The story so far: On March 10, US banking regulators took control of Silicon Valley Bank (SVB), which normally caters to startups, venture capitalists and tech companies, after it suffered a sudden collapse. Days earlier, the bank, headquartered in Santa Clara, Calif., announced it was facing a liquidity crunch and failed to raise money by either selling shares — or itself — scaring investors and prompting a run on the bank bank led. On Sunday, the US government and regulators acted together to guarantee savers’ money was returned in full. And in India, Union Minister of State for Information and Technology Rajeev Chandrasekhar met Indian startups to assess the impact on them and try to help them bridge the situation.
What is the US government’s stance?
The Joe Biden administration quickly intervened when the Federal Reserve, the US Treasury Department and the Federal Deposit Insurance Corporation (FDIC) decided to guarantee all deposits with the SVB. On Sunday, it also seized another bank, New York’s Signature Bank, which had major exposure to cryptocurrency and digital asset investors. “Your deposits will be there when you need them,” President Biden said at the White House, an announcement intended to reassure the American public that the country’s banking system is sound and has government support.
He also made it clear that taxpayers would not have to foot the bill for the government’s actions and that the money would come from the fees banks pay to the FDIC.
How is India’s startup ecosystem affected?
According to media reports, at least 21 startups in India had investments in SVB, which had assets of approximately US$209 billion and total deposits of approximately US$175.4 billion as of December 31, 2022. Chandrasekhar said India’s startups have collectively deposited about $1 billion of their funds with SVB. Earlier in the week, the startups briefed the minister on the consequences, specifically difficulties in continuing their business due to blockages on international transfers, lack of communication from US authorities, limitations on withdrawals and so on. Treasury officials said the failure of the SVB would likely affect some Indian tech start-ups and IT firms, but that any broader “contagion” that might emerge would not reach Indian shores in a hurry, nor would it pose “systemic risks”. .
A number of industry officials said that while the immediate impact from the bailout would be minimal, the shift in sentiment could have some dampening effect on the broader tech industry for a while. Dallas-based Everest Group CEO Peter Bendor-Samuel said The Hindu Given that the US guarantees all deposits, the direct impact on the industry and Indian companies is “likely small”. Avinash Vashistha, chairman emeritus of Tholons, a New York-based global innovation advisory and investment firm that had a banking relationship with SVB, told this newspaper: “Many start-ups will be impacted and may have difficulty making US payrolls and investments a week or so. For startups and venture funds that have less than $2,50,000 per account with SVB, they should have a bit of a problem.”
What kind of headwind can start-ups expect?
According to Mr. Bendor-Samuel, and many in the tech industry agree, the shift in sentiment after the SVB collapse will lead to more caution. Perhaps further retreat from the tech industry could have a dampening effect on all startups’ ability to raise money and create headwinds in their customer base. “This will not kill space, it will slow it down,” he said.
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“Apart from delays, investments may be reduced,” said Mr Vashistha. “This only adds to the uncertainty already in the markets due to inflation, Fed rate hikes and liquidity [concerns],” he added.
What lessons are there to learn?
R. Ray Wang, Principal Analyst & Founder, Constellation Research Inc., expects bigger banks in the US like Citi, Chase, Bank of America and Wells Fargo to get bigger. “Start-ups need banks that are simple and support their needs. We need more regional banks, not fewer. A second banking crisis in 15 years worries the stability of investors and start-up founders,” he said.
Technology industry insiders emphasize that this is an excellent opportunity for start-up boards to form treasury management subcommittees, particularly for those who have raised Series A or higher funding rounds and are sitting on a sizable cash pile. Board members of Indian startups need to prioritize financial planning and set clear strategies for dividing funds between two or three banks, they say. Anirudh. A. Damani, Director of Artha India Ventures said prudent financial management should be an essential practice. “It can also help put the money to work, especially in an environment of rising interest rates, to reduce burnout and potentially increase runway by as much as a quarter.” This prudent financial management could significantly affect the company’s runway [possibly] his rating,” he emphasized.
The recent crisis at SVB underscores the need for Indian founders to take treasury management seriously, tech investors have said. “Founders of any size must spread their deposits across multiple banks and establish board-approved treasury plans that outline a clear strategy for managing funds, including approved liquid and money market funds,” said Mr. Damani, echoing others in the industry. “In this way, startups can mitigate risk and protect their businesses from unexpected financial upheaval. As an early-stage startup investor, I urge founders to learn from the SVB crisis and take action to ensure their companies are well-prepared to weather any financial storm that may come their way.” he added.
What lies ahead?
Phil Fersht, CEO and chief analyst at UK-based HFS Research, said that while the SVB disaster will impact investment in the US tech start-up space, US companies are hurting the Indian sector could see as more stable in the long run -maturity bets. “Start-ups in India operate in a different market environment. Companies like Microsoft and Google are already investing in the Indian startup ecosystem. There are still huge sums of money swelling many global investment funds, and India’s start-up scene is starting to look a lot more attractive than Silicon Valley to many investors and VCs,” he said.
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Others, like Constellation Research’s Wang, said it was a wake-up call for the startup ecosystem to reevaluate risk management strategies. “Policies that force bank relationships to be tied to loans can exacerbate risk concentration. It’s best to diversify where you put your funding so you don’t get bankrun and that kind of scenario,” he said.