Former Dropbox finance leaders share best practices for managing risk in challenging times
After the collapse of Silicon Valley Bank earlier this month and the liquidity crisis it caused for the startup ecosystem, many founders and operators are re-thinking their banking strategies.
In a recent conversation with Ajay Vashee, a General Partner at IVP and former CFO at Dropbox, Anrok COO and former Dropbox Treasurer Brad Silicani shared some best practices for startups in a post-SVB world.
Read on to get some takeaways from their discussion, and learn how startups should approach cash management, bank diversification, investment policy design, and asset allocation.
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Table of contents
Strategy 1: Diversify across multiple banks
Ajay Vashee: Most venture-backed companies have managed their cash with a single bank, and that hasn't been a major issue for the past 5, 10, 15 years. Over the past two weeks, everyone has kind of been scrambling to open up new accounts. How will the collapse of SVB change the approach that startups take to banking diversification going forward?
Brad Silicani: I think collectively we forgot that the banks were credit counterparties and that when we put our money with the bank, we're really relying on them to pay us back, and we have to have a lot of faith in that.
Over the past two weeks, we've had conversations with a lot of different companies wanting to diversify. And that means diversifying across two fronts: First, diversifying your credit counterparties to make sure that you always have people who are going to pay you your money back.
And second, which is equally as important, diversifying your execution risk. Over the weekend following the SVB collapse there were many people in scramble mode to make sure that they were going to hit payroll.
It’s important not only to make sure you can have different credit counterparties, but different points of execution to make sure that you can always move forward with your business.
One trend that we're seeing is diversification between a large commercial bank and a smaller bank. I think both have strengths, and long-term there's a very strong place for a smaller bank like an SVB, and there are many of them. They do have a lot more flexibility and can move with a lot more speed than those larger banks can. A mix between those two is what we're seeing and an appropriate strategy for managing risk.
Being able to put some strategies in place to diversify will help in these situations, and allow you to manage risk and feel a bit more comfortable heading into challenging times.
Strategy 2: Design a thoughtful investment policy
AV: Imagine I'm a startup CFO that's just raised a $50 million growth round. I've now diversified that cash across a larger commercial bank and a smaller regional bank. What should my key objectives be when designing an investment policy?
BS: When thinking about an investment policy—and this also applies to thinking about your cash in general and liquidity—there are four main goals you should be trying to achieve.
First and foremost is preserving the money that was given to you. Investors invested in your company and gave you their money, not because you're really great at investing and generating yield. They gave it to you because your team can build great software.
Your job as leading the finance organization is to preserve that, so that you can make a big bet on investing in your R&D teams and your sales and marketing teams to grow. So your number one goal here is to preserve that principal.
Second is to meet your liquidity needs, making sure that you're always in a place where, at minimum, you can execute on payroll. And a good example to think about here is, not just executing payroll, but executing something like an M&A transaction.
If your CEO calls you and says, “Hey, we need $100 million or $50 million to acquire this really great company,” you're probably not going to have much time to get those funds together. So think about that in your approach to liquidity preservation.
Third, you can think about delivering some yield. Particularly with interest rates moving up over the past year, there is an opportunity to make a little bit. That's not the primary goal, but you can pick up 4–5% right now just based on money market fund investments.
Fourth, you want to avoid concentrations of risk. And you should do that at every level. Do it by diversifying the banks that you keep your cash with. Do it by diversifying the money market funds that you're invested in. And if you do have a short duration portfolio, diversify and avoid concentration there.
Your goal should be that if the next SVB happens, you look at your portfolio and have less than 10% of exposure.
Strategy 3: Accept a practical level of risk
AV: Got it. So now I have this investment policy in hand, prioritizing what you just walked through—principal preservation and liquidity. And I'm trying to thoughtfully manage to some yields in the current interest rate environment. The last two weeks have taught me in many ways that I should be wary of holding cash beyond the FDIC insured limits. How much cash should I feel comfortable holding?
BS: You're not managing your money to a completely risk-off scenario. Taking a little bit of risk and going above the FDIC limit is reasonable, and also practical.
You're a financial organization—maybe you have nobody on your team, maybe you do have a team of 40 people. Likely even at the 40-person level, you don't have a treasury team who's executing on daily transactions.
Either way, think about keeping one to three months cash burn in a checking-type account. The more you have confidence about your cash flows, the lower you can go on that number. Take the excess funds and put them into something else, like a money market fund.
You're going to take a little bit of risk on the FDIC side of things, but that's going to allow you to focus on the rest of your business: improving your top line, keeping your sales team focused and hitting the numbers that you need, and managing spend in your organization.
Free download: The startup finance leader’s framework for cash management
To summarize his experience and recommendations, Silicani put together this framework for cash management. Download the framework for a one-page recap of the conversation above, plus additional tips for managing liquidity, credit risk, yield, and more at every company stage.
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The startup finance leader’s framework for cash management