank.

As PYMNTS reported Monday, sector observers have said that the essential de-banking of crypto from 24/7 real-time payment rails may leave the industry with little option but to look to other geographies and jurisdictions.

The domino-effect closings also underscore the challenges faced by small and midsize banks focused on niche lines of business to compete with larger institutions.

Another long-term effect of the closure of Silicon Valley Bank may be that startups have a tougher time doing business.

One startup told The Information that it is concerned about future efforts to raise funds because so many investors banked at Silicon Valley Bank, while another said tech firms might not be able to find another bank that is as willing as Silicon Valley Bank was to work with them when they ran into difficulties.