Financial Infrastructure For Small Venture Funds

I’m on a plane today headed to NYC for the week. I’ve refrained from tweeting too much directly about the implosion of Silicon Valley Bank (SVB) and the threat to other regional banks. This is in part because it’s a complicated topic where there are 1,000 experts who understand it better than I do, but it’s also because I probably wouldn’t be able to be on this plane, in this job, and have this career if it weren’t for SVB. I’ll get to more about that at the end of this post.

While I’m not expert on HTM securities and loan-to-deposit duration mismatches (two new terms I’ve just learned about), I do think I’m expert in something that could be helpful to other small venture funds. Like was the case for me, most small venture funds are not sophisticated in the world of finance. Part of what makes AngelList so appealing, in addition to all the of software automation, is that it abstracts away the complexities of running a small fund, cross-fund investing, and cash management. It’s very easy to write a check into a new company, but it’s much more complicated to get the money out, or to distribute shares, and have an overall cash management plan. These managers, like me, are spending all their time with founders, making connections, hearing pitches, and the like — finance only seems to matter if you catch something big.

A number of investor friend and limited partners (LPs) reached out to me over the past few days to get a lay of the land. Most were surprised to hear that despite having many fund-related entities with both SVB and First Republic Bank (who’ve both been terrific partners to us), that we didn’t have much cash in those accounts. Why is that? The main reason is that VC firms actually don’t “hold” lots of cash, because that would mess with the IRR over time. Instead, we “call” capital from the LPs when we need it, and then we immediately wire it out to handle internal operations like payroll or to make investments.

These callers were also surprised to hear that we had accounts across these two banks plus other banks — how did that happen, they asked. It wasn’t a grand strategy on our part, it was simply the result of building Haystack as a bumpy ride. I had to spend years overcoming a backlog of Excel sheets and paperwork that felt like an administrative tidal wave. We created different bank accounts at different firms to build more relationships across the Bay Area but also NYC, and we brought on a real CFO back in 2019 to get ahead of what I viewed were financial operation hurdles on the horizon. So, we ended up with a real CFO, spread out bank accounts, and sophisticated cash management because we were small, unsophisticated, respectful of the complexity venture finance brings, and ultimately we were aware of our limitations in this realm.

This made me think about all the other small funds in the VC market. When they go back to institutional LPs (like endowments, foundations, and other sophisticated pools of capital), they may get more of these questions on financial operations – What is your cash management plan? Do you have a CFO sitting in between your back office and legal firms? If you’re lucky enough to get shares in public companies, who will broker those for you at a small scale? I’ve lived through this pre-pandemic, and let me tell you it is not easy to grok.

There will be more to reflect upon regarding this debacle as time moves on. For now, I am grateful that Haystack’s early days were both successful to be involved in some epic companies, but also that we were naive enough to not try to handle the financial operations ourselves once we began managing institutional capital about 5-6 years ago. We didn’t have a plan, but we knew this wasn’t our sweet spot, and we invested in our team operations to fill this gap. That turned out to be a very good decision, as we were able to shift our focus to being present for our founders versus scrambling internally. I’d like to thank our CFO, our back office, and our legal team for the years of loyalty and service to us. The past few days could’ve been wildly different without them.

I’m also thinking about SVB. I have many close friends who are current or ex-employees. One of my first friends I made in the Valley was a SVB employee. We’ve funded another alum in his new company. Haystack was able to bank a sub scale $1m debut fund with SVB back in 2013, and they helped me set up wires and all the little things in those early days. Haystack started and operates one of the most preeminent private events bringing together early-stage GPs and LPs (this year will be our 7th annual event), and that happened on Day 1 because a friend at SVB said “let’s do it” before I even finished brainstorming the idea with him. I feel incredibly for many friends and alums there. I know very few will find sympathy in stressful times, and that is understandable, but because were fortunate to not have the same stresses over the past few days, I wanted to take a minute and state for the record that it was many people at SVB who quietly enabled Haystack to happen, and that’s not something I want to forget.