What will startups do now?

The last 96 hours have been one of the most manic and momentous of my last decade in venture capital. Silicon Valley Bank, once a stalwart of its namesake Silicon Valley, was placed into receivership by the Federal Government Insurance Corporation.

What does this mean for your customers? Its investors? The bank? The story continues to unfold.

But one thing is certain: These mistakes will change the startup landscape and founder behavior in meaningful ways.

Here are five predictions.

Risk management comes to the fore

For many startups, it was perfectly rational and prudent to store deposits safely with Silicon Valley Bank. After all, they were a top 20 US bank and a cornerstone of the innovation economy.

No longer.

Startups will begin to adopt strategies many of the largest players already use: diversification and risk management in their treasury management function.

What does that mean? While the level of risk management will depend on the stage (it’s unreasonable to expect a two-person startup to have a sophisticated internal risk management function) and the amount of capital raised (which drives the level of exposure), it will be part of the new mindset. Each startup can use several banks. Deposits, if they are on the bank’s balance sheet, should be diversified across several providers. Off-balance sheet solutions can be used if the bank balances are too large. For example, one product, sweep accounts (which systematically spread capital across multiple banks) and money market funds can take capital off-balance sheet, allowing deposits to become bankrupt remotely.

Risk management will expand beyond just banking partners and become a key component of broader startup infrastructure.

Fintech startups offering risk management will increasingly offer services for this category.

Counterparty risk will be investigated

For significant functions (banks, but also far beyond), counterparty risk will become a more important decision criterion.

If you are an InsureTech with insurance partners, you live and die by your insurance partners. How much capacity do they have? What is their track record for consistency in good times and bad? How long have the individual sponsors worked at the bank? How committed are they to the strategy in the long term?

If you are a sales company, you can live and die by CRM. How long have they been around? Are they profitable?

When a service provider is existential – as if they ceased to exist, what would happen – counterparty risk should and will be scrutinized more closely.

For companies considering partnering with fintech startups: who supports them? Are they profitable? Who are their partners? This will be a whole new area of ​​resistance that startups will have to overcome.

Diversification where possible and practical

For some providers, sole-sourcing is the only practical option (you wouldn’t want two CRMs or two payroll providers). But for many services, especially in the financial stack, redundancy is possible.

In these cases, startups should consider diversification.

As we have seen, banking partners, for the purpose of saving capital, can easily be made redundant with a few partners.

If you are raising venture capital (which I am a provider of), don’t depend on just one firm. A single venture capital partner may happen to be out of capital at the moment you need an emergency round. Having a few players around the table can be great (not only in good times to have more people to support), but also when it’s hard. And because employees at venture capital firms can also move around, make sure you meet some of the partners at any firm. I expect to see an increase in co-led rounds as a result.

Finally, diversify your financial stack and capital options beyond equity. Venture debt historically was a key option. However, since SVBVB was one of the primary providers of venture debt, availability from them is no longer a given going forward. New alternative capital solutions, such as income-based financing, have started to come to the fore for startups. We will see greater exploration of new types of capital.

The trust barrier for adoption has been lowered

One of the reasons for going to Silicon Valley Bank was that it was Silicon Valley Bank. They were the established ones in the land of innovation.

That made them the default option for so many products: banking, venture debt, etc. The same is true for many vendors in different industries.

But as VCs, portfolio companies and many executives have scrambled for alternatives, they’ve been open to trying new ones as well.

This can be a unique opportunity for nimble players, both startups as well as established, who want to serve startups in a tough time.

But even more broadly, SVB has shown that even the safest players are not immune to risk. Already almost 90% of American consumers have used fintechs. But adoption was slower among companies.

Subject to overcoming the counterparty risk and diversification needs above, I expect B2B fintech adoption to continue to increase. More will be willing to experiment with new players.

Fintech players gather around one of two stable points.

Where do things end up?

I predict two stable points for the banking world.

On the one hand, players can be fast and rapidly adaptable companies. This is where fintech shines. Already, a number have reacted quickly to the unfolding SVB collapse, and have done everything from rapid registration to creating credit life lines.

On the other hand, boring, timeless stability will be a feature, not a bug.

Operators who thrive will remain true to traditional risk management may see lower short-term growth but sustained long-term survival.

The Silicon Valley Bank story continues to unfold live. But one thing is certain, the world of fintech and venture will never be the same again.

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