After SVB's crisis, here are 5 recession-proof financial practices your early-stage startup can adopt

Silicon Valley Bank was a very relevant player in the venture and tech ecosystem and the obvious go-to for every Latin American startup that needed an international account.

But if you're reading this article, you probably know what happened.

SVB announced its collapse and US$ 212B of assets with it, making it the biggest collapse of a lender since 2008's financial crisis. After days of crisis for startup founders, the Federal Reserve acted to create a bridge bank and return all deposits. And last week, First Citizens BancShares announced the acquisition of the Silicon Valley Bridge Bank.

First, let's all take a deep breath because we deserve it. 🙌
Ok. Now, it's time for real talk. ‎️‍🔥

SVB's crisis has shown just how frail startup finances can be. At the same time, it shows how much work can be done so that your startup becomes a rock in the middle of a financial turmoil. Yes, even in ours truly Latin America.

So what kind of work are we talking about exactly? Well, we gave experts a call so that they would share their own to-do lists: Patrick Kolencherry, principal product manager at Latitud; Juan Manuel Barrero, co-founder at the financial partner for startups Lazo; and Thomas Baldwin, managing director at the growth equity firm Discovery Americas and the co-founder of the startup Kocomo.

They took from their experiences as founders and financial experts to list the best financial management practices for LatAm early-stage startups to face a crisis like the SVB one with their heads up – and with their balance sheets blue.

1. Distribute your cash between accounts

Silicon Valley Bank's deposit situation has been solved with a double layer of stability, considering the bridge bank and the latest acquisition. Even so, startup founders can learn from the first days of chaos and better prepare for the unexpected.

That's the conclusion Thomas got to. As a co-founder at Kocomo, he has been through good and bad financial times at his own business. And that includes trying to take money out of SVB on the first days of its crisis.

Even if now the co-founder feels relatively comfortable to keep operating with SVB, he also learned that you should never have the entirety of your cash in a single financial institution.

Recall the golden rule of investing: never put all your eggs in one basket. The best practice is to diversify and divide your cash between 3 to 4 institutions nationally and internationally, Thomas says.

And how to divide the money between international and local accounts for early-stage startups (e.g. accounts in Brazil and the US)? Patrick recommends having 6 to 12 months’ worth of operating expenses in the local account. At Latitud, we lean more on the side of 12 months. As you spend, you need to keep transferring funds to keep your local reserves strong.

2. After diversification, look at liquidity

Your journey's not over when you check the box of multiple accounts though. You also need to pay attention to the liquidity offered by these accounts (= how fast you'll cash out your money when you ask for it).

Thomas is adamant: early-stage startups should look at having immediate liquidity 100% of the time.

Why? Because many startups have gotten themselves into trouble by having a financial emergency but having their money locked into long-term investments, that could only be cashed out months after your request.

"Startups are in the business of building incredible products that generate revenues and ultimately transform into sustainable and long-term endeavors. I don't think we're in the business of maximizing returns on our cash balances."

More specifically, the amount of cash that equals 6 to 12 months of your startup's expenses should be in D+0 investments (which means you get your money back the day you ask for it). If you have more cash reserves than that, then you can put it into D+1 or D+2 investments. And no more than that. Plain and simple like peanut butter and jelly and queijo com goiabada.

Still, that doesn't mean you should keep all your money in checking accounts that generate no returns whatsoever. Some alternatives keep your immediate liquidity and also offer moderate returns (about 3% to 5% a year).

3. Open lines of credit

Even at a moment when interest rates are high, keeping lines of credit open is also a safety cushion that can make your early-stage startup more comfortable when facing any crisis that might come their way. And we know there will never come a moment when you'll be a peacetime CEO in Latin America (Creditas' Sergio Furio is prolly telling us an "I told you so" right now).

"Even if there are origination fees and costs to open and keep that line available, it's well worth it. Even the best-laid plans generally don't materialize as you would've expected", Thomas says.

That works both ways: you might need cash for an emergency but also a sudden opportunity. (Lemme share a secret with you, just between us: these generally happen at the same time. And you don't wanna be broke when push comes to shove.)

The managing director advises founders to search for secured lines of credit. These allow you to borrow as much as you need up to a certain amount. When you make payments, the amount of available credit is replenished. You can ask for money again and again.

That's different from regular loans, in which you ask for a specific amount and that's the end of it. You'll have to go through a new credit analysis if you wanna borrow more money.

4. Understand and track your cash flow

We know the life of an early-stage startup is hard. Still, you're not excused from thinking about the sustainability of your startup if you wanna build an impactful and long-lasting business. No money, no future.

What you can do is start with the basics in finance and develop from there. Recognize and work on your gaps if you aren't an Excel aficionado. "Founding teams that have someone with experience on this financial side or that are mature enough to recognize that they need to work with someone external to help them with financial planning and analysis (FP&A) tend to be more successful", Patrick says.

Juan from Lazo recommends you look at your cash flow and profit and loss statements (P&L). Thomas adds cash burn and runway to that list. (Good thing we have an explanation for all of these concepts in our glossary for venture-backed startups.)

What do you have to pay, what do you have to receive, and what are the due dates of each payment? Will you be left to dry at any point in time?

You need rolling forecasts of your cash flow to answer these questions correctly. And by that, we mean keeping track of and updating your payables and receivables weekly and monthly.

Having this mindset will help you a ton in your fundraising efforts as well. Investors are now more selective than ever and wish to see a profitability horizon even at the earlier stages, as SoftBank's Paulo Passoni has warned our community before. They don't want to waste time trying to comb through your startup's numbers because they're a mess.

A golden rule for fundraising: build a good impression in the first seconds of your pitch. Otherwise, you won't get any money or you'll be penalized for your lack of good signals in the form of a smaller valuation or more founder equity dilution (don't!!!).

5. Understand and track your unit economics

Feeling close to cash flow by now? Let's add another essential financial concept to understand and track: unit economics.

Yes, you need to build a product quickly. But you also need to build it in a way that doesn't screw your company financially down the line.

Unit economics means calculating revenue and costs measured on a per-unit basis. Knowing unit economics lets you know where you stand in terms of product profitability before fixed costs.

If you're in the earliest stages, you can estimate the unit economics of your first product. As you grow, you'll be able to follow unit economics in real-time.

What's important to know is this: if your unit economics is positive, covering your fixed costs and reaching the dreamed break-even only depends on the number of sales. If your unit economics is negative, you need to adapt your business model to fix that (aka making a pivot).

Once again, unit economics is a fundamental concept not only for the sustainability of your startup but also for fundraising.

"Every single VC is gonna ask about your revenue model and then they're gonna drill it down to the unit economics. If you can't clearly and succinctly explain your margin profile and how you make money at the unit level, there's no way anybody will give you any money", Thomas says.

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