Why are so many VCs and startups flocking back to banks?

Just as venture capitalists and startups tried to withdraw funds en masse from Silicon Valley Bank, a considerable number are already clamoring to get back in. Are they right to do so?

SVB’s downfall placed a large target on the back of specialized banks and Big Tech’s VC ecosystem. The reverberations have also affected institutions outside of the United States, including previously reputable and seemingly exclusive institutions such as Credit Suisse. And with continuous rumblings of wider instabilities still on the horizon, it makes sense for companies to weigh their options going forward.

The connective thread of centralization across these banking collapses should not be ignored by VCs and startups in the crypto and Web3 space. But if this string of banking collapses indicates anything, it’s that it could be time for VCs and other liquidity providers to start migrating from centralized finance. With so many competing narratives and paths forward to take, what can startups and investors do to make sure they’re not falling into another trap?

The new still relies on the old

To be clear, we’re not advising VCs to put all their funds into one basket, or for startups to completely avoid banks at all costs. Banks and institutions provide immeasurable support for liquidity providers to help jumpstart innovative startups and keep business operations intact.

This is especially true in growth stages, where capital and other non-financial support are most vital to take a company out of the startup zone and create a business that’s built to last. Additionally, as of now, there’s no viable truly decentralized alternative to banks that can functionally accommodate the financial needs that large VCs and investment vehicles require.

But with that in mind, we can’t ignore that the quick succession of centralized banking collapses had immediate impacts on the crypto ecosystem, including a near-disastrous stablecoin de-pegging. This indicates that, despite all the buzz around how crypto is ready to overtake traditional finance, it’s still very reliant on these traditional industries.

Tackling a macro-level crisis that can have serious consequences for your operations and future requires a level head in the decision-making process. Knowing what steps to take after a crisis like this happens involves recognizing where you stand and what directions are open. When an industry is in recovery mode, it might seem worthwhile to follow what your peers are doing in order to make a quick decision. But what works best for everyone else might not necessarily work for your needs and recovery strategy.

Due diligence don’ts

With these routes to consider, it would be wise to remember not to strictly depend on other institutions or VCs to do their due diligence just because they seem reputable or operate within a risk scope that looks appealing.

Just because an institution is well-respected and known for taking the right steps in other situations does not mean it always makes the best call. Yes, such institutions are reputable for a reason, but the way an institution or consultancy analyzes a situation and its implications are typically meant for a broader audience to utilize. While it’s certainly smart to use it as a benchmark, ultimately only you can understand the needs of your company and investments. 

VCs and liquidity providers in the coming months are likely going to stick to what they know and bolster projects in an industry that has a dependable track record. And considering the banking crisis doesn’t appear quite over yet, particularly in the U.S., it may be time to consider other options for storing funds and building wealth. A truly decentralized alternative doesn’t exist now, but in the future, it absolutely will provide an alternative to the current system.

Diversifying where your money lies across centralized and decentralized spaces isn’t a bad idea, but it requires strong research and an understanding that these sectors work in completely different ways. Just because you know how TradFi and DeFi work doesn’t necessarily mean your knowledge is always transferable, and it’s important to always be open to learning and being cautious. Each sector comes with its own inherent risks.

SVB was a bank failure, not a startup failure. Still, that doesn’t mean that startups and VCs shouldn’t learn anything from its demise. Perhaps the VCs and startups that felt the sting of its collapse are right to go back, perhaps they’re not. But if there’s one key lesson to take away from the many crises plaguing the tech industry over the past year or so, it is that following the crowd isn’t always the best idea.