For VC-backed beauty startup founders both with and without ties to Silicon Valley Bank, it would be an understatement to say that it was not a relaxing weekend.
Including before and after the shocking news of the collapse of Silicon Valley Bank on Friday, founders have spent the last four days on the phone with their investors, scrambling to open up new bank accounts during limited weekend hours and making contingency plans in case of a broader banking system collapse. For those with funds in Silicon Valley Bank, the last four days have been especially nail-biting in the lead-up to the U.S. government’s announcement on Monday that all funds would be recovered. But fear of contagion meant that founders across the board took emergency precautions.
“It was crazy town. I’ve never seen anything like it,” said Tina Bou-Saba, co-founder and managing partner of Verity Venture Partners, which works with several beauty brands including Dae and Noto Botanics. “I didn’t sleep Friday night or Saturday night.” While she didn’t name the brands, she said that two of Verity’s portfolio companies were impacted, although not those where the company has a majority investment.
The most acute crisis certainly came for startups using Silicon Valley Bank. Although best known as a bank of choice for tech startups, it was also used by beauty startups, especially those with funding from Bay Area VC firms active in the DTC consumer goods world.
Outdoors personal care brand Kinfield, for example, had 100% of its funds in Silicon Valley Bank when the news of its collapse broke. Founder Nichole Powell said that the last four days have consisted of “sleepless nights.” However, she said she was finally “able to take a breather” when President Biden announced on Monday morning that the Federal Reserve would be backing up 100% of the bank’s deposits, not just the $250,000 per account that is insured by the FDIC. Kinfield had attempted to get the money out of the bank on Thursday, but the transfer did not go through before the bank froze on Thursday afternoon. She posted a TikTok video about the experience over the weekend.
“None of us wanted to see it turn out the way that it did. We were sort of hoping beyond hope that it wouldn’t, but we wanted to make sure that we were at least doing everything we could to get enough cash to operate and pay payroll, ” she said.
Powell spent the weekend opening a new bank account at Chase during its limited opening hours. But she didn’t know how many funds she would even have past the $250,000 that were guaranteed insured, until the Fed’s announcement.
But even for those that don’t bank with SVB, the fear of contagion this weekend was real, especially for brands using other startup-associated banks in the Bay Area. Many took rapid measures to move money into new banks and diversify their accounts.
San Francisco-based, VC-backed skin-care brand Kinship, for example, uses First Republic, another bank known for working with tech startups. The bank’s stock plunged by 60% Monday as founders also buzzed about possibly withdrawing money.
Kinship opted to move its money into an “insured cash sweep deposit account,” which would automatically transfer funds over the $250,000 FDIC-insured limit to other bank accounts, automatically protecting the company in the case of collapse at any one bank, said the brand’s co-founder and CEO, Christin Powell. She noted that some of the brand’s investors’ portfolio brands also banked with SVB.
“The biggest concern was just disruption of business and being able to make payroll, because it’s all such an ecosystem,” she said. “If SVB hadn’t been bought out [Monday] morning, it could have affected us, too.”
One Kinship investor, VC firm Sugar Capital, also used First Republic Bank. As a safety measure, the brand moved enough money out of its account into a new JP Morgan account to keep the First Republic amount under $250,000, said founder Brian Sugar. He noted that seven of Sugar’s portfolio companies banked with SVB, and one of them would have had major cash flow problems if the full accounts had not been guaranteed by the Fed.
The timing was especially stressful for brands in two ways: The Friday collapse of SVB meant it was more challenging to move funds during business hours. And because it happened in the middle of the month, a freeze on funds would mean brands may not be able to pay their employees come the following week, breaking legal requirements around payroll.
“What the founders were most worried about was making payroll,” said Sugar.
Cary Lin, founder of VC-backed skin-care startup Common Heir, did not bank with SVB. But because of concerns of contagion, she decided to move the company’s money out of one of the banks of concern and into a new bank account. The money didn’t make the wire transfer cutoff on Friday, so she instead moved the money into her personal checking account.
The weekend was “incredibly nerve-racking,” she said, adding, “We’re all good now, but many founders had to resort to the same moves. Obviously, it’s not a normal thing to be doing or informing your board of.”
For beauty startups, spillover from the tech space would have been especially dire, given the number of tech platforms using SVB, including Shopify.
“I was also reaching out to our vendors and suppliers to see if they’d banked with SVB. Because if they had and we’d sent them cash, for instance, it would have been stalled and then we may not have been able to get that cash back,” said Nichole Powell.
Going forward, founders and VCs are predicting a greater reliance on larger banks rather than regional, as well as more sweep accounts and diversification into multiple banks.
A sweep account “hasn’t been on people’s radars because no one expected it to get this bad; no one expected inflation or interest rates to go this high. And at some point, something had to break,” said Christin Powell. “These kinds of tools and products are good for any founder to know about, because these are uncertain times. And it’s good to just have a plan B — and a plan C, just in case.”