Startups Can Limit Banking Risk With Bitcoin – Tim Draper

According to venture capitalist Tim Draper, companies should start using Bitcoin as a hedge.

When the Silicon Valley Bank (SVB) collapsed in March 2023, many cryptocurrency and technology companies were unable to access funds.

Silicon Valley Bank specializes in servicing venture-backed technology startups, including crypto companies. Stablecoin issuer Circle was among its many clients. SVB was seized with $3.3 billion of Circle's USD Coin (USDC) holdings during the illegal seizure, causing the stablecoin to temporarily depreciate to $0.88.

The crisis abated, and the USDC recovered when it was announced that the US government would defund the SVB.

The event turned out to be a big wake-up call for Draper, who suddenly realized that many of the companies in his investment portfolio had thrown their capital into the same institution.

“When Silicon Valley Bank went out of business, it was a huge shock because a third of our companies were banked by Silicon Valley Bank alone,” Draper explained at the AIM conference in London in April.

Many couldn't even make the next paycheck due to bankruptcy.

I said, “I got all these phone calls, and in most cases, I was very good, and I said, OK, we're going to give you more money to make your salary, but you know it's going to be expensive, and we're only going to make one payment.” Cover again [..] It was on Thursday when Silicon Valley Bank went out of business – on Monday, the government bailed them out.

History repeats itself

Although the bail provided relief to all concerned, the matter is not over. The potential for another SVB crash hangs over the banking industry.

“It's inevitable that this will happen again,” Emma Hagan, SVB's head of European and Middle East risk, told London-based financial paper City AM in March.

“Traditional banks, especially those that have been slow to adapt, may be particularly vulnerable,” she added.

But Draper didn't expect to get another shock when the next bank failed.

“I've told all my companies to have a treasury room now,” he said.

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Draper also calls for the companies to diversify beyond the banking sector and put one-third of their capital in Bitcoin (BTC).

Risk management

Cointelegraph spoke to Danny Chong, co-founder of Tranchess, a yield-optimizing asset tracker, to get more insight into the importance of treasury management.

Chong, who has worked in traditional finance for many years, said that while capital can be invested in high-interest financial products, smart treasury management must always ensure there is still “sufficient liquidity when you need it”.

“Most large corporations, like Apple and Google, have strong treasuries. In fact, they have a whole team to do treasury management,” Chong explained.

To emphasize the importance of getting that mix right, Chong pointed out that SVB's failure itself was partly due to poor treasury management.

“One of the reasons for the decline was that users were basically withdrawing deposits on a very fast basis, but still [SVB] It has locked up many of these assets in long-term bonds.

To make matters worse for SVB, these long-term bonds are not only inequitable, they are also undervalued.

Tim Draper's Bitcoin strategy

Following the collapse of SVB, Tim Draper introduced new rules for companies in his investment portfolio, telling them to divide their capital into three parts.

“Put a third of your money in one big bank,” said Draper. Then “put a third of your money in a small bank” because “the US government can foreclose a small bank” and finally “put a third of your money in bitcoins”.

To explain his thinking on BTC, Draper added, “If the domino effect happens and all the banks go bust, you'll have money to pay your payroll, and it will be in Bitcoin.

“This is the general policy among Draper Venture companies,” Draper concluded.

While Draper Venture firms may now be holding BTC as a last line of defense, there is still some way to go before owning Bitcoin becomes a common hedging strategy.

According to Chong, “some innovative and forward-looking companies have looked into investing in crypto or digital assets.[…] But most institutions are not so forward-looking.

Difference between crypto or tradfi

The collapse of SVB exposed a surprising lack of financial planning in VC-funded companies, despite the existence of a number of financial products that promise better returns than a bank account.

Cointelegraph spoke with Paul Frambot, CEO and co-founder of the loan and credit platform Morpho, who revealed some of his strategies to protect capital and increase efficiency.

As for raising Morphone's treasury, Frambot says, “We only look at the lowest risk product, even if that doesn't necessarily mean the highest return.”

“The money raised from investors is earmarked for operations,” Frambot said.[…] We can't farm the Diffy product in this capital city.

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Frambot said it is important to maintain traditional banking for a business firmly embedded in crypto.

“We're drifting apart, and a good part of that [capital] It's not in crypto, it's in the bankbook to protect ourselves and save ourselves from some risk, even if it's extremely small, like the Ethereum risk.

Like Draper, Frambot believes diversification is one of the most important elements in a solid fund management strategy.

“We have a lot of stable coins that have been very valuable in the past,” Frambot said.