SVB: Why did so many UK startups only have one bank account?

As startups and investors take stock of the SVB collapse and the dramatic bailout, one key question emerges during postmortem: whow in the world did so many startups only have one bank account?

In the UK, just over a third of startups had access to no banking facilities other than SVB UK, according to a survey by the UK Business Angels Association.

Founders say the difficulty of opening accounts in high street banks – and investors’ cozy relationship with the bank – all led to the over-reliance on SVB UK.

VCs were blinded by the SVB referral pipeline

First, opening accounts with traditional banks can often require companies to have historical records, which early-stage startups don’t have, explains Reshma Sohoni, founder of London-based early-stage investor Seedcamp.

High Street bank accounts can also take longer to open due to extra checks for these risky looking and unprofitable businesses; an unwanted delay when startups have VCs ready to transfer capital, she says.

A document compiled by VC group Phoenix Court Group this week for portfolio companies cut the process of opening an account – even in the midst of the SVB crisis – from as little as 24 hours to as much as four to six weeks at Barclays.

“Much of the early-stage tech sector is characterized by a cash-burn profile that most banks try to avoid,” adds one investment banker. “But there was a risk for a long time that SVB was the only bank that really took the time to understand technology – very few other banks ever really tried, because they thought they had bigger fish to fry elsewhere.”

Industry voices tell Sifted that the startups most likely to keep their money exclusively in SVB were at earlier stages, as companies tend to “graduate” from SVB UK as they scale and open up more bank accounts. In later stages, startups are also likely to have a dedicated finance function that will be well-acquainted with the need to have multiple bank accounts and ways to put their money.

But there are still plenty of newer banks out there — like Tide and Wise — that were friendlier to startups opening a business account. However, what might make a start-up choose SVB UK over one of these was how many there are investors also knocked at SVB.

This meant that when start-ups raised money from VCs, the investors – already clients of the bank – were very likely to refer them to open an SVB bank account. The money for the $5 million seed round was just transferred from Investor A’s bank account at SVB to the Generic Gen AI startup account at the same bank.

VCs relied on SVB for their own funding structure

There are other reasons for VC’s cozy relationship with SVB.

The structure of venture capital funds means that when they raise money from LPs, they don’t get access to cash right away. So when they needed to close a start-up financing deal, they could take out short-term loans from SVB to invest in a company, while they waited for their LP to transfer the funds (a capital call line).

Additionally, the rules of the venture game often mean that a VC firm’s general partners (GPs) are required to put money into their fund in order to have skin in the game. Investors tell Sifted that GPs often took loans from SVB to finance that process as well.

“When you have a world where one bank provides funding to GPs, LPs, portfolio companies and even some payments banking services, you have a huge concentration of risk in one bank,” says another investment banker.

“I think what happened in the UK is that it became too easy to give it to SVB, which was not SVB’s fault as they had been so successful. But a systemic risk arose in the technical system.”

CFOs need to open new bank accounts, pronto

A European VC partner told Sifted that while the SVB saga teaches us a lesson as old as time, most founders just don’t like to bother with the important, gritty financial details.

“It’s what your grandmother said: ‘Don’t put all your eggs in one basket,'” he says. “Founders see all this funding stuff as something that gets on their nerves. That’s probably not the right way to think about it. You have to have a proper financial manager who doesn’t just do your accounts, but who is really top notch.”

A head of a European network of scaleups tells Sifted that he was not surprised that early-stage startups did not have a diverse set of bank customers, but that later-stage companies in that position need to ask their CFOs some questions: “It does It doesn’t surprise me for seed stage or Series A companies. But when you get a CFO – Series B-plus – you really have to look at it carefully.”

Amy O’Brien is Sifted’s fintech reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — You can register here.

Tim Smith is a senior reporter at Sifted. He tweets from @timmpsmith.