How will the collapse of Silicon Valley Bank impact Indian startups?

According to financial experts, multiple startups globally, including those with an Indian nexus, will need to reevaluate their financial positions in light of the biggest bank failure since 2008

The Silicon Valley Bank (SVB), founded in 1983 in Santa Clara, California, was a prominent financial institution providing banking services to innovative companies in the technology and life sciences sectors. Its client base included some of the world's most successful startups, such as Etsy, Docusign, and Pinterest, among other tech giants. However, SVB made global news headlines last week when it collapsed—the second-biggest financial disaster since 2008, causing a global panic.

Why did it collapse? 

A combination of factors caused the collapse of SVB. Sumit Mehrotra, a senior business anchor at CNBC_Awaaz, who has been covering the stock market for nearly two decades now, explained how SVB had invested heavily in long-dated US government bonds, which the bank eventually started selling due to a lack of cash at hand. 

“As bond yields (the amount that an investor makes off a bond investment) increased, depositors withdrew money because they had better options (the right to buy or sell an underlying asset). SVB was forced to liquidate assets at a loss,” Mehrotra tells The Established.

Additionally, SVB lent significant amounts of money to risky ventures (i.e., technology startups that other traditional banks would avoid) that were not backed by sufficient collateral. As a result, when these ventures failed, the bank was left with a significant amount of bad debt, leading to a liquidity crisis. Moreover, the bank failed to diversify its portfolio, focusing less on business and household accounts like other retail banks. This led to further losses as customers scrambled to withdraw their money once news of the bank failure broke.

How will this impact Indian investors?

The collapse of SVB may also have significant implications for Indian investors and startups. India has a rapidly growing startup ecosystem, with many Indian startups relying on funding from foreign investors, including those in the United States. The downfall of SVB may lead to a decline in foreign investment in Indian startups, which could hinder their growth and development. SVB was a prime choice among Indian startups t because it allowed them to open accounts internationally without a social security number (SSN) or a physical presence in the US, which other traditional banks like Wells Fargo and JPMorgan Chase mandated. 

“The collapse of SVB will impact Indian startups as they receive a lot of funding from US investors. At least 60 Indian businesses, including all those that have received funding from incubator programmes such as Y Combinator (a technology startup accelerator that has launched more than 4,000 companies since its inception in 2005). On Y Combinator's insistence that all of its companies bank with SVB, at least 400 companies have funds stuck with SVB,” Mehrotra added.

Moreover, Indian startups that have received funding from SVB may face significant challenges in accessing further funding, which could impede their ability to innovate and expand.

Alvin Foo, the managing partner of Chain Valley Capital, says, “The impact of the SVB collapse on Indian startups and investors is likely to vary depending on their exposure and relationship with the bank. Indian startups with accounts or loans with SVB may face difficulties accessing their funds or repaying their debts. They may also lose access to credit lines or other financial services that SVB provided.”

Although international transfers were initially suspended, recent developments demonstrate some relief as withdrawal limits have been limited. It is yet to be determined if it will be possible if companies will be able to transfer all of their money at once, or what the exact specifics of the withdrawal process will look like. 

What’s next?

While the collapse of SVB has raised concerns about the risks associated with investing in startups and the technology sector, other financial institutions in the US with significant exposure to the technology sector are not yet facing the same challenges as SVB. 

According to Foo, Indian startups should contact their SVB account managers or representatives for updates and guidance on their accounts or loans. They should also contact the US Federal Deposit Insurance Corporation (FDIC), which has taken over SVB's operations, to claim their insured deposits or seek assistance.

“Moving forward, Indian startups will need to adapt to different norms and expectations of doing business with other banks or countries or even seek alternative sources of funding or financing from other banks or investors, especially those with experience or expertise in the tech sector. They may have to deal with different regulations, currencies, languages, and cultures. They may also explore opportunities for mergers, acquisitions, partnerships, or collaborations with other startups or firms that can provide support,” Foo says. 

Lessons learned

SVB’s downfall will allow Indian startups to reevaluate their future strategies. While the situation continues to unfold, the larger economic impact on the Indian financial market, if any, will be more apparent. Meanwhile, startups should split their reserves between different banks to avoid placing their bets in one place.

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