Immad Akhund, Co-founder and CEO, Mercury
Erica Brescia, General Partner, Redpoint Ventures
In conversation with: Terri Burns, Investor, Board Member, and Co-chair, Fortune Brainstorm Tech 


Brainstorm Tech 2023: Bank Fallouts And The Future Of Financing Tech 

Conferences

Immad Akhund, Mercury
Erica Brescia, Redpoint Ventures
Terri Burns, Fortune Brainstorm Tech 


Bank Fallouts And The Future Of Financing Tech 

Silicon Valley banks collapsed. It set off obviously a chain of events impacting tech and the banking industry overall, we saw a huge massive ripple effect on startups in particular and we're still trying to make sense of what exactly happened today. However, the bank run also created a lot of opportunities out there for fintech disruptors and challengers, some of whom were already on stand by to shake up the banking space. So we want to have a look at how some of these challenges were addressed in the new financing opportunities that have emerged as a result. Joining us next is Imad Aoun Ceo of Mercury, a company engaged by more than 100,000 startups when the SUV folded Mercury swooped in with over $2 billion in deposits. So please also welcome Erica Brea, general partner at Red Point Ventures. Erica has been a leader in the open source community for more than 15 years. And it's worth noting here that both Emad and Erica are also active angel investors and founders who understand the unique needs and the quirks of startups. So let's dive into what's next in fintech from Erica's Emma's perspective in an interview with Brainstorm Tech co chair and my friend Terry Burns Ahmad Erica. We're very excited to have you both today. Thanks for coming. Thanks for having me. Great to be here. So let's go ahead and jump straight in. I'll start with you Ahmad. An estimate recently came out that roughly 20% of all account transfers from STB went to Mercury more than any other Neo Bank and second only to JP Morgan Chase, I would love to hear more from you about what roles in Mercury play in. Really helping tech companies recover from a really scary and chaotic moment. Yeah. So Mercury is a Neo Bank. We target get startups really our bread and butter is early stage tech companies. We will already, I would say, you know, for that segment uh neck and neck with SBB. Uh And you know, obviously when this collapse started happening, I guess this kicked off on Wednesday in March, we were, you know, really made ourselves available to get as many people to sign up to Mercury and help them to kind of get set up very quickly. And as a tech start up, obviously, we can react really quickly to these changes in a way that a normal big bank can't react. Uh You know, I was a SBB user in my previous company. Uh So I was sad to see what happened to them. Uh But I do think, you know whether it's the big banks or regional banks. Uh, yes, banking is kind of weird. It's one of the few things where it's basically all bits now, but it's still dominated by 100 year old companies. So I think this wave of kind of fintech is, yeah, I would say still just beginning. Erica, you were quoted in fortune last month, speaking about the SPB fallout and you said, quote, the current panic is fueled by the subset of vcs that are trying to race their way out of SVB. So do you think that vcs are to blame for the bank run? No, I don't think dcs were to blame for the bank run. But I do think what was really unique about SCB is there was this concentrated set of customers and relationships and a really strong network that just you don't see in most other banks because of the concentrated customer base that they had. And there certainly were a subset of vcs that really rushed to tell their companies to pull out all their capital as quickly as possible. And was another set of vcs ourselves included, but many, many others who were trying to, you know, keep everybody calm and rational and give sound advice, which was, hey, first of all, you should have multiple banking relationships. If all your funds are with SEB, you need to open up another bank account, move at least six months of your operating capital out of SEB and make sure everything that is over 250 K is, is kept in whether it's sweep accounts or other secured facilities. So, you know, you're not at any risk, but we really tried to take a thoughtful and measured approach and it was interesting to see from the inside, just the energy and near hysteria and how quickly things were changing on the VC side. And folks were jumping to tell people to pull their capital out. And at least for me, it felt like there might have been an opportunity to kind of slow and stem some of the tide if we'd been able to work a little bit more in concert and take, you know, a balanced and like rational approach. I mean, the SPB thing happened from 8 a.m. to 2 p.m. that was 50 billion in that time period. But signature first Republic, I mean, that was like a multi week thing and they're not as influenced by VC. So I think there's this interesting dynamic where, you know, if you're a public bank, uh like your public stock gets hit because there's an earnings release or something and then your depositors now panic on social media. Like that dynamic is very new. It hasn't existed before. So at least when it comes to regional banks, this is kind of like not just a tech problem, this is a general problem and I don't know what's going to fix that because yeah, the big banks have this like implicit government guarantee, uh, regional banks don't have, most of them only have 250 K and FDIC insurance. And it's not obvious as a depositor why you should trust like this regional bank when you, you know, you, you have money there. Like, why should you leave it there? Right. So, it's a weird, like, game theory that played out with these three banks, but I don't think that's the, you know, I don't think it's finished the point about trust. I think this is a point that I definitely want to double down a little bit, especially as a Neo bank, a relatively new startup institution. How have you instilled trust in, especially many of your new customers who I think, you know, are rightfully so really nervous perhaps about their banking systems right now. Yeah, I think the, I don't think it's reasonable to ask our customers or really for any bank to ask, ask their depositors to just trust them. So the way we reacted is we actually increased the FPSC insurance. Uh So we basically sweep all of the funds that anyone has with us. Uh We increased it from 1 million pre S PB uh crisis to 5 million now. Uh And then we also give access to anyone with more than that, really anyone on Mercury uh access to treasury accounts. So you can put money in us government e bills via vanguard. Uh So, you know, my thinking and what I say to customers is, hey, yeah, this is what we say and you should trust that. But at the same time, you have the assurance of 5 million FTC insurance and the rest, you know, anyone doing sensible cash management wouldn't put the rest of it in a bank account in any way they would put it in treasury. So that's what I tell customers. And that gives them a lot of confidence in Mercury, But it's hard for a regional bank to do that because you know, we don't, we can't lend against these deposits. We already sweep them anyway, a regional bank has to, you know, the banking model is you take on deposits and you lend against them. So they have to be a bank, they have to be a bank. Tech companies can be more creative about these things. You also did a pretty good job with transparency even way before the crash. So I think in helping people understand exactly how you work and where the risk may or may not be in working with Mercury. And I think that served you really well. Yeah, I mean, trust has always been the hardest thing for Mercury, right when we launched in 2019. And like, I remember having a conversation with someone and they were like, I have raised $5 million. It's the most money I've ever seen in my life. Why would I put in Mercury? And I was like, fair point now. I can make a better argument. I'm going to ask one more question here and then I'm going to open up questions to the audience so please start getting your questions ready. I'm curious to know more about early warning signs, whether or not either of you thinks that there were any early warning signs that a crisis was on the horizon. And if not, what are things that you both in your relative position want to look out for in the future to keep in mind for potential crises? There were, I mean, look, there were some blog posts and things starting back in December. So there were some warning signs, but I think a lot of people dismissed it as, you know, BB had a ton of, they had, you know, $200 billion in deposits. This was not, you know, it seemed like otherwise a healthy bank and then, you know, I think when they went to go, they had to make a filing right about the $2 billion that they went to raise. And that's when everybody had this woe moment of, hey, what's happening? And I think, you know, social media really just set the flywheel in motion, right? And you know, to I Mad's point within a day, $40 billion evaporated out of STV because people saw that filing. Um I do think, you know, CD failed because they made poor decisions around uh you know, interest rates and, and taking a healthy investment approach to deal with this influx of deposits that they had. Um, so perhaps the bank would have failed anyway, but it certainly wouldn't have been in a spectacular as a fashion if we didn't have the social media kind of fervor around what was happening. I think there's a lot to be learned from that for the future. I think the Fed learned a lot. I don't think we've ever seen a bank run like that before. And when you look at, you know, the dynamics, it kind of makes sense, right? You have this highly networked and concentrated base of customers SVB. And you know, a lot of folks that were very active on social media that just made things happen faster than anyone expected. And I think there's a lot of learnings to take from that in terms of not only how startups responsibly approach financial management and treasury management and also um you know, how these things may come to pass in the future and how quickly we need to respond. I think, you know, when the Fed came out with their review of what happened, they admitted their own lack of oversight and action and slowness to react when they saw the initial warning signals, any questions from the audience right over there, just wait one second, please state your name. Hi, Joe Marquese with human ventures. I had a question. Did you see any correlation between the 6 to 9 months before of crypto banks failing and then the run on SVB afterward and, or some of the investors who might have been invested in both. I think the, the calls in a way is the same, which is in 2021. Uh There was a lot of money swishing around uh and people were not being responsible for where they placed it and how they think about the risks around that. So, you know, if you think about D I yield, like I was talking to people, I was saying like, you know, if you're getting 10% like you're taking risk and they were like, no, it's like no risk. It doesn't, didn't make any sense. Uh And similarly, you know, uh SCB put 100 billion in like 10 year mortgage backed securities uh for 1.9% like that's not a lot of yield. Uh But it was, I think all of it was a zero interest rate kind of phenomena. Uh So that was like the underlying like kind of, it just screwed up. Everyone's kind of risk management profile, let's say, uh hopefully we learn these lessons but, you know, I would say every like 20 to 40 years, like people forget all of this and we have a new bubble and we have these mistakes again. So, uh at least we get immune from the next 5 to 10. Maybe immune sounds like a risky thing to say. But I, I hope You're right. I do think a lot of lessons have been learned and like, one of the things that we saw too was because of the level of investment happening in 2021 and the sizes of rounds going into very early stage companies, you know, sometimes you had companies with 10 or 15 employees that were taking on $20 million worth of financing that didn't have finance teams that were sophisticated and knew about treasury management and, you know, boards would of course make inquiries and approve investment policies and things like that. But that takes time to all happen once an investment happens. And I think this was a really important wake up call. I think for startup founders and quite frankly, for vcs, who might not have had as close of an eye on this shortly following investments to make sure that people are following sound financial management practices. And then, you know, on the regulation side, I think we've learned a lot from this and now, you know, hopefully we'll see some very healthy levels of regulation and oversight come out of it to prevent these in the future. I hope that leads to immunity, but uh maybe I'm the only time will tell, get sick. Yeah. Any other questions from the audience? You have a question over there. Hey, hi. Uh Emily, she with a worldwide um Erica, you mentioned that filing was sort of the trigger for everything to kind of domino effect from there. Do you think a good crisis, communications plan, uh, that maybe the SVP like COMMS team could have put in place or some sort of Comms plan could have saved the, the downward spiral. You know, I've thought a lot about that because I was on the call that many know, happened with Greg Becker and I was actually on a call with him a week before with another group of V CS um following an article that had come out in the Financial Times and, you know, this was not a demonstration of a spectacular calm strategy, right? I mean, I think everybody can agree that the calms could have and should have been much better. I mean, getting on the call and telling everybody not to panic was probably the worst possible thing that they could have done. I don't know honestly, if a great com strategy really would have stopped some the tide though. Um just given how quickly everything was happening and the amount of energy already out there in social media, you know, it would have been, it would have been hard to quell. But um yes, certainly, I hope every comms person has looked at this and learned some lessons about perhaps how to approach things better in the future. I do think the gentleman, I can't remember his name who came in did a spectacular job after, you know, the fed took over a CB in communicating what was happening and really instilling a lot of confidence and calm. I only wish he could have come in, you know, prior to the crash of the bank and maybe prevented it in the first place. I want to zoom out just a little bit here and think about some of the US economic conditions that are at play right now, whether those are recessionary measures, debt ceiling inflation, etc how are us economic conditions impacting both funding and growth for early to mid stage startups? Whether that's in your case, Ammad from Mercury standpoint or I know that both of you are active angels as well. What are you seeing in the market with your own portfolio companies, the impact of the broader market on funding for early to mid stage startups? I think it's kind of interesting that like the US has not really gone into a recession, it's actually like fairly resilient. Uh I would say the VC economy has been in recession since November 2021. Uh So a year and a half ago, uh you could see like every quarter, there's less and less funding. Actually Q two is not out, but there was some, some numbers that are out there. It's almost certainly like way worse than Q one which is already way worse than every quarter uh last year. So I think we're in like a like the fundamental reason is uh you know, things that make sense to invest in when interest rates are zero. Don't necessarily make sense when interest rates are 5%. So there's a big pull back. I think that will continue actually for the next year or so. I think it's going to be pretty depressing times. Uh, in the startup ecosystem, lots of companies will fail and things like that. Uh, but I think there is something healthy about it. We were in a pretty deep bubble and, uh, I think a lot of people, you know, burn too much money, raised too much money and all that kind of stuff. Uh Yeah, I don't know what happens in the US economy, but weirdly, I think the VC startup economy is like on a, on a different cycle and even, I mean, you saw it in 2009, the US went into a pretty deep recession but like we see funding only slow down for about nine months. So I think actually it won't be on the same cycle. Yeah, I think there is some nuance to that though. So seed round sizes are actually going up, which is interesting, but the number of deals getting done is going down. So what we're seeing is hopefully higher quality companies getting funded. And what interesting is in particular with AI we're seeing so much energy and excitement that a lot of folks that had maybe previously equated a company exited a company that were in executive roles are actually now taking the leap to start a start up again because they just can't resist the market opportunity. And so we're seeing a lot of interesting things get built and certainly in AI we're seeing, I'm sure you've all seen in the press some very, very large rounds getting done very early and at very high valuations. And it's almost like a bifurcated market, right? If you're building a core A I company versus anything else, we're typically seeing dramatically different valuations tomas point at the growth stage. You know, I do think we've seen virtually every company has lowered forecasts, right? So we are seeing growth slow down from a company perspective and the series B market and C market has been very slow for quite some time. And I think that will continue. What's really interesting though is the valuations haven't come down that much for the deals that are getting done. There's a real flight to quality. That's kind of funny enough like driving the prices of the rounds of companies that are actually executing well and showing really fantastic growth and momentum in this environment, they're still raising spectacular around. So, you know, fewer rounds are getting done. But I think it's into companies that are building um more financially healthy and sound businesses. So I think this is overall a great thing for the ecosystem and the companies that do make it through this are going to be much healthier business as uh moving forward, Erica, this is great. Thank you. So much for your time. Thank you. Bye.