SUMMARY
The SVB collapse is the second-largest bank failure in the US since the Washington Mutual meltdown in 2008. The ‘startup bank’ was among the top 20 banks in the country in December 2022, with $209 Bn in assets
Due to its long list of services and startup-friendly policies, Silicon Valley Bank emerged as a popular option among global startups looking to expand or shift their base to the US
Although some Indian banks have opened startup-focused divisions, their tech infrastructure and attitude towards agile and innovative new-age businesses need a rethink.
The Silicon Valley Bank (SVB), the fabled banker to the tech startup ecosystem, had finally ended up in such a deep hole that there was no way out. Federal regulators took it over on Friday the 10th after its stock plunged by 60% the previous day, followed by a panic-triggered bank run.
As per available data, depositors attempted to withdraw $42 Bn after the stock market crash. People managed to take out around $16 Bn within a day, leaving the bank with negative $1 Bn of cash when the Federal Deposit Insurance Corporation (FDIC) took over to control the mayhem.
Things snowballed after SVB announced on Wednesday (March 8) its plans to shore up the balance sheet post its $1.8 Bn loss as it had sold several long-term bonds for some much-needed liquidity. Although the group’s CEO Greg Becker asked its customers to ‘stay calm’, panic had spread. In exactly 48 hours, a bank that had been around since 1983 and survived the dotcom bust at the beginning of the millennium, the global meltdown of 2008 and the coronavirus crisis of recent years was dead.
But things took a turn for the better, thanks to the intervention of the US government. SVB is now operational as Silicon Valley Bridge Bank, N.A., a newly created, full-service FDIC-operated ‘bridge bank’. It is open for business, and new and existing depositors have full access to their money.
FDIC is also taking all necessary measures to minimise losses and looking for a potential buyer. Recent updates show HSBC Bank has acquired SVB’s UK arm.
SVB Aftermath: Responses, Reactions And Industry Support
The SVB collapse is the second-largest bank failure in the US since the Washington Mutual meltdown in 2008. The ‘startup bank’ was the 16th largest lender in the country in December 2022, with $209 Bn in assets.
There is no reason to think that SVB’s failure will not directly affect the Indian startup ecosystem. To begin with, most Indian SaaS companies maintain U.S. accounts and most of them bank with SVB. In addition, more than 60 Y Combinator-backed Indian startups have $250K+ stuck in their SVB accounts, and nearly two dozen companies have more than $1 Mn tied with the lender.
“I am personally in touch with at least 15 Y Combinator founders who are directly affected because of this, and the threat is real. It is not the ‘1%’ stated by some armchair SJWs, [but] rather pre-seed, seed and even pre-series A startups who employ over 500 people collectively!” Anurag Rathore, VP of products at BharatPe, wrote in a LinkedIn post.
Meanwhile, Rajeev Chandrasekhar, India’s union minister of state for entrepreneurship, skill development, electronics & technology, tweeted that he would meet the Indian startups to understand how the SVB meltdown impacted them.
Startups like Truly Financial, Tazapay, and RazorpayX have come forward to help their peers open virtual accounts in the US for deposit settlements. Many investors including venture capitalists like Vinod Khosla, firms such as Redpoint Ventures as well as entrepreneurs such as OpenAI CEO Sam Altman have promised to support their portfolio companies with payrolls and the ongoing cash crunch until the founders get access to their money.
Interestingly, many from the startup fraternity supported SVB soon after the collapse. And their tweets indicated the bank’s strong relationships with its startup clients.
The Rise Of Silicon Valley Bank
Conceived by Bill Biggerstaff and Robert Medearis over a game of poker, the Silicon Valley Bank was established in 1983 to provide credit and banking services to the growing number of tech startups in and around the area.
Under the leadership of its first CEO, Roger Smith, the company started to cater to the startup market long overlooked by the traditional financial services industry. The reason: Startups had to submit the details of their assets and profits to be considered creditworthy, but many failed to meet those parameters.
SVB was different from the average bank, though. It was willing to bet on startups that other banks considered too risky. It also understood that startups needed more than just access to capital; they also required guidance and support from a financial institution that understood their unique needs. By the mid-1990s, it had become the go-to bank for technology startups and its client base grew.
Randy Bean, the founder and CEO of the strategic advisory firm NetVantage Partners (now acquired), wrote in his latest blog on Forbes that by the mid-1990s, the emergence of the world wide web made tech professionals from traditional Wall Street companies rapidly migrate to the West Coast – which later became Silicon Valley – with dreams of creating the next Netscape, Apple Computer, Microsoft and Sun Microsystems.
The company [SVB] grew from a small community bank to a diversified, global financial services organisation, catering to a client base without geographical boundaries. A financial partner to innovators worldwide, SVB offered services such as commercial banking, venture investing, wealth management and investment banking to dynamic and fast-growing startups as they scaled.
According to news reports, 88% of the Forbes 2022 Next Billion Dollar Startups are SVB’s clients, and nearly 50% of all US-backed tech and life science companies banked with it.
The Bank For Startups
Due to its long list of services and startup-friendly policies, Silicon Valley Bank emerged as a popular option among global startups looking to expand or shift their base to the US. This was particularly beneficial for Indian founders who had to flip their domicile to Delaware to raise funding from Y Combinator.
The bank enabled VC-backed tech startups to park their funding quickly and facilitated the movement of their investments in startups easily. It also wielded significant clout in the Indian startup ecosystem due to its willingness to cater to C corporations whose founders did not have social security numbers. Not many US-based banks would do this for overseas startups.
“We also loved the community aspect, which was the biggest strength of SVB. It used to hold VC games night, networking dinners, Holi and Diwali celebrations for Indian founders, assuring them that their bank is a trusted partner in their business,” Ayush Jaiswal, cofounder of the edtech company Pesto.Tech, told Inc42.
For more than two decades, SVB’s venture capital arm [SVB Capital] invested in startups from all over the globe, including those in India. It backed several Indian startups such as BlueStone, Paytm, Naaptol and Shaadi.com. Additionally, it invested as a limited partner in prominent VC firms, including Sequoia Capital, Accel, Kleiner Perkins, Ribbit Capital, Spark Capital and Greylock, among others.
However, the status of many of these investments is currently unknown. In a LinkedIn post, BlueStone founder and CEO Gaurav Singh Kushwaha wrote, “During our inception in 2011, SVB invested $1 Mn. Since then, they’ve exited our cap table by transferring their shares, in entirety, to another private entity. Today, BlueStone bears no exposure to SVB.”
Similarly, Paytm founder Vijay Shekhar Sharma also mentioned that SVB already exited the company long back.
SVB Collapse: What It Means For The Indian Startup Ecosystem
According to Amit Gupta, director at Factoryl, a growth facilitation company, in the larger scheme of things, this [SVB crisis] is not as relevant to Indian tech startups as to Silicon Valley, where 60% of venture-funded companies banked with SVB and even VCs parked their money there, essentially LP money.
As he mentioned on LinkedIn, although ripple effects will be there in India, people will survive, and the jugaadu (resourceful) Indian founders will find a way out. For many, it’s a short-term pain, but in the medium term, nothing much.
Neeraj Tyagi, cofounder and CEO of WeFounderCircle, a startup investment platform for early stage founders, concurred, adding that instead of trying to find a solution from the Indian perspective, the country’s banking ecosystem could gain valuable insights from what happened.
“There are some startup-friendly banks like HSBC, YES BANK, IDFC FIRST Bank and others. But the ecosystem needs much more in terms of safety of funds, ease of banking, lending and investment. This is a challenge and opportunity to strengthen banks and startup engagement models,” he stated in a LinkedIn post.
Indian startups went with SVB instead of homegrown banks because the latter would rarely project themselves as partners to founders. Although some banks have opened startup-focussed divisions, their tech infrastructure and attitude towards agile and innovative new-age businesses need a rethink.
More importantly, what happened at SVB was not a regular bank run but a fatal domino effect that could hit any bank. Very few will survive if more than 20% of their deposits get called in 24-48 hours.
“This incident is a critical reminder for every entrepreneur to re-evaluate their treasury management practices. As a result, we will advise our portfolio startups to diversify their banking receipts and split their treasury across multiple options for better security, liquidity and returns. Furthermore, the swift collapse of a 40-year-old institution emphasises the fragility of even the most established institutions and underlines that no one is bulletproof,” said Anirudh Damani, managing partner at Artha Ventures Fund.
Will we see Silicon Valley Bank in a new avatar when the turmoil is finally over, and the best-case scenario takes place? This can only happen if another entity acquires SVB, everyone gets their deposits back, and pay cheques continue to roll out as smoothly as before. More importantly, the FDIC’s role in restoring public trust in the US banking system will be crucial.
Meanwhile, the jittery startup ecosystem can only hope the new owners will continue the old bank’s legacy. Recounting his experience about banking in India, Damani of Artha Ventures pointed out how most banks operate on archaic tech stacks that are bug-riddled and need to catch up with the business demands of 2023.
Others cite how the MSMEs struggle to raise capital in India as legacy banks and FIs fail to provide support due to rigid rule books. This lack of support and understanding can significantly hinder the growth and success of startups in a post-SVB era if the bank’s playbook is unfollowed in the new regime.
“SVB had a deep understanding of the startup ecosystem and provided innovative financial solutions to cater to the unique needs of startups. All these made it an attractive option for Indian companies. We hope that the new owners will continue to run a bank that startups will not only want to bank with but will also bank on,” said Damani.
While the Indian startup ecosystem would be relieved that there wasn’t much damage from the SVB collapse, the inherent problems with running global businesses from India have not gone away.
“Even after all these problems at Silicon Valley Bank and its complete collapse, it’s still preferable to register in the US for most startups as these problems in terms of remittances and LTCG won’t go away immediately,” a Delhi-based former investment advisor and early-stage fund manager told Inc42.
Other experts and investors pointed out that with SVB out of the picture temporarily, India has the opportunity to position GIFT IFSC as an alternative for offshoring or flipping companies.
Like SVB, GIFT IFSC allows several advantages for startups operating in international markets, such as dollar accounts, no regulatory approval for foreign investments, and other tax exemptions. Investors believe that GIFT IFSC has to become the beating heart for Indian startups making global products.
Essentially, the recommendation is to create an SVB-like institution that can empower startups. So even as it no longer remains an option for Indian startups, the SVB playbook might well manifest itself in any alternatives that come up.
