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Comment by mlyle | Hacker News Reader

> But this is their house catching on fire and all of their money just vanishing through no fault of their own.

You can choose to hold money in multiple banks. There are services that will happily set up laddered CDs across many institutions for you to diversify exposure and maximize insurance.

To use your tortured analogy: if my neighbor's house burned down, and he didn't buy fire insurance... I would be sad, but I don't exactly think it's my problem (or the government's) to pay to make him whole.

> If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.

I know we all like to believe we control our own destiny. Tiny little inconsequential-seeming choices wobble startups between success and failure every single day. Having a good product is such a tiny piece of it all.

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I keep seeing this and I’m sorry, it’s just silly. My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in? CDs don’t work — my job is to spend that money in the next 18-24 months, not save it.

Edit: And the people saying the “CFO” should have done better…at that point, one person is probably still founder, CTO, CHRO, CFO, snack buyer, and janitor combined (been there).

yes startups are a rickety vessel and they usually fail, we shouldn't pay for that

> My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in? CDs don’t work — my job is to spend that money in the next 18-24 months, not save it.

You just ask your bank to place the money using IntraFi. You can get a little more interest by locking up some of the money on a 9-12mo ladder, which makes sense if you have 18 mos of runway.

If you have an unanticipated expense or opportunity and need to spend some early, it's a small penalty to get the money out-- usually 6 months of interest, so as long as the probability of having to spend a bunch more is low you're ahead.

Sorry, dumb question, I'm just a software engineer:

If it's so easy to get it right, why so many companies got it wrong?

Could it be because startups don't usually start by hiring people with a lot of expertise in finance?

I think people mostly just ignored the risk.

Venture capitalists provide banking advice to the companies they fund, and this isn't on the list of things most mention. Now we're reminded why it's a best practice.

I think it's hubris to think that you can have tens of millions of dollars and can ignore vital things with it (account security, systemic risk from counterparties, etc).

Most startups aren't around long enough for it to be a problem.

Remove the single point of failure in having one bank. Put the money not needed for day-to-day operations into short-term liquid government-based financial instruments like t-bills.

If you still think the risk is too high, pay the premium for CDARs or insurance.

It is not about removing all risks. It is about making it acceptable. If your primary bank fails, you can manage it like any other strategic business risk.

The risk of a top 20 bank failure is small compared to the myriad other existential risks being managed by a new startup. We still don’t know if this new failure will even result in depositor losses (though for some reason HN is full of people who seem to want them). I looked at the FDIC database and it seems depositor losses are quite rare.

It would be great if VCs would provide simple cash management services to their fledgling investments, though.

> It would be great if VCs would provide simple cash management services to their fledgling investments, though.

It was dirt simple to just use IntraFi. You just say you want it, and sign the form. If you want a little more interest income, you do some cash flow planning and check the box for laddering.

You do have to know it exists, though. Remember the CFO at this hypothetical startup is probably really good at Python, not treasury management. And later on if you need something like a revolving AR credit line, you can’t use your IntraFi balance to collateraize that.

OK, but one of the whole points of why you take venture money is to leverage experience and best practices. Our VCs introduced our bankers and suggested things we should do.

Totally agree -- VCs should hand out cash management support to go with the cash they hand out!

Exactly, I do not want anyone to lose money, but the government should not step in and cover the haircut that may or may not happen. The insured limits are plastered all over the account when you open them. If you find them unacceptable, then solve the risk they impose.

Thus, an easy prudent solution is to have a second bank, likely a "too big to fail bank", with emergency funds to cover the day-to-day until you can roll over to money locked into time-based investments or the system has worked its course on the first bank.

In my personal finances, I have done that in housing deals going above the insured limit by immediately moving money into government-based financial instruments. Then as appropriate, I transferred that to my preferred investments and risk profile. If I, as a layman doing a once-in-a-decade housing deal, can manage it, then a startup can.

> The risk of a top 20 bank failure is small compared to the myriad other existential risks being managed by a new startup.

Its small, but also easy to at least partially mitigate.

"Find 40 banks" Sadly, that's your job now. Alternatively, I could imagine more VCs from now on will stop giving out the whole round in one wire. They'll start wiring money only in small traunches. You'll legally have claim to the whole $10M, but will be moving to a "just in time" system so you can make payroll. Or we could raise FDIC limit, but politically, that sounds untenable right now.

> My 12-person startup gets a $10M series A and my first priority should be to find 40 banks to put it in?

Your first priority should be to assure the safety of wherever you put it. Whether that is diversification to the point where all the funds are insured or inquiry into the finances of the institution where you plan on putting all the eggs, or a mixture of lesser diversification and diligence, it should be done.

> my job is to spend that money in the next 18-24 months, not save it.

Well, your first job is to make sure that money is still there when you need to spend it, otherwise, you aren’t going to be spending it.

Live and learn - now you know the risk involved and cannot escape by saying you did not know.

But if your neighbor’s house is currently burning down, you probably want the fire department to put it out before it spreads to your house…

Which is what's being done. Insured amount going out on Monday, dividends based on liquidation of assets going out over time. The fire is being managed, it's not like nothing is happening here. People are just pissed that the government and FDIC are doing what they've said they would do instead of something more, which was never promised.

People are worried about what this means for confidence in regional banks.

The prudent thing to do right now is to pull your money out of your regional bank and move it to a GSIB and call it a day. This endangers regional banks and concentrates deposits into the large players.

You can stand your moral ground here or you can risk a string of bank runs and systemic collapse. It might not even make a difference anyways with how slow we’ve been to act.

On the flipside, moral hazard is a real problem too. Setting the precedent that your regional bank can do whatever and you'll be just fine isn't great, either.

Yup. The federal government should get a dividend out beyond insurance ASAP if the bank is not acquired. They say "next week", but it should really be Monday or Tuesday.

And it's OK even to incur a little bit of risk/uncertainty when doing so.

But this is different from bailing out all the depositors 100%.

Many did use multiple banks.

Yup, and presumably they're a lot less worried. :)

If you use multiple banks, you have a higher risk of experiencing a bank failure, but it has less of a consequence on your operations, liquidity, and viability if it should happen.

Even if you have 10 banks, losing 10% of your working capital is a huge deal, no?

Here, it's more like losing access to the amount of that is above $250k for some time, and maybe losing 5-40% of that amount forever. So, (0.1 * x - 250000) * 0.4.

So if you use IntraFi to place across 10 banks, and you have $10M, maybe you lose $300k.

It is a risk... but there's plenty of ways to lose a few percent of your working capital that are out of your control.

If you want to further reduce the risk, you could do additional things (e.g. buy some T-bills).

Well, no. My employer for example was banking at SVB and FRB, in no small part because it was difficult for them do bank elsewhere.

And there are many others in the same boat.

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