Jump Capital’s first response to the shutdown of Silicon Valley Bank last Friday by the California Department of Protection and Innovation was triage, two of the Chicago-based VC firm’s leaders told Venture Capital Journal.
“We were identifying where [portfolio companies] had their bank accounts, how many had redundancies – multiple accounts at different banks – and which ones were impacted by SVB,” said co-founder and partner Sach Chitnis. “We actually spent our time taking a look at the full landscape to make sure if this were to expand beyond SVB [that] we were not caught on our heels.”
Chitnis estimates that less than 30 percent of the more than 100 companies in Jump’s portfolio had accounts, venture debt arrangements or lines of credit at the bank that for four decades was at the center of the venture capital ecosystem. Jump Capital, the venture arm of Jump Trading and Jump Crypto, focuses mostly on Series A-stage fintech, data infrastructure and B2B SaaS start-ups, writing checks ranging from $4 million to $10 million. Its $350 million Fund VII closed in September 2021.
Top of mind for Chitnis and his colleagues was the fact that Monday was just a couple of days before the middle of the month when “almost everyone [would be] pulling payroll.”
Over the weekend, Jump created a vehicle internally that was outside of its funds to provide capital to “a handful of our companies just to make payroll on Monday, not knowing what they were walking into,” given how opaque the status of the Federal Deposit Insurance Corporation’s guarantees for up to $250,000 in deposits was, said Chitnis. “We were making sure they had the ability to operate.”
For VC firms to know when the companies they back pull payroll from their bank accounts is “a level of detail that most people gloss over,” said Jason Felger, head of Jump’s operating platform. “Most don’t understand if you have payroll in the middle of the month, that money actually comes out of your account several days earlier.”
In addition to asking their founders precise questions about who their payroll providers are and when exactly and how they pull capital from the company’s accounts, “we were trying to get insights from major payroll providers as to how flexible they were when they would pull,” Felger explained.
The aim was to minimize any disruption for employees within those companies as much as possible, he said. For those companies that didn’t already have more than one deposit account, Jump advised them to open new accounts.
“If we’re helping them make payroll, the first question is where are we wiring the money?” Chitnis said. “Are we wiring to a JPMorgan account or are we wiring it directly to a payroll provider? Let’s skip the middleman.”
Will founders have to vet their banks?
The turmoil unleashed by the failure of SVB, Signature and Silvergate since March 9 has fueled speculation as to whether start-ups will now have to put more time and effort into how they choose which banks to do business with.
Felger said he hopes founders won’t be compelled to add worrying about how strong banks’ balance sheets and investment practices are to “the litany of other things they need to be worried about and focusing their time on.”
One thing almost certain to change as a result of this week’s events is that start-ups, which are more often burning through cash rather than generating it, will no longer want to have all of their capital in a single account with a single institution, he noted.
Even very early-stage companies will need to think about “something that looks and feels like Treasury management – ‘Where should I have my capital based off of the different needs that I have across different time horizons?’” he added.
Felger expects many founders to find it difficult to establish new banking relationships without asking deeper questions such as whether the bank has its own charter or is using that of another institution in order to have more confidence about who they’re doing business with.
Start-ups that relied on SVB for loans or lines of credit were required to concentrate all their deposits at SVB. Although nearly all banks that serve venture-backed companies require something similar, most of them have waivers allowing customers to keep $250,000 or less at other banks, said Chitnis.
“We have seen just in the last week almost every one of them is allowing a lot more discretion on that,” he said. “This is a herd mentality kind of norm that when everybody’s doing it, you have no other option. And now it’s going the other way, where everybody’s [allowing multiple accounts] and they’ll have no option but to provide that latitude.”
One change that Felger hopes venture debt providers make in their covenants would be to permit borrowers to be able to maintain separate “rainy day” funds of up to three months of operating expenses for emergencies in an account at other institutions. “Most of them will probably gravitate to that because the reticence from founders and VCs will be very high if they don’t allow for some type of flexibility with that because of last week.”
Recruiting finance talent
Based on their experience as operators, many of Jump’s team members firmly believe their portfolio companies, most of which are at the Series A fundraising stage and generate around $1 million in annual recurring revenue, need a strong finance leader even at that stage.
The point isn’t to necessarily focus on Treasury management or ensure multiple deposit accounts or manage lines of credit, “but to bring that overall financial acumen and quantitative rigor to a lot of the different other aspects of what’s needed to grow a company at that stage,” said Felger.
He concedes that not all of Jump’s founders agree but said “it’s an active dialogue we have with pretty much every investment we make.”
Most of the founders that Jump invests in are product leaders, whose concept of finance tends to be limited to the technical aspects, Chitnis noted. “When we think about it, it’s more strategic finance. It’s being a consigliere to a CEO, being able to let the CEO run the operations of product, go-to-market strategy, and letting some of the nuances of having redundancy, the infrastructure and keeping the trains running on time.”