In the wake of the Silicon Valley Bank receivership and larger speculation around the stability of banks the world over, there are many great startup founders who—through no direct fault of their own—are wondering how they will make payroll in the coming weeks.
To help software company founders and management teams navigate this admittedly stressful scenario, we want to offer some guidance.
First and foremost, we acknowledge that some of these tactics may not seem intuitive on their face. We also know that many of these tips are going to create new headaches in the process. However, leveraging a mix of these short- and long-term solutions will not only help founders manage an unexpected liquidity crunch today, but help lay the groundwork for a stronger, more diversified capital strategy going forward.
Figuring out where to get cash now
For founders directly (or even indirectly) affected by the SVB receivership, there are a few steps you can take immediately to shore up your liquidity. This starts with opening a new bank account and ensuring that customers’ funds are not being routed to SVB.
Additionally, when sourcing a new bank, founders should:
- Consider a bank with an insured cash Sweep option: WIth Sweep accounts, funds are automatically transferred to a safer third-party at the end of each business day. While intended to avoid cash drag, Sweep accounts are especially useful in the current market because these transactions are excluded from appearing on SVB’s balance sheet, while also guaranteeing that all deposits are insured.
- Consider a bank that doesn’t primarily cater to venture-backed startups: SVB was a powerful and positive player in the startup space for almost four decades before it went into receivership. While this was an asset for innovative startups in the past, it resulted in an industry-wide cash panic as a wide swath of the startup community saw their assets collectively frozen on March 10. By leveraging banks with a more diversified customer base that’s backstopped against more predictable investments, there’s much less risk of insolvency down the line.
- Consider routing customer funds to personal accounts until a secondary corporate account is established: Like we said above, this may not be an intuitive step, but it’s a responsible maneuver if you’re still exploring your options as attitudes toward the banking system level out.
What other cash options do founders have in the short-term?
So much of building a startup involves cementing and leveraging relationships, both with customers and investors, as well as peers within a founder’s network. Trying and uncertain times like these are the moment where founders need to tap into these relationships to help secure your runway.
One option is to ask customers with payments due in the next 30 days to pay early in exchange for a slight discount. While the ability for founders to discount a cash payment (and the size of these discounts) will vary, an immediate cash infusion today could be make-or-break for founders who are fast approaching their payroll deadlines.
Another option? Go to your investors and ask them to put additional liquidity into the business. The SVB news is widely circulated and the sentiment for those directly impacted is considerable. If you’ve done your due diligence in advocating to investors to date, asking them for help—and in turn a vote of confidence in your startup—is a logical next step given the current market conditions.
Founders can also go directly to their payroll provider to explore payroll loan options directly. While many banks offered emergency bridge loan offerings for customers immediately following SVB’s closure on March 10, most of these have expired now that the FDIC has guaranteed all accounts will be covered and access to cash would be granted as of March 13. That said, with liquidity concerns lingering across the banking space, it may make sense to pursue certain loan options specifically where payroll is concerned to immediately extend your runway.
Prioritize expenses and consider delayed payments
Perhaps the most important action you can take as a founder is to tighten your budget in the broadest sense. This involves figuring out what expenses you can do without for the short term, as well as deciding where you can safely delay payment. Some low-hanging fruit might include:
- AWS sandbox environments for development and testing
- Paid marketing
- Travel & entertainment
It also makes sense to contact your vendors directly and to discuss extended payment terms. Definitely be sure you have these conversations before deciding outright to freeze payment—again, there is widespread goodwill toward startups who’ve felt the brunt of the SVB fallout, and vendors may be more willing than usual to accommodate postponed payments. This includes conversations with your landlord, if you have an office or brick-and-mortar presence.
This will also unfortunately trickle down to personnel. If cash is tight, it only makes sense to freeze any new hire plans, including delaying start dates (if possible) while founders explore other avenues for liquidity.
It also might make sense to ask executives to take payment in kind, either with a low interest rate for the next 30 days, or, alternatively, in the form of equity from your startup’s option pool. It should also go without saying that now is the right time to hit pause on discretionary bonuses (and really any variable-based pay).
Going forward? Strategically plan cash inflows and cash outflows
Finally, as a founder, you simply need to change your mindset in the wake of recent events, and accept the new realities of your current situation. For those most squeezed by recent events, they have to adjust their operating assumptions (ie. $X million in the bank, with $Y burn, and Z months of runway) based on the actual cash coming in and going out.
Founders should develop a perspective on the timing (and percentage) of receipts for uninsured deposits and run a new sensitivity analysis (i.e. what if I don’t receive access to my uninsured deposits for [24 weeks], and what if I only receive [60%] of the dollars?).
As it relates to cash inflows, founders must:
- Make sure you understand when you actually receive customer payments
- If you have large customer concentration, make sure you know exactly when your large customers are going to pay you
- Understand whether any of your customers are impacted by SVB
- Know your “cash zero” date at all times
The biggest takeaway I’d like to leave founders with is that You CAN Navigate This, and you aren’t alone.
While a great deal of uncertainty remains, founders must remember that they’re part of a larger startup community, which includes many of the team members here at Boast who know firsthand the challenges of starting and financing a business.
Check out some of our recent webinars to learn more about how we recommend you can diversify your capital strategy, or book a call with the team today to learn more about how Boast’s technology and expertise can help.