Bloomberg Línea — Despite the release of funds from Silicon Valley Bank (SVB) for customers as of Monday, some Brazilian startup founders have not been able to transfer their money to their accounts in Brazil.
Startups managed to withdraw all the money they had deposited in the institution, as announced by the US government late Sunday, but that only worked for those with accounts in the United States, and some Brazilian founders have been unable to transfer their money into Brazilian reais.
On Thursday and Friday of last week, when international remittances were still possible, more than $200 million was transferred into other accounts, but when SVB opened on Monday under FDIC control, there was a limitation on domestic withdrawals.
“I’ve already heard some reports of Brazilian startups that had accounts at the bank that were able to redeem 100% of the amounts deposited this Monday, including funds of above $250,000,” said Caio Fasanella, head of investments at Nomad, in an interview with Bloomberg Línea. It was even possible to redeem card points for startups through the SVB Go platform.
But the limitation of these transfers only to US domestic accounts created a problem for Brazilian startups that did not have this alternative and needed to access the funds as soon as possible to honor their operations’ commitments.
Banking options in the US
Faced with this demand, companies such as Trace Finance and Latitud rushed to launch banking products - which they said had already been in development for months - to recover funds from the startups that still have money stuck in the bank under FDIC intervention.
“Everyone who didn’t get their money out last week and didn’t have a US domestic account has their money stuck,” Bernardo Brites, CEO and co-founder of Trace Finance, told Bloomberg Línea in an interview.
Money from Brazilian startups in SVB has been transferred to big banks such as JPMorgan and Morgan Stanley, as well as to smaller ones like Mercury, and local fintechs like Brex, owned by Brazilians Henrique Dubugras and Pedro Franceschi. There are also those on the waiting list from Trace Finance, which announced the launch of Trace Finance US Inc bank on Thursday during the run on SVB.
According to Bloomberg News, Bank of America attracted more than $15 billion in new deposits in a matter of days after the collapse of SVB, Signature Bank, and Silvergate - something that shook confidence in smaller financial institutions.
Trace said it works with “several banks” on the backend. Regarding demand, it said it has a $3 billion waiting list, but that amount is equivalent to what those startups raised in their last rounds.
Brites estimates that the startups have already spent up to half of that amount raised, i.e. meaning $1.5 billion would enter the fintech account.
The fintech said it can finalize the registration within three hours for startups with a balance above $500,000. During the night of Tuesday (March 14) to Wednesday morning alone, 65 registrations of companies for the startup’s banking product were made.
Trace also said that its product is FDIC-insured and has additional insurance of up to $2 million.
Latitud’s banking product, meanwhile, called Meridian, will focus on founders of early-stage startups that need international accounts but are not big enough to be customers of large US banks. On Wednesday, the business account is in test mode for Brazilian startups.
According to Latitud, early-stage startups rarely have the business track record to be serviced by traditional US banks, “which require up to $10 million in deposits”.
The rollercoaster ride since the collapse of SVB
Since last Thursday, the life of Brazilian entrepreneurs with resources in SVB has been a kind of rollercoaster.
Over the weekend, faced with the FDIC limiting coverage to $250,000 per client, startups began evaluating emergency lines of credit with fintechs such as Brex and Capchase to pay salaries and keep operating. But with the announcement late Sunday that the FDIC would cover all funds in an unprecedented way, plans were put on hold.
“I am very happy that SVB customers will have full access to their deposits. With this excellent news, offering our consigned loan is no longer necessary. This is a much better outcome for these customers. Thank you to all Brex employees and capital partners for the extraordinary work over the weekend,” Dubugras said in a tweet on Sunday.
In general, for a Brazilian startup to receive investment from abroad, it has three companies: one in Brazil, one in the Cayman Islands, and another in Delaware, USA. For those founders who wish to keep an account in the US, the obstacle has been having a holding company based in the Cayman Islands, through which venture capital funds normally contribute.
“Investors prefer the Cayman structure because they trust it more and there are tax benefits,” said Zazos CEO and founder Alexandre Maluli.
But US fintechs like Brex, for example, do not accept that the account is opened through the Cayman structure, but rather by the Delaware LLC, which is a pass-through company.
“Hey, Brex, Henrique Dubugras, we’ve been sending a ton of people to Brex because we understand that if founders in Latin America have an EIN [a US tax identification number used to identify a business entity], they can open a cash account even with a holding in Cayman. Is that the case?” tweeted the CEO of entrepreneur network Latitud, Brian Requarth, on Monday afternoon.
Brex responded that it requires companies to be incorporated and registered in the US. In other words, it is possible to open an account with Brex through the Delaware entity.
One of the products Latitud offers is a “package” for startups, which includes lawyers to structure the company in Brazil, the Cayman Islands, and Delaware.
Kamino also offers this type of solution. Benjamin Gleason, a partner at Kamino, told Bloomberg Línea that both Latitud and Kamino used to offer SVB as an option for founders because it was the bank that allowed startups with a holding company in the Cayman Islands and operations in Brazil, but not in the US, to open an account.
“It’s important to think about diversification, keep current account balances below $250,000 secured at different banks, and look to open a relationship with at least one or two systemically important banks,” he said.
For example, JPMorgan or Morgan Stanley might be options for cash-heavy startups, or KeyBank or FifthThird for startups under $10 million valuation, in addition to allocating investments in securities considered safe such as Treasuries and Money Market sweeps, according to Gleason.
However, he does not advise transferring and keeping all dollars in just one bank, as happened with SVB, “let alone in banks and fintechs with less history and systemic importance,” he said.
“It should also be thought of within a larger treasury management strategy across the companies and countries in which the startup operates.”
Major US banks such as JPMorgan and Morgan Stanley open accounts for the Cayman Islands jurisdiction, but the process is more time-consuming compared to a US entity, Bloomberg Línea has learned.
According to Brites, traditional banks ask for up to 60 days to open an account. This is because American banks understand that, because it is an offshore company, the risk is higher.
Since March 9, dozens of startups and funds have sought to open an account at Morgan Stanley, which was the case of Zazos.
In a conversation with Bloomberg Línea, Zazos’ founder Alexandre Maluli explained that his startup has a holding company in the Cayman Islands, which has as its “daughter” the Delaware LLC company, which has under the Brazilian structure.
“All the money we raise goes to the Cayman Islands. For me to bring money to Brazil, I first need to go through the Delaware account and there needs to be a bank account for each company. I had both in SVB and could do internal transfers, it was simpler. They are companies in different countries, but they had bank accounts in the same bank,” said Maluli.
Now, he needs to open accounts in the US for the Cayman and Delaware entities.
“Normally we leave the bulk of the money in Brazil, but I don’t intend to bring it here now. The one in the Cayman Islands, mainly, I will leave in the US, probably invested in the US Treasury because the government is safer than the banks,” he said.
To bring the money to Brazil, Maluli explained that he needs to transfer from the Cayman Islands to Delaware, and from Delaware to make the international remittance.
“The recommendation we have received [as founders] is to diversify, to have $250,000 in each bank,” he said.
The challenge with the bigger banks however is that they are not as quick to open accounts, according to Latitud CEO Brian Requarth.
“You can simultaneously open accounts with ‘the bankers’, but it’s better to focus on fintechs as well. Meanwhile, you can focus on an intermediary company so you don’t have legal implications. Many founders in our community have raised seed money and it’s hard to move with a lower balance sheet,” Requarth said at a conference on Monday afternoon.
Andy Mattson, a partner at accounting firm Moss Adams, said startups are worried about the banking system overall and don’t know where to put their money.
“A lot of founders want to know if they can put the amount into their personal accounts, but that can bring up some legal issues,” Mattson said at the Latitud conference.
“When you’re a bank in the US, there’s a significant amount of compliance rules you need to follow, and many don’t want to work through the bureaucracy of dealing with tax havens.”
Dan Green, a partner at law firm Gunderson Dettmer, warned that if a founder, in their personal account, takes funds for the company, “it needs to be something very short-term, and it should be made clear that it is not financial compensation to the founder.”
“It must be approved by the board. It’s not something to be done without thinking,” Green said at the conference, adding that JPMorgan “is very interested in increasing its capital in Latin America”.
“They are moving much faster to get those accounts allocated.”
There is no rule prohibiting large banks from opening accounts for companies that have a Cayman Islands structure, according to Green.
Brian Hutchings, also a partner at Gunderson Dettmer, said putting money into a venture capital fund’s account is not an ideal situation, “because you are taking the company’s money and giving it to a single shareholder”.
“The situation is the same, the board needs to approve it and it needs to be documented,” he said.