Startups flock to too-big-fo-fail banks, Kruze Consulting

Based on data from 160+ venture fund startups and more than $2 billion in cash, startups have been flocking to the major banks like JP Morgan, Morgan Stanley and Bank of America. In addition to new bank accounts, startups have also been moving cash into less risky vehicles like sweep and treasury accounts.

In February of this year, only 9% of startups-maintained bank accounts at the major banks, but by April that number skyrocketed to 72%. Additionally, JP Morgan had basically no presence in the startup banking world but after the FRB took over JP Morgan now commands a 60% market share of startup bank accounts. Startups have also been changing the way they hold cash in the bank. At the end of February $1.5 billion of startup cash was held in checking and other "risky" accounts. By the end of March, that number declined by $400 million and has continued over the following months as startups move cash into sweep and treasury bond products.

Healy Jones, VP at Kruze Consulting: "The banking landscape after SVB and FRB declines has not only impacted where startups bank, but also what accounts they hold it in. Recently, we've been seeing term sheets that require startups to maintain two banking relationships. While these measures have insulated startups from future banking failures, they also make it very easy for startups to move cash quickly between banks - making the possibility of mass withdrawals easier - since our data shows that the median startup now has two banking relationships today versus only one in February."

The startup and venture ecosystem has adapted quickly to the recent volatility in the banking sector. Startups have positioned themselves wisely in order to minimize the impact of future banking failures, but their new capital deployment strategies have made it easier for startups to move cash quickly between banks which could make it harder for bank regulators to contain crises.

www.kruzeconsulting.com