Density CFO Says Establishing Product-Market Fit Critical for Banks Post-SVB

Silicon Valley Bank was a full-service institution focused on meeting the needs of startups.

Few other banks offered the potent mix of flexibility, understanding and banking products and services that made the now-failed SVB such a fixture within the startup landscape.

“SVB is an incredible bank,” Ori Franco, chief financial officer at Density, said for the “PYMNTS CFO Series: What’s Different?” in a discussion that touched on the fallout from the lender’s collapse.

“We stand behind them as they stood behind us when we needed it as a company,” he added, emphasizing that Density maintains its banking relationship with SVB.

SVB was acquired Monday (March 27) in part by First Citizens Bank, a North Carolina lender with a long history of purchasing failed banks.

Banks Must Find Their Product-Market Fit

Given that the government stepped in to backstop SVB deposits, Franco said that the SVB failure caused “more of an operational challenge, than a capital at risk challenge,” adding that his organization was able to quickly open another account with a regional bank to manage its vendor payments and handle other immediate needs, including payroll.

Still, with SVB gone, a lot of young companies will find it harder to manage their finances, and many startups find themselves facing pressing existential questions around their future.

“SVB offered a suite of products to support companies our size, particularly credit facilities that require deposits to be in the bank in exchange for offering credit [to startups],” Franco said. “For example, if a [startup] raises a round, SVB would provide them with a working capital facility in exchange for that funding to be held with them. Other banks offer [these products], but SVB was just so far ahead.”

In general, banks lend to companies that can provide proof of revenue and are able to meet other longstanding criteria. By contrast, SVB supported many startups at the beginning of their operational journeys and was more lenient in allowing variations within contractual terms, including revenue covenants underwriting credit agreements.

Franco said that, looking forward, he believes other banks will start to take a similarly understanding view in establishing new banking relationships with startups.

“I think there will be more leniency around requirements to hold deposits in a given financial institution to the extent that you have credit facilities outstanding,” he said. “It will become more of a point of negotiation than it was in the past.”

He added that from a credit product standpoint, “it’s good business.”

Reducing Redundancies to Drive Growth

Franco said what stands out to him about the post-crisis banking landscape, from his perspective atop the finance arm of a mature and well-funded startup, is it is imperative to address relationship redundancy questions and avoid the same type of concentration risk that brought SVB down.

“It’s easy just to hold money in a bank,” he said. “What’s the hard part is how to operationalize treasury management. How do you, as a CFO, operationalize credit cards, payments, lockboxes, loans, everything else that comes with operating a business? I think that’s where we will be very thoughtful about [establishing relationships with] that redundant or second financial institution with whom we work, so if we need to make a move, it will be easy both operationally and from a cash management standpoint.”

Franco said the macro environment has put a spotlight on certain business fundamentals that were not as much in focus even just a year or two ago.

“Whereas previously growth and subsequent scale were important, now we are thinking about things like unit economics and improving margins,” he said. “Growth is still a key metric, but the thought now is let’s do it in a healthy and responsible, even creative, way.”

He added that there’s been a “descoping” of certain priorities and investments as part of a renewed focus on this flavor of healthy growth.

“We are taking a much closer view in terms of pricing and ROI, as well as whether this particular moment is the right time to be investing in something,” Franco said.

As for what he sees as providing the right mix of ROI and scalability?

Franco highlighted the opportunity that artificial intelligence (AI) and deep learning tools can provide organizations.

“I think every internal team or operational segment will [now] need a dedicated data person” to properly leverage these modern solutions, he said, adding that having an internal point person, versus an external consultant, able to establish integrations and shepherd the appropriate data will be a key hire for all organizations looking to win in the long run.

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