Indian Startups & The Silicon Valley Bank Brouhaha

Read Our Latest Coverage On — Silicon Valley Bank Collapse And How It Might Shatter The Valley Dream For Indian Startups?

Silicon Valley Bank (SVB), an American commercial bank, has kept a lot of Indian tech startups on tenterhooks in the last 24 hours. As part of its Q1 2023 strategic actions update shared on March 8, the bank sold substantially all of its Available for Sale (AFS) securities portfolio worth $21 Bn, resulting in a loss of $1.8 Bn and a panic attack on the public markets.

As a result, shares of SVB Financials, the parent arm of the US-based Silicon Valley bank, plummeted 60.41% to $106.04 on March 9. This is the lowest SVB’s shares have touched in the last five years since 2018.

On March 10, the SVB stock was down 66% in pre-market trading hours and is now worth less than $1 Bn. The trading is now halted on SVB stock and the newsrooms are buzzing with possibilities of insolvency. As per a CNBC report, the bank is in talks with large financial institutions about a potential takeover.

Source: Yahoo Finance (at 4:57 PM Indian Standard Time]

The bank officials have been assuring their clients that there is enough liquidity available with the bank. As mentioned in SVB’s Q1 2023 report, the securities were sold with the intention of reinvesting the proceeds, and to raise approximately $2.25 Bn, along with a commitment from General Atlantic, a leading global growth equity fund and longstanding client of SVB, to invest $500 Mn.

“We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash-burn levels from our clients as they invest in their businesses,” SVB’s CEO Greg Becker said in a letter to shareholders on Wednesday.

SVB, a popular bank among tech startups, has built up its reputation as a game changer with founders and VCs, owing to its modern banking products. As claimed, 88% of the Forbes 2022 Next Billion Dollar Startups are SVB’s clients while almost 50% of all the US-backed tech and life sciences companies bank with them.

Multiple VCs and founders that Inc42 spoke with said that many of the Indian tech founders, with a US parent or having their business in the region, have their money parked at SVB, thereby putting them in a fix in the current situation.

However, ever since the news has gone viral on WhatsApp groups and other social media platforms, many Indian neobanks have come forward to help Indian startups open their accounts in other US banks or get their money transferred to Indian accounts.

For instance, while TrulyFinancial has opened hundreds of accounts in the past eight hours for Indian startups, RazorPay has created a dedicated desk to help fellow startups in urgently moving funds from the US bank to India.

“Its 3 AM here and we have been working round the clock to ensure that we are able to help Indian founder open new US bank accounts on Truly Financial. Because of the regulations, we cannot disclose the names of the companies, but panic is definitely there and people are moving money in fear,” TrulyFinancial’s cofounder Kanchan Kumar told Inc42.

Panic Takes Everyone By Storm

“Shit hits the fan. Then, if you tell people that no, we sold very good loans, not bad loans, please don’t panic, guess what happens? People panic. Stocks down 60% and VCs are telling their startups to get their money out. Perception, in a banking system, is reality,” Deepak Shenoy, the founder & CEO of Capitalmind, said in one of his tweets.

Most startups are now withdrawing their money, fearing that they may not be able to access their accounts or will face difficulty in transactions, in case the situation escalates.

The founder of a growth-stage startup, who has an account in SVB, told Inc42 that between 8 PM and 2 AM IST on March 9, most of the groups he was interacting with went on fire. “Literally everyone panicked, Twitter was blown and VCs everywhere were telling their portfolio companies to withdraw their money,” he added.

“If everyone is telling each other that SVB is in trouble, that will be a challenge,” said Becker during a zoom call.

Understanding The SVB Fiasco 

The Silicon Valley Bank primarily works with venture-backed tech companies. In 2021, global venture funding reached $681 Bn, leading to a sudden rush of huge cash in the hands of the bank. In 2021, SVB saw a mass influx in deposits, which jumped from $61.76 Bn at the end of 2019 to $189.20 Bn at the end of 2021.

This was again a historic year of funding for India when Indian startups raised $42 Bn in funding, with US-headquartered enterprisetech unicorns Fractal and Uniphore raising two of the largest funding rounds. While Uniphore raised $400 Mn from NEA and March Capital, Fractal raised $360 Mn from TPG. Overall, of the 108 unicorns in India, around 10% have their headquarters in the US.

However, as deposits grew, SVB could not grow its loan book fast enough to generate the yield it wanted to see on this capital. As a result, SVB purchased a large amount (more than $80 Bn) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio.

“97% of these MBS were 10+ years in duration, with a weighted average yield of 1.56%. The issue is that as the Fed raised interest rates in 2022 and continued to do so through 2023, the value of SVB’s MBS plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield,” explained Jamie Quint, general partner at Uncommon Capital, in a tweet.

Simplifying this further, Loginext cofounder Dhruvil Sanghvi explained this is just like an FD one buys for 10 years at an annualised rate. In the last 12 months, the Federal Reserve has been consistently increasing its interest rates, which has gone up to 4-5%, which basically makes MBF an unattractive investment instrument.

Later, the 2022 funding winter further plummeted the fund inflow for SVB, disturbing the balance of fund flows. As shown in the slide below, the US-VC-backed investment activity has continuously fallen since Q4 21, while the bank expected a continued cash burn for H1 2023.

But liquidity is not an issue here. As mentioned in one of the tweets by Samir Kaji, Founder and CEO of Allocate, a bank run driven by panic is the real issue here.

“When the company itself sells so much stock at one shot, it typically creates market panic that something is wrong, and then more and more people start selling. Based on that, all venture funds are advising their companies not to park their money in SVB bank, as if the situation escalates, it may lead to more loss due to trickle-down effect,” Sanghvi added.

Disaster For One, Opportunity For Another?

Sources close to the development told Inc42 that competitive fintechs are now seeing this as a lucrative opportunity and are now reaching out to SVB’s clients.

“Everyone is taking money out. US-based fintechs Brex, Mercury, Meow, and UBS might’ve added a few billions last night to their valuation,” sources said.

Also, many of the stock market investors are now looking at the bullish side of the Silicon Valley Bank fall and taking it as a good buying opportunity. For instance, investor Keval Desai, the founder of early-stage VC firm SHAKTI, is not only telling the portfolio companies to withdraw funds but has also packed an order to buy the bank’s stock.

Anirudh Damani, Managing Partner at Artha Venture Fund further added that SVB’s market capitalisation suffered a significant drop following its failed financing round. However, it is worth noting that SVB had over $700 million in property, plant, and equipment and $212 Bn in deposits before this event. While any unexpected challenge can be disruptive, it is essential to remember that SVB is a well-established bank with a strong foundation.

Fears Of Insolvency And Challenges Galore 

Silicon Valley Bank is currently going through a fear of insolvency. As mentioned in one of the tweets, “Most people don’t realize how crucial Silicon Valley Bank is. Billions of dollars in venture debt. Untold amounts of warrants and convertible notes in early-stage firms. If SVB fails, this could be the Lehman moment for the startup world.”

Overall, the Indian startup ecosystem is not likely to have a major impact. As Shashank Randev, founder VC at 100x.VC, puts it, late-stage VCs might feel some heat as their institutional investors or LPs might be from the US.

Sanghvi highlighted that most funded companies park their funds in two to three banks and liquid investment options. Currently, there is no immediate risk of cash being wiped out.

However, as a precautionary measure, most companies are now withdrawing maximum cash from the bank, leaving a minimum $250K.

As of now, people are getting back to the roots of the problem as well. Many founders have openly shown their support to SVB and hope that it will move out of this fiasco soon.

Damani believes that the problem is getting magnified more due to the bank run. While some have raised concerns about the potential for systemic risks in the banking system, he believes this event is unlikely to have a broader impact. The financial industry is constantly evolving and adapting to new challenges, and I am confident that the sector will continue to operate efficiently and effectively.

“Overall, while the situation with SVB is undoubtedly unfortunate, it is also an opportunity for the industry to learn and improve. Of course, as investors, we must remain vigilant and diligent in our due diligence, but we can also stay optimistic about the long-term prospects of the financial sector,” added Damani.