You can choose to hold money in multiple banks. There are services that will happily set up laddered CDs across many institutions for you to diversify exposure and maximize insurance.
To use your tortured analogy: if my neighbor's house burned down, and he didn't buy fire insurance... I would be sad, but I don't exactly think it's my problem (or the government's) to pay to make him whole.
> If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.
I know we all like to believe we control our own destiny. Tiny little inconsequential-seeming choices wobble startups between success and failure every single day. Having a good product is such a tiny piece of it all.
Edit: And the people saying the “CFO” should have done better…at that point, one person is probably still founder, CTO, CHRO, CFO, snack buyer, and janitor combined (been there).
You just ask your bank to place the money using IntraFi. You can get a little more interest by locking up some of the money on a 9-12mo ladder, which makes sense if you have 18 mos of runway.
If you have an unanticipated expense or opportunity and need to spend some early, it's a small penalty to get the money out-- usually 6 months of interest, so as long as the probability of having to spend a bunch more is low you're ahead.
If it's so easy to get it right, why so many companies got it wrong?
Could it be because startups don't usually start by hiring people with a lot of expertise in finance?
Venture capitalists provide banking advice to the companies they fund, and this isn't on the list of things most mention. Now we're reminded why it's a best practice.
I think it's hubris to think that you can have tens of millions of dollars and can ignore vital things with it (account security, systemic risk from counterparties, etc).
If you still think the risk is too high, pay the premium for CDARs or insurance.
It is not about removing all risks. It is about making it acceptable. If your primary bank fails, you can manage it like any other strategic business risk.
It would be great if VCs would provide simple cash management services to their fledgling investments, though.
It was dirt simple to just use IntraFi. You just say you want it, and sign the form. If you want a little more interest income, you do some cash flow planning and check the box for laddering.
Thus, an easy prudent solution is to have a second bank, likely a "too big to fail bank", with emergency funds to cover the day-to-day until you can roll over to money locked into time-based investments or the system has worked its course on the first bank.
In my personal finances, I have done that in housing deals going above the insured limit by immediately moving money into government-based financial instruments. Then as appropriate, I transferred that to my preferred investments and risk profile. If I, as a layman doing a once-in-a-decade housing deal, can manage it, then a startup can.
Its small, but also easy to at least partially mitigate.
Your first priority should be to assure the safety of wherever you put it. Whether that is diversification to the point where all the funds are insured or inquiry into the finances of the institution where you plan on putting all the eggs, or a mixture of lesser diversification and diligence, it should be done.
> my job is to spend that money in the next 18-24 months, not save it.
Well, your first job is to make sure that money is still there when you need to spend it, otherwise, you aren’t going to be spending it.
And it's OK even to incur a little bit of risk/uncertainty when doing so.
But this is different from bailing out all the depositors 100%.
The prudent thing to do right now is to pull your money out of your regional bank and move it to a GSIB and call it a day. This endangers regional banks and concentrates deposits into the large players.
If you use multiple banks, you have a higher risk of experiencing a bank failure, but it has less of a consequence on your operations, liquidity, and viability if it should happen.
So if you use IntraFi to place across 10 banks, and you have $10M, maybe you lose $300k.
It is a risk... but there's plenty of ways to lose a few percent of your working capital that are out of your control.
If you want to further reduce the risk, you could do additional things (e.g. buy some T-bills).
And there are many others in the same boat.
Maybe building an entire society on a drastically slanted gap between the wealthiest and the least wealthy is actually super unstable and prone to failure?
Making bad treasury management decisions is not "no fault of their own". If people want to make the case for a taxpayer bailout, they should start with something like, "Look, we know we fucked up by [not paying attention to something important|taking a risk we thought we could get away with|getting high on our own supply], but we're humbly asking for help."
If somebody's house catches fire because they cheaped out on the furnace and the didn't get homeowner's insurance, I'm going to feel bad for them. They have some Kubler-Ross time ahead for sure. But unless they're family, I'm not taking them in.
Inquiry into bank finances, diversification across banks, etc., are all available options. Maintaining large uninsured balances at a single bank without doing those things (or doing the first, but not taking appropriate actions thereafter) is a choice.
I am not opposed to reasonable government action to mitigate ripple-effect harms given the externalities, but the idea that the startups involved have no responsibility here is misguided.
If only we could centralize the investigation of bank finances and judgement of whether they are healthy enough to use into some sort of agency, staffed by domain experts, with the power to demand relevant documents and shut down unhealthy banks. Nah, that would never work, let's just make it the depositors' responsibility.
If startups were going under because it turns out that they were pointless and there was no market, and they ran out of runway… then sure.
But this is their house catching on fire and all of their money just vanishing through no fault of their own.
It doesn’t distinguish between good startups and dumb ones, real businesses and nonsense — how could you root for this beyond pettiness?