But is that a good thing for society? Adding a rent-seeking middleman that doesn't actually contribute anything except a technical workaround for an issue that can be solved directly by the governemnt?

It's called risk management, it costs money and it's something anyone running a business should be familiar with. Don't run your company like a multimillion dollar lemonade stand.

YC doesn’t make you keep your money anywhere, they don’t even suggest any place or even say anything about startup banking (unless you were to ask one of the partners for advice). Even a cynical take would suggest they’d prioritize their portcos who launched banks for startups (like Brex), but even still in my experience they haven’t even done that.

According to Ankit Parasher, Co-Founder of YC-backed fintech start-up SALT, “SVB was the default bank for any international start-up expanding operations to the US. It was a stable bank and most VCs recommended it, so the impact of SVB failure is expected to be even larger than just Indian SaaS companies and YC-backed start-ups.”

From https://www.thehindubusinessline.com/companies/indian-saas-a...

Even still, YC doesn’t give any recommendations on bank account that I’ve seen. For ourselves, we had to do some corporate clean up before YC and while they connected us to the right lawyers and provided basic review, it was really just between us and our lawyers. For wiring the money, they just ask you where to send it.

SVB is no doubt popular, but YC makes no recommendations on any banks whatsoever in my experience

From an insurance perspective, why is it ok to guarantee payment to 20 x $250k but not $5mm? From a payout perspective the amount is the same, is it just the single point of failure risk?

That's the idea. One bad management decision doesn't take down all the capital.

But in terms of socializing the risk it works out the same. There is no difference between paying a company back $5mm or 20 companies 250k each.

Do you think most entities socialize the cost of their finances by just dividing up millons to billions between infinite banks and customers of this bank are the only ones not doing this? This seems unlikely. What you are proposing would obviously cost more money in practice else it would make no sense for you to propose it.

Lets take it another way. Why not limit FDIC insurance such that its harder to stack them and derive more benefit?

Sure, if we change the limit of FDIC so it's harder to stack that would make sense. e.g. coverage is per entity not per account.

But that's not what people here are suggesting. People are suggesting to divide the funds so that it's all covered. That it was irresponsible of companies NOT to do that and hence they deserve not to get the full deposit amount back.

EDIT: yes it'll cost more money to split today. But it's a waste. The extra cost doesn't go to the FDIC or tax payers, it just goes to a middleman. So then why not just raise the FDIC limit? (or change the rules so you can't split it)

You are oversimplifying their argument. People are suggesting that people use more than one bank or make a service that involves using more than one bank not necessarily infinite banks. It isn't necessary to choose between zero risk and existential risk. You can with only modest effort achieve moderate risk.

the math is still the same though, just different degrees. If we (as tax payers) are ok with insuring 3 accounts (as an example) x 250k each, why are we not ok with insuring 1 account for 750k?

Because you're spreading the risk of bank failure across many banks, which honestly is probably good for everyone....

Someone with 3 250k accounts is liable to need a bailout on 1 of 3 costing less money.

Yes but now you have 3 times as many accounts that need to be bailed out.

Instead of 3 people holding 1 account each at 1 bank with 750k, now I have 3 people holding 250k at 3 banks. Per bank it’s still 750k.