Until March 9, Silicon Valley Bank represented a good place to deposit funds, especially for small tech companies and startups like Iterate.ai, a provider of Interplay, a low-code AI platform for enterprise use.
“I never had one question about SVB potentially collapsing. Nobody ever discussed the health of SVB,” said Iterate.ai CEO Jon Nordmark.
Nordmark recalled hearing from a friend via email late that Thursday March 9 that SVB’s stock price had plunged dramatically. “I knew something was wrong at 4:30 [P.M.] Thursday, that SVB was having problems. I realized, oh my gosh, this could be a real disaster. In the morning Friday, it dawned on me that we better move our money out now to shore up our company,” he recalled in an interview with Fierce Electronics.
“Of course, none of that worked. We drove to downtown Denver but SVB was completely shut down. The doors were locked and nobody was there. We emailed and nobody answered. That’s when we went to Wells Fargo and Chase…with all the records to open a business bank account.”
Nordmark knew his SVB deposits were insured, but also realized the $250,000 FDIC guarantee was well below the several millions of dollars held by Iterate. Ai at SVB. The company tried to have the money wired from SVB. No luck.
For many startups, the weekend following the collapse was a complete panic. Lindsey Hoell, the CEO of startup Dispatch Goods told ABC News her company would have lost millions of dollars had federal regulators not guaranteed all of the company’s deposits the following Monday.
Nordmark felt less panicked than CEOs at other companies holding deposits at SVB, some with fewer than 20 engineers and other workers. Iterate.ai, founded in 2013 has 100 employees with $10 million in annual revenues, by comparison, with 10 large customers such as Circle K and Ulta Beauty.
“Little startups are completely different than we are,” he said. “At a small startup, you are jack of all trades and master of none.” Even at its somewhat larger size, Iterate.ai does not employ a full-time accountant, although it does keep a full-time attorney.
“For us, we do operate at a profit, so when SVB failed, it was more of a super puzzle. It wasn’t like we are going to die, but how do we maneuver through this? We even thought of having our customers make advance payments and instead of a regular quarterly payment were thinking, 'Can you pay in two weeks?” Iterate.ai spent the weekend after SVB’s collapse analyzing its cash flow. “We figured out with cash flow analysis we could live even if we only got the $250,000 back. We knew we could make it and that was a massive relief.”
When regulators said all the depositors’ funds would be restored, Hoell, Nordmark, and hundreds of other startup executives breathed a sigh of relief. Without the government’s move, 92% of Iterate.ai’s cash would have been wiped out.
“I’m super grateful, even more for other startups,” Nordmark said. “America needs the startup ecosystem. Certainly many startups don’t work out, but others do and those could have been in trouble. We might have lost three to four years of startups—that could have happened. Tons of innovation in the US comes from startups because they can move faster than big companies. That’s where we got Amazon and ChatGPT came out of a startup and now hundreds of startups are working in generative AI.”
Guaranteeing all deposits even above the original $250,000 limit “was a good move,” Nordmark added. “Even better would be if other SVBs were operating properly in the future. I can’t believe it got to the place it got. It was just shocking.”
Before its collapse, SVB bragged on its web site it represented 40% of IPOs in the US. About 37,000 of its customers were small businesses with more than $250,000 in deposits. When full deposits were in peril, a group of 5,000 CEO and founders representing 400,000 employees signed a petition posted by Y Combinator urging federal regulators to provide relief. The petition also called on Congress to restore stronger regulatory oversight and capital requirement for regional banks.
Lessons learned
Nordmark said he immediately recognized some lessons from the near-disaster, including the hand-to-forehead realization of the need to keep funds at more than one bank. “I would have two banks at least. Now we have two and maybe three. That is a for-sure scenario. With three banks you have $750,000 [to meet payroll], a sure bet.”
Another lesson is harder one to learn. “For a startup, the best insulation against a bank collapse like we witnessed with SVB is to be cash flow positive like we are at Iterate.ai,” Nordmark said. At the start, Iterate.Ai made money by selling consulting services. Then, the company moved to a process where it would never hire a person unless new revenue supported it. A $1 million signed contract could support three salaries for engineers and programmers and benefits, he said.
“That approach was a godsend,” he said. Nearly every month, the cash flow positive approach has helped Iterate.ai remain profitable. “A startup is just an adventure until it makes money, and a business is not a business until it’s profitable.”
Brian Sathianathan, co-founder and CTO of Iterate.ai, said “so many startups struggle and fail because they focus on getting funding and keeping investors happy, rather than sustainably growing their business and customer base. Customer-funded businesses can better weather economic storms and keep their employees for the long term.”
The captain should go down with the ship
As for what happens next, Nordmark is interested in federal investigations of executives at SVB’s parent company who sold their stock in advance of the collapse. “I have friends at SVB and one was just heartbroken. It was ripping him up inside. So what is shocking is that four of their leaders sold a bunch of stock. That to me is just wrong. They should get in trouble for that. I think they knew it would collapse and sold their millions and left the rest of the shareholders holding the bag. SVB would have had people forecasting and had to know something was coming. It’s just wrong to enrich themselves as others lose everything. I know the SEC won’t appreciate that.
“The captain is supposed to be the last to leave the ship when it is sinking. But they bailed out and then the ship went down."