The unusual Silicon Valley Bank fallout and brunt on startups
On 7th March it was one of America’s best banks, listed on the Forbes Annual list. Start-ups considered them as ‘friends with benefits’. But on 10th March, the sixteenth largest bank in the US collapsed.
Anushruti Singh March 16, 2023
MORE IN Focus
Cryptocurrency under PMLA lens: Know what it means and how it will change the crypto space
Emergency Credit Line Guarantee Scheme: To extend or not to extend!
How AI chatbots like ChatGPT are transforming service desks for SMEs
The SME IPO platform: Its high points and why embracing it makes sense
Angel Tax: Impact on start-ups and non-resident investment firms
Once the darling of start-ups, the Silicon Valley Bank (SVB) is now the talk of the whole world due to its dramatic collapse.
As US regulators closed and seized its deposits, the lender’s share price hit rock bottom as customers ran out of deposits. According to the experts, the main reason behind the sudden failure of SVB is investing.
Yes, you heard it right.
Let me tell you the reason in brief. With so many depositors, and tripled cash, the bank invested the majority of its assets in US bonds after making a fortune by investing in tech start-ups. But the US government or Federal Reserve Bank manipulated the interest rates to slow down the rate of inflation.
This is where things started to go wrong. Due to the rate hike, the bond rates got knocked down and fell sharply. Then start-up funding dried up, leading to start-ups withdrawing large sums of money. And this whole scenario resulted in the collapse of the SVB.
After Washington Mutual’s failure in 2008, this is the largest bank failure of our times. One twitter user, reacting to the SVB saga, wrote an interesting thread explaining the mayhem. “It will take months now to recover all the funds, months that some companies do not have to wait for cash to hit their accounts. It’s painful, but it could have all been avoided, especially if the outcome is indeed the max or the near max recouping of funds,” reads the thread.
So how could this have been avoided?
The thread explains, “Well for one, SVB should have been doing more prudent portfolio rebalancing and should have been much more communicative way ahead of this incident, both to the investors and the large depositors.”
You can read the thread here—
Are Indian start-ups going to suffer?
The bank reported banking 44 per cent of 2022’s venture-backed tech and health care IPOs, and 55 per cent in 2021, as per media reports.
The sudden loss of access to funds has left Silicon Valley reeling. Companies such as Roku, Roblox, space company Rocket Lab USA, Etsy and Vimeo among many others are witnessing major setbacks.
In another development, start-up accelerator, Y Combinator, submitted a petition to the US Government stating that the SVB episode will affect approximately 10,000 small businesses.
“By that measure, we can estimate that payroll-related furlough or shutdown will impact more than 10,000 small businesses and start-ups. If the average small business or start-up employs 10 workers, this will have an immediate effect of furlough, layoff, or shutdown, affecting over 100,000 jobs in the most vibrant sector of innovation in our economy,” the petition said.
Now the question is, what will be the ramifications of this collapse in the financial world in the US and the companies operating within it? Will it have a contagion effect on the entities having dealings with them? In other words, are Indian companies going to suffer?
There’s a mixed bag of reactions coming out.
Ashu Garg, a prominent Silicon Valley based venture capitalist and early-stage investor for over two decades believes that the collapse of the Silicon Valley Bank is likely to adversely impact the Indian start-up scenario, as it has injected a lot of uncertainty into the sector overnight. “I think it is a big hit for Indian start-ups,” he says.
“Most Indian start-ups that do business in the US, use this bank because it is one of the few institutes willing to work with the Indian banks. A lot of the banking institutes do not want to work with overseas customers,” he points out.
Over the years, SVB has been a real supporter of the Indian start-up space and has provided banking services to it.
“So, SVB has been able to work with the Indian companies that do not have US employees. So, if they (are gone), it will be very problematic for the Indian (companies),” Garg further adds.
Jyoti Prakash Gadia, Managing Director at Resurgent India, also feels that there will be serious ramifications of this event in the finance world. “Luckily our banking system is well-regulated, and it is likely to have a limited effect on the Indian banking system. However, as SVB was primarily a major banker for the start-ups in the US, the start-up ecosystem in India is also likely to be impacted adversely,” he says.
Several start-ups in the US have invested in Indian start-ups and some Indian start-ups also have overseas subsidiaries. All such entities who have either deposited with SVB or have any other relationship with it in the form of debt or investments, will face uncertainty and a likely loss depending on the size of their deposits and their other transactions with it.
The companies in the tech and life sciences sectors are likely to be the most impacted as these sectors had major deals with SVB. Some Indian banks are already reported to be in touch with the companies affected by the SVB episode to assist them to tide over the crisis.
According to Tracxn, SVB has invested in approximately 21 Indian start-ups. Although the amount invested in these start-ups has not been disclosed.
Recently, Paytm issued a clarification about its relationship with SVB through a tweet, saying that the SVB was no longer a stakeholder in the fintech giant. SVB had exited even before the recent crisis at the bank, Paytm’s CEO and Co-founder Vijay Shekhar Sharma said.
Impact to be short-term
Over the years, the Silicon Valley Bank (SVB) has been a reliable and go-to bank for many Indian SaaS and Y Combinator-backed start-ups, owing to its versatility, its adaptability and its fundraising abilities.
Meanwhile, the Indian companies which were conducting business in the US, will take some time to figure out an alternative to the SVB.
At the same time, many experts feel that this event will only have a short-term impact.
Gaurav VK Singhvi, Co-Founder at We Founder Circle says, “While the news of its sudden collapse came as a surprise to many, forcing many start-ups to transfer their accounts to different banks, the jitters due to its downfall will have a limited impact on Indian start-ups, both directly and indirectly.”
“The general market sentiments have also been impacted due to the sudden debacle and its likely impact on global markets in the short to medium term. A lot will depend on the further actions of the US regulators and the government as regards to the resolution process and the bailout package if any,” says Gadia. He recommends that deposits should not be pulled back from the bank, which sounds plausible as banks do function on limited reserves.
“Nevertheless, we must also recognise that SVB’s clients have been struggling for cash over the past year and with the restricted runway, the consequences could be hugely damaging if they do not withdraw their cash in time for payroll and other operational purposes,” Singhvi adds in.
Neeraj Tyagi, Co-Founder & CEO at We Founder Circle asserts that the SVB’s woes were tied closely to liquidity, which was aggravated by declines in deposits and net interest margins at the bank linked to broader tech sector vulnerability and higher interest rates.
In that scenario, large corporate depositors may decide to keep their available funds out of the short-term lending market while they wait for more market clarity, he tells us.
“However, the disintegration of SVB may deprive tech firms of an important source of funding. SVB may have facilitated bespoke financing options and complex lending packages that tech customers frequently require, and the complexity of the lending products may even make the sale of SBV’s assets more difficult. Pragmatically, capital-intensive startups will likely struggle to launch and remain solvent without customised capital,”
In response to the chaos, T V Mohandas Pai, former Infosys director and chairman of Aarin Capital, advised the founders of India-centric start-ups to “be careful” and to “not get carried away” by investors who force the companies that they fund to domicile in the US and open bank accounts there.
He also talked about the need for the Reserve Bank of India (RBI) to collaborate more closely with the start-up ecosystem in order to make it easier for Indian ventures to do global business.
Currently, the start-ups, especially the companies that were conducting their businesses via SVB, will need to keep their fingers crossed. They will need to show agility by taking their next steps in the right direction with an emphasis on strong fundamentals instead of a reliance on speculation.