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What the Banking Crisis Means for the Beauty and Wellness Industry

Published March 28, 2023
Published March 28, 2023
Troy Ayala

The failure of Silicon Valley Bank (SVB) shook the global economy, not just the tech sector that the bank largely served. SVB catered to venture-capital–backed companies, including some beauty and wellness brands, for example, Veracity, Rebundle, and The Flex Co. On March 10, the bank was taken over by regulators after what was effectively a run on the bank, which occurred when depositors rushed to withdraw tens of billions of dollars worth of deposits. The subsequent collapse led SVB to become the largest US bank to fail since the 2008 global financial crisis.

Within days of shutting down SVB, regulators also took over New York's Signature Bank over concerns about the bank’s concentration in the crypto sector and its large share of uninsured deposits. The shutting down of both banks comes in the wake of cryptocurrency exchange FTX filing for bankruptcy at the end of 2022, which left users unable to access their money. While FTX customers may have to wait years to get their money back (if ever), customers of SVB and Signature Bank will have full access to their deposits—even accounts with more than $250,000, the limit of Federal Deposit Insurance Corporation (FDIC) insurance. On March 26, First Citizens announced it would acquire much of SVB, with customers of SVB automatically becoming customers of First Citizens.

More banking troubles emerged after the collapse of Silicon Valley Bank and Signature Bank. Credit Suisse’s stock and bond prices took a sharp decline after a prolonged period of financial losses and scandals, which were only magnified by the failures of the two banks. On March 19, Swiss investment bank UBS agreed to buy Credit Suisse for nearly $3.2 billion in a deal brokered by Swiss officials to try and prevent a global banking crisis. Credit Suisse is one of around 30 banks worldwide deemed “too big to fail” because the bank is of such importance to the global financial system.

On March 22, the Federal Reserve raised interest rates again by another 25 basis points, or 0.25%, in an attempt to curb inflation. The Fed acknowledged recent turmoil in the banking industry but added that “the U.S. banking system is sound and resilient.” The rate increase makes borrowing money more expensive for companies and consumers, which is expected to slow down economic activity and calm inflation.

After a dizzying few weeks, the dust has seemingly settled. The government stepped in and is doing what is necessary to ensure Americans’ deposits are safe and tamp down inflation. But the effects of the recent bank collapses, rescue, and rate hikes are still largely unknown.

How will the reverberations of this shake out for the beauty and wellness industry? We talked to brand founders and experts to find out how they’re coping with the effects of the recent banking turmoil.

The Silicon Valley Bank Collapse

The failure of SVB was the catalyst for the events that followed. SVB primarily served tech start-ups, but beauty and wellness brands based out of California’s tech capital also banked at the now-failed institution and spent an anxious few days wondering what would become of their deposits.

The news came at the end of the workweek when many founders were attending one of two industry conferences that were happening concurrently: the consumer packaged goods trade show Expo West in Anaheim, California, and Austin’s SXSW. Between Thursday March 9, when customers started pulling their funds out of SVB, and Sunday March 12, when regulators stepped in, these beauty and wellness founders faced the possibility of not being able to pay their employees and losing almost everything they worked for seemingly overnight.

“We banked exclusively with SVB, so we were impacted immediately,” said Ciara Imani May, founder of Rebundle, a sustainable synthetic braiding hair start-up. “We had no idea if we'd get all of our money back following the collapse and had to ‘stop transacting’ for the weekend.”

Cary Lin, co-founder of Common Heir, says her brand didn’t bank directly with Silicon Valley Bank, but with one of the other regional banks that came under pressure since the SVB collapse. “It was a massive ‘drop everything you're doing and put out the fire’ moment on the Friday before the weekend,” she says. “The biggest impact to us was the stress, constant communication with investors and information sharing with other founders, understanding legal liability with any potential impact on payroll and the board, and figuring out how to de-risk our deposits and act quickly in the best interests of the company. As first-time founders who had never considered the risk of our deposits as one of the things we needed to worry about, this episode was incredibly nerve-wracking until the Fed stepped in to help resolve it.”

For Lauren Schulte Wang, founder and CEO of sustainable period care brand The Flex Co., the situation became dire when Wang realized she couldn’t access any of the company’s money held with SVB. At this point, regulators hadn’t stepped in to assure customers that their deposits were safe, so Wang had to move quickly to ensure she could run payroll at the start of the following week for her staff. “Our CFO/cofounder drove to a physical retail bank location to open up a new business account,” she said. “We informed the team that [we] would not miss or delay paying our team as we knew that they have medical expenses, mortgages, rent, and families to feed. Without access to any additional sources of capital, [we] decided to use [our] liquid life savings to fund their new business account in order to fund payroll the following Monday.”

Veracity, a hormone-testing–based skincare brand, had banked with SVB since the brand’s seed financing round in 2021. When founder Allie Egan first heard rumblings of problems going on at SVB, she was initially worried but hesitant about moving Veracity’s funds. “Having lived through 2008, I am fully aware of how bank runs work and I morally hesitated about being a part of it,” she tells BeautyMatter.

Egan was speaking at SXSW as SVB was coming undone, which provided her some comfort since there were many other indie brand founders who were going through the same range of emotions. “It was extremely hard to focus as the fate of our business and so many others were in the hands of regulators from Friday morning until the news of a full backstop came through on Sunday night,” she says. “It felt surreal. Like your entire life and the life of your company was turned upside down only for it to go back to normal like nothing had happened.”

Claire Chang is the founding partner of igniteXL Ventures, a beauty- and wellness-focused venture firm based in Palo Alto, California, that was significantly impacted by the collapse: 25% of the firm’s portfolio companies were banking with SVB and 10% had significant uninsured funds. “As you can imagine, it was an emotional roller coaster, with the looming possibility of losing the entire uninsured deposit balance, to partial deposits being available, to 100% protection,” Chang tells BeautyMatter. “It was an uncertain and intense 72 hours.”

"As first-time founders who had never considered the risk of our deposits as one of the things we needed to worry about, this episode was incredibly nerve-wracking until the Fed stepped in to help resolve it.”
By Cary Lin, co-founder, Common Heir

Investor Reaction

Founders called on their investors for advice on what to do next during this unprecedented event, with many advising to move funds out of SVB as swiftly as possible. “They steered us towards the larger, ‘safer,’ too-big-to-fail banks and advised us away from the neobanks,” says Lin. “One actually was standing in our bank branch the very moment I called to let them know we were moving funds out, and [they] said, ‘Do what you have to do.’"

When Wang made the decision to move her family’s liquid life savings into the new business checking account she opened amidst the bank run, she says that her investors advised against it. They suggested that she wait and see what would happen with the bank, or delay payroll by furloughing employees. “My husband and I felt it was the right thing to do to not delay pay, not even by one day, to the team,” she says. “We were able to successfully run payroll that Monday, and later that day, we gratefully received all of our SVB funds into our new bank account.”

As an investor, Chang’s role was to provide immediate support and resources. “Our team was glued to multiple screens nonstop monitoring investor chat rooms, which banks founders were 'safe' to open new accounts with, who the right people to talk to were at these banks, alternative lenders that could provide emergency funds, Zoom calls led by the FDIC and legal experts on what the possible outcome may look like come Monday, what resources companies can access, etc.” she says. “Also, we take mental wellness seriously especially at times like this.  We made ourselves available 24/7 and were checking in with our founders to make sure they were doing all right.”

The immediate consequences of SVB’s collapse have forced these founders to be extra cautious with where and how they store their funds. “I am definitely diversifying where we bank and keeping an even closer eye on our burn rate as it will likely only become harder to fundraise in the near future,” says May.

Lin is also diversifying her company’s deposits now, although she notes she’s not sure that “this exact flavor of crisis will ever happen again.” Wang now has two bank accounts to keep her finances secure, which she says works for the stage her company is currently in. The Flex Co.’s current revenue is in the eight figures, with plans to expand and grow in the coming year. “But it’s not feasible for a company our size with just 30 employees and two working in accounting/finance full-time to spread our money across more than two bank accounts,” she says.

Egan has no plans to move her money out of SVB. “Right now, they continue to provide the best access to capital, and with the government support, it is literally the safest place to have your money (for the next 12 months at least!),” she says. “Practically, we’re allocating more money to money market mutual funds to both 1) earn interest on our cash (taking advantage of the high interest rate environment!) and 2) diversify where funds sit. We are also renegotiating our banking relationships to give us access to ‘rainy day’ funds when absolutely necessary.”

“I think the bank crisis and the ‘VC recession’ will limit the availability of capital for ineffective products and that, ultimately, that will raise the standard.”
By Anna Gudmundson, CEO + co-founder, Sensate

What Happens Next

While SVB’s customers are out of the woods for now, the far-reaching consequences of the recent banking crisis have yet to be seen. Venture capital investors had already started pumping the brakes on aggressive funding over the prior three quarters, which is part of what led to lower deposits at SVB, and ultimately, its demise. The recent events only point to more uncertainty in the future, which may drive investors to be more conservative in their approach to funding start-ups in the beauty and wellness space.

“Available capital at all stages of a company’s growth is the life fuel that allows brilliant innovation and ideas to get to the market, evolve, and add value to our lives,” Anna Gudmundson, CEO and co-founder of Sensate, tells BeautyMatter. “It is critical that there are no gaps in ability to find funding at any point in the growth journey. Many excellent entrepreneurs and companies would never get to provide their value without the support of capital. This is especially true [for] products that are ground-breaking and require a lot of research and development budget.”

According to Chang, the main change, which is consistent across much of venture, is a re-emphasis on safe banking practices (e.g., having secondary banks and distributing deposits across 2-3 accounts) and expert-led sessions on best practices in the post-SVB era. “As for the overall funding landscape, this will have short-term implications for sure as many of the investors' immediate attention is on supporting their portfolio companies,” says Chang. “Therefore they are less likely to have time to take new meetings. In the long term though, the investors will be back looking for the next exciting team to back. However, the precarious macroeconomy remains, so the overall focus for founders should be capital efficiency, optimize runway, and getting to profitability.”

Fear is in the air, and it’s spreading rapidly. A decrease in venture capital investment hits historically marginalized founders the hardest. “Women and Black founders consistently receive less than 2% of investor dollars each year,” says Wang. “So my concern is about the impact to any business who’s looking to raise capital with a woman or Black founder because underserved founders are already disproportionately impacted by shortfalls in investor capital. And women and Black founders play a critical role in the wellness industry.”

Not only will this banking crisis stifle innovation, but it may also dampen the female entrepreneurship that is often what pushes the beauty and wellness industry forward. “Personally, this was a very hard week,” admits Egan. “I have two small children, and when you are put through a stress like this it makes you question all that you sacrifice to be an entrepreneur. I’m not backing down, but I know many other women, especially those with families, might be less inspired to take the leap—they already have so much on their plate.”

Egan hopes investors will provide founders with more resources and best practices to preemptively manage cash risk in the future. While founders often wear many hats, the role of financial risk manager is a heavy burden to bear when you’re also juggling marketing, accounting, product development … the list goes on.  “It is too much,” she says. “We need the support of our investors, our banks, and our governments so we can spend our time building (and occasionally being with our families!)”

Chang is hopeful that the recent challenges will build resilient founders that ultimately strengthen their business for the long term. “How you show up at times like this says a lot about what you are made of,” she says. “As investors, we are eternal optimists, and as such we believe that founders today are stronger than ever before, having gone through catastrophic events like COVID and the SVB crisis all within the span of three years—that's A LOT!”

According to Lin, the recent banking crisis highlights the level of interconnectedness of the tech and beauty world, the former of which enables e-commerce and allows the latter to sell online.

“There was definitely an ‘aha’ moment where it hit me that beauty isn't immune to what happens in tech, and that we joke about lipstick being recession-proof, but I'm not sure that it's recession-proof on the supply side,” she says.

Similar to the “lipstick index,” in beauty, challenging financial times seem to increase the consumer demand for wellness products.

“I think the bank crisis and the ‘VC recession’ will limit the availability of capital for ineffective products and that, ultimately, that will raise the standard,” says Gudmundson. “And in a time where we’re the most stressed and sick we’ve been in modern times, wellness will certainly continue to grow as a sector. Let’s hope there is capital to support great innovation and strong founders!”


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