It’s a Wonderful Banking Life

Posted June 13th, 2023 by Bob Clarke, in Capital markets, From The Trenches

By Robert Clarke, CEO of Kinaset Therapeutics, as part of the From The Trenches feature of LifeSciVC

It’s now been a couple of months since the SVB collapse and the scramble many of us faced during that tumultuous few weeks. Following up on Aoife Brennan’s great blog from “in the moment” of those dark days, I thought it would be helpful to share some perspectives on lessons learned and strategies we’re implementing at Kinaset Therapeutics as we navigate these interesting times of crisis in the banking and financing of our respective companies.

Flashback to the easy going days of the first week of March 2023. Then the second week of March kicked in. My colleague at Kinaset, Roger Heerman, CBO/COO, and I had been in conversation about what was a seemingly really bad couple of days at SVB. Rumors had started about a possible collapse when my phone rang on Thursday from one of our BOD members asking if we were following the SVB story and how much money did we have there. What started as concern over SVB quickly became deep worry.

It conjured visions of George Bailey working through a bank run hoping to keep Bailey Building and Loan afloat in Frank Capra’s Christmas classic “It’s a Wonderful Life”. Except in this case I was George Bailey hoping that Mama dollar and Papa dollar (FDIC-insured $250K) could hang on so we could cover expenses the following Monday. SVB had put themselves in the role of the absent-minded Uncle Billy but in this case the misplaced money was instead lost via a need to liquidate low yield treasury bonds at a loss. I can’t really ID a Mr Potter in this scenario (although others might be able to) but if there had to be one, it would be the collective tech sector simultaneously looking to withdraw funds from SVB to secure their money. And just like that, a top 20 bank in the US was insolvent.

In the end, the government backed all our collective monies using the emergency relief fund that was spawned from the banking crisis of 2008-2009. However, for many companies, that was a very dark weekend in March as everyone tried to figure out if they would ever see their money again.

In the follow-up from the SVB collapse and re-birth, there have been several key takeaways:

  1. Diversification of Banking:

In our case, when SVB was going sideways we were serendipitously served by a bulge bracket bank account that we already had in place. When Kinaset started in the pandemic, it was an easy decision to initially establish our banking relationship with a Big Four bank that would allow us to put on our masks and physically go into a brick-and-mortar facility. As time went on, of course we found out that our position in the big bank world didn’t exactly garner us a high profile and the pain of working through a big bank became apparent. So on we went to establish a relationship with SVB who made our banking life much easier right up until about March 9, 2023.

As many were thinking about how to get their money out of SVB, the next predicament was where it could go. The Big Four banks of course looked like the safest bet but establishing a new account with one of them was not a layup. As a high-risk investment sector in biotech, the big banks would be looking for infrastructure and assurances that many of us just wouldn’t have with our tranched structures.

So luckily for Kinaset, we were able to get a wire transfer in to SVB on Thursday for a portion of our capital, at least enough to carry us through a quarter of our operating expenses. Our wire got in just under the wire (bad pun alert) and the money appeared in our Big Four account which at least took the immediate stress off the table. Had we been behind just a couple of more hours, all our capital would have been frozen as many experienced.

It is pure serendipity that we had not closed our Big Four bank account and kudos to Roger for having a “just in case we need it” approach to keeping that account open.

So now what’s happened in the aftermath. The FDIC account protection limit of $250K is another challenge for us all. In the day of $20, $50, $100, or even $300MM Series A rounds, no one could practically manage the hundreds to thousands of accounts it would take to derisk capital with FDIC assurance. Nor would accounts of that size practically cover company payroll or R&D expenses.

So what are we all to do? Clearly, the safety of the “too big to fail” banks is where many of us have turned. One obvious solution. However, the ecosystem of mid-size and regional banks is something that we also want available to us. And considering say a reborn SVB as a second (or main) bank serves two purposes: 1) it diversifies funds without overtaxing the CFO to try and manage an unreasonable approach; 2) it will foster and hopefully help stabilize more tech friendly banks that are easier for start-ups to work with.

In our case, a mix of Big Four and mid-size is a comfortable approach providing the security of the big with the business-friendly service of a mid-size that more easily helps us manage foreign currency etc.

  1. Diversification of banking tools

As the crisis unfolded, there was a crash course in banking strategies and tools that we all quickly learned. Many CFOs likely have all this knowledge at their fingertips but for many, like me concepts of sweep accounts and money markets quickly became new jargon we had to learn.

Obviously, we all want to feel our funds are as secure as possible while at the same time easily accessible for when the time comes. Investors have trusted us with significant capital to support our R&D efforts to create new drugs to help patients. That is our noble cause and a critically important one. However, much like our own personal bank accounts, we need to have an eye on the bottom line at all times.

So now as we consider all the tools available to us from our banks, funds can be diversified into safer havens like sweep accounts and/or lower interest-bearing short-term securities. While we might forfeit some interest gains along the way, the security and access to the capital will help our CFOs sleep better at night if this were to happen again.

  1. An ecosystem of support

As the SVB crisis unfolded, one thing quickly became apparent as our investors set up group Zoom calls with the broad portfolio. We are all in this together. It was very heartening and helpful to listen to shared thoughts and approaches from every angle. Everyone was forthcoming and everyone was truly rooting that no one ran into disaster. Those more knowledgeable about things like sweep accounts were able to explain these concepts to those of us who had less previous exposure. It became an intensive tutorial in banking that I for one have learned a great deal from.

The other important part of these interactions was the empathy shared between executives. There were companies that had the legitimate stress of not making payroll on Monday and facing the possibility of lawsuits or worse due to lack of availability of funds. Hopefully, for those that had more stress piled on, the chance to commiserate with like-minded colleagues provided some relief along the way.

Since the SVB collapse, several other banks have failed including Credit Suisse which combined with a daunting fundraising environment for biotech and a rocky XBI doesn’t exactly settle the nerves. But hopefully as we head into the second half of the year we can build some momentum in biotech as people get excited about things like the exciting data reporting out of ASCO this past week (as an example). And of course, if we need it, hopefully there is a guardian angel like Clarence out there looking out for all of us.

This entry was posted in Capital markets, From The Trenches. Bookmark the permalink.