Expert reveals steps tech start-ups can take to avoid the financial risks like the SVB collapse

Tech start-ups are vital for the UK's growth. The recent collapse of the Silicon Valley Bank (SVB) has highlighted the need for these companies to have measures in place to manage financial risks and avoid unforeseen disruptions.

A run on the bank by depositors led to the collapse of SVB on Friday, March 10, 2023. In the UK, SVB's subsidiary was quickly purchased by HSBC.

Before the deal was struck many UK tech start-ups faced an anxious few days as they were unable to access money tied up in the failed bank. The fears of the knock-on effect on smaller UK tech firms led to a group of 200 industry-leading bosses signing a letter calling on the authorities to step in.

The government facilitated the talks that lead to the HSBC takeover. Chancellor Jeremy Hunt called the affected firms "some of the most important companies, our most strategic companies".

The UK tech sector ended 2022 as Europe's leading ecosystem, retaining its position as the main challenger to the US and China. It has more high-growth companies than anywhere in Europe, with over 85,000 tech start-ups and scale-ups

Following a few basic guidelines can help emerging tech companies mitigate the risks caused by a bank collapse like SVB, according to Charles Fletcher, Partner at Michon De Raya, a law firm specialising in advising tech start-ups.

"In our experience, there are simple, practical steps to financial management that businesses can take to minimise the uncertainty and stress many have experienced," he said.

Fletcher advised on how businesses could minimise the risk of a financial crisis. He believes if businesses consider spreading loans and deposits across more than one bank, it can provide a backup option in case of unexpected bank failures, ensuring that critical operations can continue without disruption.

He further suggested that start-ups should also have an emergency funding plan in place to avoid cash flow problems that can arise from unforeseen circumstances. This may involve securing funding from multiple sources, including venture capitalists, angel investors, and crowdfunding platforms, or making use of retained profits.

According to the partner at Michon De Raya, it's also important to separate funds from different places, such as revenue from customers and investment funds, which can help maintain a clear picture of the company's financial position and ensures that the money is used for the intended purpose.

Fletcher went on to suggest that businesses taking strategic approaches to managing currencies can also help to reduce financial risks. Using hedging strategies to protect against currency fluctuations or setting up currency accounts in different jurisdictions to facilitate international transactions are some directions businesses can take.

Finally, he also urges businesses to ensure that they have detailed risk registers and crisis management protocols in place. This will help to identify potential risks and develop strategies to deal with them, as well as provide a framework for responding to unexpected events.

The recent banking turbulence has underlined the need for businesses to be prepared for the unexpected. Tech start-ups are very important to the UK, yet as new businesses, they are vulnerable to the fallout from financial crises.

It's easier said than done, but Fletcher believes that by following a few simple pieces of advice, tech start-ups can avoid a lot of financial risks and crises. More tips from the partner at Michon De Raya included opening accounts with multiple banks, having an emergency funding plan, separating funds, managing currencies strategically, and having a detailed risk register and crisis management protocols in place.