The collapse of Silicon Valley Bank (SVB) last week sent shockwaves across the start-up world. The 16th largest bank in the United States was among the leading banks serving the large technology and start-up ecosystem. Start-ups headquartered not just in the US, but in many other countries, including India, banked with SVB and had deposits in the bank.
So, after regulators announced on Friday that the bank was being shut down, many start-ups would have had a sleepless weekend wondering how they would recover their money and what were the alternatives in case their deposits were stuck.
Many of them had sizeable balances in SVB. For instance, Mumbai-based company Nazara Technologies said two of its step-down subsidiaries had a cumulative balance of $7.75 million, or about Rs 64 crore in SVB.
According to Tracxn, a market intelligence platform, at least 21 start-ups in India had exposure in SVB.
The Santa Clara, California-based SVB, which had $212 billion in assets, was shut down by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (FDIC) was appointed as the receiver. A new bank was created and all insured deposits were transferred to this bank to protect depositors. Uninsured depositors would be paid an advanced dividend within a week and future dividends would be paid as and when FDIC would be able to sell SVB's assets.
According to the National Venture Capital Association (NVCA), the "most pressing concern" was that many companies had deposits far in excess of the FDIC-insured amount of $250,000, which may not cover payroll for many companies.
"Without access to additional funds, or if access is delayed, companies will be faced with difficult decisions ranging from furloughing employees to potentially shutting down," it said in a statement.
Garry Tan, CEO and president of Y Combinator, the Silicon Valley accelerator, said within its community, one-third of the start-ups with exposure to SVB used SVB as their sole bank account and as a result, they would fail to have the cash to run the payroll in the next 30 days.
"By that measure, we can estimate that payroll-related furlough or shutdown will impact more than 10,000 small businesses and start-ups. If the average small business or start-up employs 10 workers, this will have an immediate effect of furlough, layoff, or shut down, affecting over 1,00,000 jobs," he said in a petition sent to US Treasury Secretary Janet Yellen among others. Over 5,000 CEOs and founders had signed the petition.
There is hope. In a joint statement by Yellen, Federal Reserve Board chairman Jerome Powell and FDIC Chairman Martin Gruenberg said depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer, the statement added.
Shareholders and certain unsecured debtholders, however, would not be protected. Also, any losses to the deposit insurance fund to support uninsured depositors would be recovered by a special assessment on banks, as required by law.
Similar measures were announced for Signature Bank, a New York-based crypto financier, which was also shut down over the weekend.
The regulators will now have to find a suitable buyer for SVB. The UK arm of SVB is being acquired by HSBC Holdings for just one pound.
Over the past few quarters, fundraising among start-ups had already slowed as investors tightened their purse strings amid rising interest rates and worries of a looming recession. The collapse of a large institution like SVB, deeply involved in the start-up ecosystem, will shake investor confidence further in the near-term.
"A lot of start-ups might not have a bank account in the SVB but the investors' confidence can get impacted for the short term in the US and global markets, which could result in a further slowdown in funding from global investors which could directly impact Indian startups," said Gaurav Singhvi, an angel investor and co-founder of We Founder Circle.
Start-ups will also now look to diversify their banking partnerships, following the closure of SVB. Already, Indian banks, which have offices in the GIFT city (Gujarat International Finance Tec City) are said to be approaching start-ups to help them set up dollar accounts there.
"There is an opportunity in the making. If the Indian banks are targeting start-ups to open accounts in their Gift city branches, it bodes well for both banks and startups in India alike. It means startups have a safer means of banking and financing in India," said Singhvi.
The announcement by the US government to assure depositors that they would be able to access their money has helped avoid panic and a fluttery moment for most Indian start ups that have an exposure to SVB, said Ankur Bansal, co-founder of BlackSoil, a venture debt fund.
Indian businesses that had an exposure to SVB primarily did so to either have a holding company structure to enable fund raising from US investors or operating businesses to work with customers there.
"The current pain will be short term in nature and most Indian startups with deposits in SVB should be able to roll over the current tide without too much heartache (though with some heartburn)," said Bansal.
The start-ups will now switch to other US banks that can offer solutions for start-ups and the Innovation economy, he said.
