Startups Flock to Too-Big-To-Fail Banks
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SAN FRANCISCO, May 25, 2023 ~ Startups have been flocking to major banks such as JP Morgan, Morgan Stanley and Bank of America in the wake of data from 160+ venture fund startups and more than $2 billion in cash. According to recent figures, only 9% of startups had bank accounts at the major banks in February, but that number has now skyrocketed to 72%. JP Morgan had virtually no presence in the startup banking world before the Federal Reserve Board (FRB) took over, but now commands a 60% market share of startup bank accounts.

Startups have also been changing their approach to holding cash in the bank. At the end of February, $1.5 billion was held in checking and other "risky" accounts. By the end of March, that number had declined by $400 million and has continued to decrease as startups move their cash into sweep and treasury bond products.

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Healy Jones, VP at Kruze Consulting, commented: "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 - making it very easy for startups to move cash quickly between banks - since our data shows that the median startup now has two banking relationships today versus only one in February."

It appears that startups have adapted quickly to recent volatility in the banking sector by positioning themselves wisely so as to minimize any potential impact from future banking failures. However, their new capital deployment strategies have made it easier for them to move cash quickly between banks which could make it harder for bank regulators to contain crises.

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