The collapse of Silicon Valley Bank (SVB) has rattled cross-border startups in India, signalling their need to diversify banking relationships quickly and adopt better risk mitigation strategies.
“The scars of this will take years to resolve as founders, investors and boards turn highly cautious,” said Siddarth Pai, who is a co-founder at the venture capital firm 3one4 Capital and co-chair of the Regulatory Affairs Council at the Indian Venture and Alternate Capital Association (IVCA), highlighting how the crisis has had a ripple effect across borders given that the startup ecosystem is highly connected across the globe.
“Diversification of banking and professional relationships and networks is key for all businesses, not just startups. This will end up being pursued aggressively as startups begin to appreciate and take risk management a lot more seriously,” he added.
SVB does not have any direct operations in India — it sold its venture debt business to Singapore state investor Temasek in 2015.
However, several Indian startups like Nazara Technologies that have significant operations in the US have been in for a jolt as they have deposits in SVB. The digital gaming and sports platform’s two step-down subsidiaries, Kiddopia Inc and Mediawrkz Inc, hold cash balances in SVB that cumulatively account for $7.75 million (approximately Rs 64 crore). The company, in a statement, said the situation was “fluid”.
“Many of the Indian startups who flipped overseas have always gone to SVB as the first bank of choice for all. SVB exposure straddled stages, sectors and industries,” said Pai.
Among the worst impacted in the Indian startup ecosystem are the SaaS companies which also operate in the US – in fact, they are the ones who have, of late, been evincing significant investor interest and have the potential to become unicorns in the future.
Venture capital firm Iron Pillar, last year, had come up with a report stating how India would have more than 250 unicorns by 2025 and that most of them would be companies building for countries beyond India.
“Almost half of the Indian tech ecosystem is currently building up for the global market. In fact, that’s where the opportunity lies given the sheer scope in the larger ecosystem,” its managing partner Anand Prasanna had then told DealStreetAsia in an interview.
If these startups start feeling the heat from SVB’s collapse, the Indian tech ecosystem will automatically plunge into a crisis.
“While it is recommended not to pull back deposits from the bank which sounds plausible as banks do function on limited reserves, 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 on time for payroll and other operational purposes,” said Gaurav VK Singhvi, co-founder at We Founder Circle.
How deep is the crisis?
With the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) stepping in to prevent contagion, the SVB crisis seems to be under control for now, said experts.
“This is an important event but will impact only a selected portion of the economy i.e. startups. If handled swiftly, which the US government will do, this will pass through,” said Girish Vanvari, ex-tax head of KPMG and founder of advisory firm Transaction Square.
Many startups have already started opening accounts with larger banks, “especially those designated as ‘Systematically Important Financial Institutions” by the Fed,” said Pai.
However, that doesn’t solve the whole problem as SVB has already cornered a large chunk of the deposits. In the US alone, SVB used to bank 50% of the tech and life sciences startups.
“SVB was unique… majority of its deposit base and customer base is from a single industry that is facing current headwinds. This, along with a sub-optimal investment allocation precipitating a liquidity crunch unfortunately undid the bank,” said Pai.
However, the collapse of SVB is just an example of a larger problem within the banking industry in the US where several large lenders are under tremendous stress, with their combined unrealised losses amounting to $620 million, per a report by the FDIC.
News of the SVB collapse surfaced at a time when the markets have been jittery, and the turmoil now only seems to be spreading.
Major US banks lost around $90 billion in stock market value on Monday, Reuters reported bringing their loss over the past three trading sessions to nearly $190 billion. Shares of First Republic Bank tumbled more than 60% while peers Western Alliance Bancorp and PacWest Bancorp also fell.
This is despite, HSBC moving in to rescue the UK arm of SVB for £1, protecting customer deposits as part of the deal.