The game theory of a bank run, navigating advisor relationships, and bond laddering explained

What Entrepreneurs Can Learn from the Recent Bank Run Crisis: Insights from Interplay's Podcast

How Did the Recent Bank Run Unfold?

In a tumultuous period marked by the collapse of three major banks, the recent financial upheaval has left many entrepreneurs and venture capitalists questioning the stability of the banking system. In a recent podcast, Mark Peter Davis, managing partner of Interplay, along with general partners Mike Rogers and Brett Palatiello, delved into the intricacies of the bank run, offering critical insights and actionable advice for entrepreneurs navigating these uncertain times.

What Was the Experience of Venture Capitalists During the Bank Run?

Mike Rogers shared his firsthand experience, emphasizing the role of VCs as both investors and therapists during such crises. He highlighted the importance of staying calm and providing support to founders, reassuring them that they are not alone and that VCs are there to help them navigate through the turmoil. This psychological support is crucial as it helps founders focus on practical steps rather than succumbing to panic.

How Did Founders Respond to the Crisis?

The bank run forced many founders to revisit their financial strategies and contingency plans. Rogers noted that proactive founders, especially those who had previously experienced crises, quickly moved to scenario planning. They assessed various outcomes, including the possibility of losing partial or complete access to their funds. This level of preparedness allowed them to make informed decisions and ensure the survival of their companies even in worst-case scenarios.

What Should Founders Do in the Wake of a Bank Run?

Given the current financial climate, founders need to adopt robust risk management strategies. Rogers recommended diversifying how funds are held. Here are some practical steps:

1. Utilize Sweep Accounts: Sweep accounts allow businesses to spread their funds across multiple accounts, thus increasing FDIC insurance coverage. For example, platforms like Rho can distribute funds across up to 75 different accounts, significantly mitigating risk.
2. Invest in Short-Term Treasuries and Money Market Accounts: These financial instruments provide a different risk bucket and can offer higher yields in a rising interest rate environment. Founders can leverage these to enhance their cash runway while reducing dependence on traditional bank accounts.
3. Implement Bond Laddering Strategies: Bond laddering involves buying treasuries of varying maturities to match anticipated cash flow needs. This ensures liquidity and stability, allowing companies to access their funds as needed without being exposed to market volatility.

Why Is the Current Bank Run Different?

One unique aspect of the SVB crisis, as Rogers pointed out, is the concentration of cash-burning startups as its customer base. Unlike traditional banks that cater to businesses with steady or growing deposits, SVB's clientele predominantly consisted of startups reliant on continuous venture capital funding. This inherent vulnerability, coupled with a highly interconnected network of VCs, led to a rapid and massive withdrawal of funds, triggering the bank's collapse.

What Should Founders Know About Advisor Relationships?

Switching gears from the banking crisis, Phuong Ireland offered valuable advice on maximizing the benefits of advisor relationships. Here are some key takeaways:

1. Choose Advisors Wisely: Select advisors not just for their expertise but also for their communication skills and compatibility with your working style. Conduct thorough interviews and check references to ensure they can effectively contribute to your business.
2. Structure Your Meetings: Avoid making meetings transactional. Instead, focus on specific topics and create a structure that facilitates deep, meaningful discussions. Clearly outline the objectives of each meeting to ensure productive outcomes.
3. Be Open to Feedback: A good advisor will challenge your ideas and offer constructive criticism. Embrace this feedback and be willing to consider different perspectives to drive better decision-making.

How Did the Bank Run Affect the Crypto Market?

Brett Palatiello highlighted an interesting development in the crypto market amidst the bank run. Bitcoin, for instance, saw a 25% increase in value, reflecting its perceived role as a hedge against traditional banking risks. This surge suggests a growing confidence in cryptocurrencies as an alternative to conventional financial systems, particularly during times of banking instability.

What Are the Broader Implications of the Bank Run?

The recent crisis underscores the need for updated financial regulations. The current FDIC insurance cap of $250,000 per account may be inadequate for many businesses. Rogers and Palatiello argued for a revamp of these policies to better protect both consumers and businesses, potentially by guaranteeing all deposits and increasing capital requirements for banks.

FAQs

What is bond laddering, and how can it benefit my startup? ‍

Bond laddering involves purchasing treasuries with different maturities to ensure liquidity and stable returns. This strategy can help startups manage cash flow needs effectively while earning higher yields in a rising interest rate environment.

How can I protect my company's funds from future bank runs?

‍Utilize sweep accounts, invest in short-term treasuries and money market accounts, and implement bond laddering strategies. Diversifying where and how your funds are held can significantly reduce risk.

What should I look for in an advisor?

‍Choose advisors based on their expertise, communication skills, and compatibility with your working style. Conduct thorough interviews and check references to ensure they can provide valuable insights and guidance.

How did the recent bank run impact the crypto market?

‍The bank run led to a significant increase in Bitcoin's value, highlighting its role as a hedge against traditional banking risks. This suggests a growing confidence in cryptocurrencies as an alternative financial system during times of banking instability.

Conclusion

The recent bank run crisis offers several lessons for entrepreneurs. From diversifying financial strategies to leveraging advisor relationships effectively, these insights can help startups navigate future uncertainties. By adopting robust risk management practices and staying open to expert advice, founders can better position their companies for long-term success. For more in-depth discussions and valuable insights, listen to more podcasts from Interplay. If you're looking for support and resources to grow your startup, consider joining our incubator program.

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