The acute panic that roiled the tech world in early March had subsided by the time 60 or so mostly Canadian investors, startup founders and executives logged onto Zoom for what may have felt like a belated lesson on cash management.

A week earlier, the pre-eminent U.S. tech lender Silicon Valley Bank had filed for bankruptcy protection after a liquidity crisis triggered a run on the bank. In the ensuing days, customers were consumed by worry about whether they could access their deposits—the vast majority of which were uninsured—and untapped lines of credit. 

Most of the bank’s Canadian clients came away unscathed. But SVB’s implosion spooked entrepreneurs and investors in this country, many of whom have never lived through a bank failure at home. 

Now, with three chief financial officers as their guides, a few dozen were taking a pop-up Zoom seminar on what to do with the sizable sums of cash they raise, lest history repeat itself. “This is not a once-in-lifetime event,” said Elena Pikulina, a Relay Ventures associate who hosted the session. “This will for sure happen again. We just don’t know when, and it’s better to be prepared.” 

The frothy market that characterized the years leading up to SVB’s collapse created an environment in which many startups focused on raising as much cash as possible—not necessarily how to manage it once they closed the deal. 

Even after U.S. regulators took control of SVB on March 10, promising all customers their money was safe, Pikulina said Relay—which is an investor in The Logic—continued getting a barrage of questions from portfolio companies asking how to ensure their money was protected from vulnerabilities in the banking system.

The firm assembled a panel of three CFOs to walk companies through best practices that are easily overlooked, particularly when markets are hot and money is cheap. 

As the SVB failure highlighted, one common misstep was leaving the bulk of a company’s cash uninsured. In the U.S., the Federal Deposit Insurance Corporation (FDIC) guarantees US$250,000 in deposits held in a given account. In Canada, insurance covers just $100,000. 

For Allison McMillan, CFO of restaurant staff-scheduling firm 7shifts, the risk of keeping large sums in one place have sunk in.“We once took for granted the stability of banking infrastructure,” she said. “We are diversifying deposits going forward.” 

McMillan’s company began banking with SVB seven years ago. About 90 per cent of the Saskatoon-based firm’s business is stateside, she said, and it needed a bank to manage its cash flow there. While it no longer had deposits with SVB by the time of the collapse, McMillan said the failure prompted her to look at opening secondary accounts at banks in both Canada and the U.S. “It’s all about access to cash when unimaginables happen,” she said.  

Diversifying banking relationships is certainly something startups should practice, said Pikulina. But it’s not as straightforward as spreading cash across accounts in $100,000 allotments. “They need to balance how time-consuming it is to manage multiple accounts,” she said. “You increase your safety, but you sacrifice your flexibility.” For example, a startup with $1 million in the bank can’t reasonably be expected to maintain 10 separate deposit accounts, she said. “They probably don’t even have a finance person, let alone a treasurer, to be able to do that.” 

In Canada, where bank failures are rare, holding cash in two accounts—one at a large bank and another at a debt provider—is typically a sufficient precaution, Pikulina said.

Even absent the risk of a bank failure, spreading deposits across a few banks is wise, said Patrick Lor, managing partner at Panache Ventures in Calgary. Banks can freeze accounts for a host of reasons, he said, such as when a fraudster co-opts a business’s merchant account to process illegitimate payments. Banks may also experience outages from technical issues.

Like Relay, Lor said Panache is helping portfolio companies with due diligence to make sure they understand treasury management. The firm is also developing best practices that all their startups can refer to. Diversification is a good first step, he said. “Imagine somebody gives you $10 million and it goes away because of a treasury operation,” said Lor. “That’s not how you want to lose it. You want to lose it giving your business a legit shot.”

Companies with deposits in the U.S. may consider a “sweep” program, which spreads cash across multiple accounts to guarantee it’s fully insured, but for simplicity, lets customers do all transactions through their primary banking institution. 

In the meantime, Lor foresees banks enforcing their terms more strictly. In the low-risk environment in the debt market of the last few years, both banks and startups likely paid less attention to their own fine print, like the consequences of missing a payment, he said. 

Now, as banks look to avoid the kind of liquidity crisis that took down SVB, he said, they could start cracking down on violations they might previously have overlooked—to the point of foreclosing on a customer’s business. 

Lor suggested companies meet with their bankers at the first sign they might trip a loan covenant, adding, “I think most banks will work with you.”

Correction: The original version of this story incorrectly stated the number of bank failures in Canada over the past century. A small number of domestic banks have collapsed since the mid-1980s. The Logic regrets the error.