Comment by expazl | Hacker News Reader

Comment by expazl | Hacker News Reader

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> a fund that was acting responsibly

You have to consider how these actions will affect the future relationships between banks and both the specific actors but also the startup scene in general. Startups already had a difficult time with traditional banking which is a large factor in why SVB was so successful, because it catered to the market specifically. What bank is now going to look at a startup not be thinking "Do we really want to take on a group of people who will collectively launch a bankrun at the slightest sign of trouble, even if we are geared to handle a bank run?", A run on the bank is never good news, even if the bank stays liquid, and it has a ton of knock-on effects and causes a huge number of headaches for the bank.

In this situation, where you think there might be a bank run and you have a coordinating role with a large number of customers. I think the responsible thing to do would have been to reach out to the bank and talk through all the options that will let everyone stay whole without a bankrun, not to fire up a group chat and scream "The bank is burning to the ground!". It seemed very likely that without the panic SVB could have secured liquidity and then the long term investments would not have posed a risk. I'm not saying their position was optimal or even good, but the panic just does not look to be the best option for the customers nor the most responsible action for those who had major pull in the market.

> > Startups already had a difficult time with traditional banking

I have seen this statement a half-dozen times in the last 3 days.

Can somebody explain in detail what are these hard times that a startup faces at Wells Fargo, BoA, JPMChase etc?

KYC? If Silicon Valley Bank was skipping that then they were against the law

Wires being signaled as suspicious? I doubt it, maybe the startup is new but everybody knows who the Founder's Fund is... or Blackstone or CVC. When they send the big equity raise checks banks look at the recipient but also at the sender.

KYC is a big part of it, yes. SVB wasn't skipping it; the Wells/BoA/Chase-type banks just do not want to do the additional KYC work for completely unknown players, which many startup founders are. It's not just that; certainly if you're going to open a corner convenience store, you probably won't have a lot of trouble getting a business bank account with BoA. But unlike a more traditional small business, tech startups often come with a massive amount of money that they immediately want to put in the bank, which raises flags... which brings me to:

When a bank offers an account to a business, they take on anti-money-laundering and terrorist-funding risk. (That is, if one of their accounts is used for money laundering or funding terrorist activities, the bank is exposed legally to that.) That risk is higher for an unknown small company than a more known quantity. SVB specifically said "we're prepared to take on that risk"; the big banks... not so much.

SVB also has built extensive relationships with a bunch of VCs, and will generally accept one of those VC's vouching for a new small company as a signal in favor of it being legitimate. The BoA's of the world don't do that sort of thing.

(Source: a former colleague in the fintech space explained this to me.)

> > tech startups often come with a massive amount of money that they immediately want to put in the bank

But this is not true, the startup is nothing but an empty box with just a handful of dollars in the account in the very beginning. They are not that different compared with a gas station or a mom&pop shop you mentioned. That is until it gets the first VC investment.

Although there are millions of startups, there are only about 2000 VC funds in the US, for sure the banks look at the sender and even if the check is in the millions they'd know it's legit because of the sender which is known and famous , and it's also known to make wire transactions in the millions to finalize their equity investment

Sure, that all sounds logical, but... it's not actually how it works in practice. ::shrug::

KYC is not a completely standardized process.

There are ways to go above and beyond the standard SSN/database-based approach that can mean the difference between a (compliant!) approval and a "sorry, but our identity provider says you do not exist”.

These are very likely more costly, both in implementation and day to day operation, so banks generally only do that if they are interested in that clientele.

The same goes for fraud prevention (“Sorry, we only accept customers with a Verizon/AT&T/T-Mobile postpaid plan, and if you ever dare to initiate a transfer from a foreign IP while traveling we will immediately close all of your accounts”).

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