Incorporator The Journal of U.S. Formation
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Editorial 6 MIN READ

The startup-bank concentration problem

Your formation's cash is almost certainly sitting in one of three banks, and the FDIC insures the first $250,000 of it

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 5 sections
  1. How concentrated the sector actually is
  2. What the $250,000 FDIC limit actually covers
  3. Treasury management for an entity with runway
  4. What to do this quarter if you are a founder
  5. Sources

venture-backed Delaware C-corp formed in the last five years is overwhelmingly likely to bank at Silicon Valley Bank, First Republic, or Signature. The FDIC insures the first $250,000 of what sits there. The rest is an unsecured claim against a single private institution.

That is the startup-bank concentration problem, and it is worth thinking about in January 2023 because the answers are quiet plumbing (sweep accounts, ICS, Treasury bills, government money market funds) that nobody sets up until they suddenly wish they had.

How concentrated the sector actually is

SVB Financial Group's own disclosures describe its customer base as approximately half of all US venture-backed technology and life-sciences companies. The bank's 2021 annual report put the figure at "nearly half"; the management commentary in its Q3 2022 10-Q describes the franchise in similar terms. Deposits at SVB peaked above $189 billion in early 2022 before drifting down through the year as startup burn outpaced new venture funding. By September 30, 2022, total deposits stood at roughly $173 billion, the majority of which were non-interest-bearing demand balances from corporate clients.

First Republic is the second concentration. It is not a "startup bank" in the SVB sense; it is a coastal private bank whose wealth-management clients include many of the founders and partners behind the same companies. A venture-backed CEO's operating account and personal banking are frequently at different branches of the same institution. Signature Bank in New York plays a third role, with a large commercial real-estate book and, since 2018, a deliberately built crypto-industry deposit franchise through its Signet payments network. Silvergate Capital, smaller but more concentrated still, built almost its entire balance sheet around crypto-exchange and institutional-digital-asset deposits.

Four banks. Any honest map of where newly formed US technology entities keep their cash runs through them.

What the $250,000 FDIC limit actually covers

Standard FDIC deposit insurance is $250,000 per depositor, per insured bank, per ownership category. The limit was raised from $100,000 by the Emergency Economic Stabilization Act of 2008 and made permanent by the Dodd-Frank Act in 2010 (12 U.S.C. § 1821(a)(1)(E)). It covers checking, savings, money market deposit accounts (not money market mutual funds; those are different), and CDs. It does not cover brokerage sweeps to non-insured investments, stocks, bonds, mutual funds, annuities, or cryptocurrency.

For a single-member Delaware LLC with one operating account at one bank, the number is $250,000. Full stop. The second $250,000 is not insured. A Series A company carrying $10 million of runway in a single demand account has 97.5% of its balance sheet exposed to the credit of one bank. Most founders have never done this arithmetic because the industry's working assumption has been that banks of SVB's size do not fail.

That assumption is doing a lot of quiet work. SVB's September 30, 2022 10-Q disclosed approximately $17.0 billion of net unrealized losses on its held-to-maturity securities portfolio, which had an amortized cost of roughly $95.3 billion. Those losses are not recognized in GAAP income because HTM accounting defers them, but they exist. A bank that owns long-duration Treasuries and agency MBS at pre-2022 yields, funded by non-interest-bearing corporate demand deposits that can be wired out tomorrow, is in a particular position if those deposits move. The position is legal, well-disclosed, and within regulatory capital rules. It is also a concentration.

Treasury management for an entity with runway

There are four workable places for corporate cash above the insurance limit, and a Delaware LLC or C-corp with two years of runway should use some combination of them rather than picking one.

Sweep accounts with insured network deposits. The Insured Cash Sweep (ICS) program, operated by IntraFi (formerly Promontory Interfinancial Network), splits a customer's deposit across a network of FDIC-insured banks so that no single-bank balance exceeds $250,000. A company with $5 million can sit in twenty-plus partner banks through one relationship, with a single statement and full FDIC coverage on every dollar. CDARS is the same idea for certificate balances. Most primary banks, including SVB, offer ICS as a product. The spread the bank takes is small. The benefit is that your operating relationship does not change and your runway is no longer a single-name credit bet.

Direct Treasury holdings. US Treasury bills are backed by the full faith and credit of the United States and are not a deposit at any bank. A three-month T-bill bought through TreasuryDirect or a brokerage settles to the Treasury, not to a bank balance sheet. As of early January 2023, 3-month and 6-month T-bill auction yields are running in the 4.5% to 4.8% range, materially above what any operating account pays. The operational cost is that you have to manage the ladder; bills mature, and someone has to roll them. For a Series A or later company with a finance lead, this is not a heavy lift.

Government money market funds. A 2a-7 government money market fund holds Treasuries, agency paper, and repurchase agreements backed by Treasuries. It is a mutual fund, not a deposit; it is not FDIC-insured. Its credit risk is the issuer of the underlying paper (the US government, largely) rather than the bank. The 2014 SEC reforms (Rule 2a-7 amendments, Release No. 33-9616) require institutional prime funds to float NAV and allow liquidity fees, but government funds retain stable NAV. The Vanguard Federal Money Market Fund (VMFXX) and Fidelity Government Money Market Fund (SPAXX) are the obvious names. Yields in January 2023 are around 4.2% to 4.3%.

Second bank relationship. The cheapest form of diversification is an operating account at a large, regulated, non-startup-concentrated bank: one of the four US GSIBs, a regional with a broad deposit base, or a custody bank. Splitting payroll and AP across two institutions costs a few hours of treasurer time and eliminates the single-point-of-failure case entirely. It does not replace ICS or Treasury exposure; it complements them.

What to do this quarter if you are a founder

A practical January-to-March checklist for a newly formed Delaware entity with more than $1 million in the bank:

  • Run the arithmetic. Write down every account, the balance, the bank, and what is insured. Most founders have never done this.
  • Call your primary bank and ask specifically about ICS or an equivalent insured sweep. It is almost certainly already a product they offer.
  • Move idle operating cash above four to six months of burn into T-bills or a government money market fund. The yield pickup in the current rate environment alone usually pays for the treasurer time many times over.
  • Open a second operating account at a different bank. Fund it with one to two months of payroll so that a temporary outage at the primary institution does not stop salaries.
  • Put all of this in writing as a short treasury policy and have the board approve it. This is standard for companies past Series B and oddly rare below.

None of this is exotic. It is the same discipline a public-company CFO runs without thinking about it. The reason it matters for a formation-stage entity is that the concentration is, right now, more acute at the small end of the market than at the large end. A Series A startup with $15 million at SVB is running more single-bank credit risk, proportionally, than most Fortune 500 treasuries.

For a lot of readers the honest answer is that a second bank account and a call to IntraFi would move their 2023 risk picture more than anything else on the roadmap. The banks are fine; the arithmetic still works out the way it works out.

Sources

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