How SVB’s collapse hurt small startup owners

Tiffany Dufu spent a morning last week crying in an airport bathroom as she hurriedly navigated the collapse of the Silicon Valley Bankwhich holds most of his business funds.

Dufu founded the The Cru, a professional training and mentoring startup that aims to keep women in the workforce. On Friday—just as SVB was being taken over by federal regulators, and customers couldn’t access their accounts—he was scrambling to figure out how to make payroll for his employees, he explained in a video he later posted on LinkedIn. “These are 10 people I feel responsible for supporting. You take people’s lives very seriously,” Dufu said. luck in a call on Tuesday.

To make sure The Cru staff were paid, Dufu talked to her husband and finally decided to withdraw the money needed for payroll from their savings account.

“I’m very lucky that I have a savings account, and I can do that,” Dufu said. “Because of its timing, TriNet, which is our payroll provider, needs a wire transfer by the end of the day on Friday. So there’s not a lot of time to figure out what to do.”

It’s a scary moment, Dufu said, especially since her son is a junior in high school and college costs are looming. In his video, he expressed the many stresses he faced as a founder, including many financial worries. “You think: What have I done?”

Fortunately, US regulators announced on Sunday that they would backstop the failed Silicon Valley Bank, saying that “the depositors of this institution will be whole.” Citing “systemic risk,” the Treasury, Federal Reserve, and FDIC acted immediately in an effort to use depositors’ funds to restore consumer confidence and prevent further bank runs. Regulators noted that there was no bailout for stockholders and bondholders and senior management was removed.

“I’m very happy with the Fed’s announcement on Sunday, but Tuesday is the end of the day, and we still don’t have access to our funds,” Dufu said. The team recently launched a equity crowdfunding campaign coincided with Women’s History Month—and that brought in over $77,000 in funding that gave Dufu some liquidity. “I’m hoping … that the crowdfunding campaign will hopefully prevent me from having to go further into my personal savings.”

On Wednesday, Dufu posted on LinkedIn that The Cru finally got access to its funds in SVB.

As startup founders scramble to navigate the ongoing chaos, the regulators’ announcement quickly sparked a flurry of tweets complaining that the move was just a bailout for Silicon Valley’s wealthy elite.

But many of the startup founders who scrambled to figure out their finances last week, would beg to differ.

“People have a stereotype when they think of a tech founder—and when they think of Silicon Valley—they think of Mark Zuckerberg. That’s far from the truth,” Dufu said. a razor blade financially.

“Most of us are not rich. And for some of us, the money that is in the SVB account is very difficult,” added Dufu, noting that of the billions of dollars given to venture capital every year, less than 1% is in those founder of the Black woman. .

“The collapse of SVB may look like a 1% problem that only affects the coastal-tech-elite. It’s not true,” Lindsey Michaelides, CEO of Ohio-based Strongsuit Tweet on Saturday. “It’s affecting small businesses that are made up of hard-working people making modest mortgage payments in the midwest. It’s affecting parents who put dinner on the table.”

“For us, anything short of making up those deposits would mean team cuts and up to a full shutdown of our business,” Michaelides said. luck.

Why many businesses have accounts with over $250,000 with SVB

Many on social media have commented that founders and business owners are irresponsible in having money in their accounts on FDIC insured limited to $250,000. But even a small company with less than 20 people who pay their employees close to the median income spends a quarter of that threshold to pay staff every two weeks.

Large companies can easily exceed the $250,000 threshold when trying to process payrolls. And splitting corporate deposits into multiple accounts, while safer, doesn’t always make the best business sense. Having at least two or three bank relationships is probably smart; Having 20 or 30 doesn’t make sense.

“It’s a little different in business,” Michaelides said. “A lot of people out there don’t have access to a lot of money on a regular basis. You’re not paying people, you’re not paying vendors. From a business standpoint, that’s working capital that you’re— access to actively run and grow your business.

Convenience is also a factor. Dufu, who first opened a business bank account in Bank of America when he launched his business, saying that banking is easier with SVB. “When I raised the venture, all my investors were banking with SVB, all my tech founder sisters and brothers were banking with SVB, and so I moved my money,” he said.

Michaelides added that it takes time and a lot of administrative burden to open and maintain business bank accounts. In the world of startups, $2 million or $3 million is not a whole lot when you consider all the different costs. So if companies spread that across a set of accounts so their balances are under the $250,000 threshold, they’ll be managing a substantial number of accounts, he said.

Although the SVB meltdown prompted Michaelides to open accounts at two more banks, a process he began on Friday, the team has yet to gain access to the new accounts, he said. .

It’s not just tech companies—or even those that bank on SVB—that are affected. Payroll processing companies like Arches and Patriotwhich both used SVB as their payroll infrastructure, also felt the effects.

CEO of Rippling tweeted over the weekend that it is moving to JP Morgan Chase while Patriot noted on Monday that it expects to have “two large, well-established banking entities” to replace SVB soon. Meanwhile, Patriot noted on Tuesday that SVB’s direct deposit systems are now operational, and it has begun processing direct deposits.

As a result, some workers were left hanging. Lisa Andresen, an Arizona mother of two who works at B2B startup ICopy, said she didn’t get her paycheck Friday because of the SVB collapse. “I finally got my money on Monday morning, but it was a tough weekend,” he said luck.

“Overall my company is fine with it. They keep us all updated, try to meet our needs as best they can, but they don’t have control over it like we do. It’s just a crazy situation in overall,” he said, adding that the company has told workers it plans to pay any late payments or overdrafts employees may incur as a result of the delay. “Every day people are affected this.”

The ripple effects have only recently been realized

Although many are heaving a sigh of relief this week, there are likely to be ripple effects that will continue to play out. Omsom, an Asian seasoning packet startup founded by two Vietnamese sisters, called the SVB collapse a roller coaster of a public correspondence to its customers over the weekend asking for support by stocking up, buying gift cards, and sharing the company’s story.

“It’s a common misconception that what’s happening at SVB only threatens big tech,” said Vanessa Pham, CEO and co-founder. luck. “But when big institutions and gatekeepers make big changes, it’s often the smallest, most marginalized groups who feel the impact the hardest. This includes small, early-stage companies. seeds like Omsom.

Osmom—which now has access to all its funds—will be able to make payroll, but Pham says the team is in the process of finding short-term loans and talking to investors about potential bridge capital late last week.

“Having the rug ripped out from under you is very distracting,” Pham said. “Business owners trust that their hard-earned money will be in the bank every day. If that changes overnight, it creates a huge disruption operationally, financially, and psychologically – especially for small teams like ours.

Dufu says the experience also shook his confidence, and he intends to move all his money out of SVB and back to Bank of America. “I will not bank with SVB anymore. I’m going to keep my money from now on with a solid, long-standing, old-school, reputable institution,” he said.

Meanwhile, beyond the psychological scars, there are also significant financial effects for some companies. Businesses with debt financing or SVB lines of credit need more information about financial options going forward.

The timing of all of this is also important. “In the early stage of a startup, in many ways, your time is your most valuable resource,” Dufu says. “The time I spend managing and navigating this crisis is time I don’t spend with my customers. It’s time I don’t spend on sales calls.”

For this to happen with only a few weeks left in the quarter, it may harm revenue targets and delay new jobs, Dufu said. “I didn’t focus my energy on what I really should have focused on as a CEO of a small, early-stage startup — that’s a cost I’m paying now that I can’t get back. The Fed can’t get that back me.”

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