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

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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.

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