SVB collapse: Some Indian startups will see pain before things get better

SVB's collapse is having and will have a meaningful impact on India's startup Image: Noah Berger / AFP

In a globalised world, as the financial crisis and the pandemic taught us, everyone gets hurt when something goes wrong. Silicon Valley Bank’s (SVB) collapse on Friday, while not comparable with those black swans, will still have a significant impact on India’s tech startups.

With a large number of India’s software startups operating in the US as their primary market, the expectation is SVB’s collapse will clearly have some impact on them, especially in the near term. It’s only on the magnitude of the disruption that venture capital investors differ.

And the crisis is still unfolding. Even as the US government moved quickly to contain the impact of California-based SVB’s failure—America’s second biggest bank collapse—New York’s Signature Bank has also failed, Associated Press reported earlier today. And a third troubled bank, First Republic Bank, has added funds from the US Federal Reserve and JPMorgan Chase, to strengthen its position, according to AP.

“SVB's collapse is having and will have a meaningful impact on India's startup scene, especially given the wave of US domiciled SaaS companies and deep tech companies that have emerged from India in recent years,” says Mohanjit Jolly, a partner at the VC and PE firm Iron Pillar.

“SVB was THE institution for startups and VCs, both from a normal banking relationship as well as being the go-to partner for venture debt facilities,” he points out.

“India-based founders don’t know who to turn to as an alternative to SVB. Likely true for founders in other countries too,” Gokul Rajaram, a well-known San Francisco-based technologist and prolific venture investor, wrote on Twitter on March 10.
 
“From what I hear, SVB was the only bank who’d bank a Delaware C Corp with founders who didn’t have an SSN (social security number). Unique, tech forward bank. Shame what’s happening.”
 
Rajaram adds: “Important to note that SVB’s loan book (their assets) are quite good. They hold a ton of securities. They just didn’t have enough cash to meet withdrawal demands, and when that happens you are not a bank anymore... Fear and panic killed a healthy key ecosystem player.”

US government financial institutions, including the central banker Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation have said depositors’ money in the failed banks will be protected, and that they will be able to access their money soon. They also said in a statement on March 12 that US taxpayers’ money will not be spent on bailing out the banks, unlike in the global financial crisis of 2008.

“The standard insurance for any customer is only the FDIC insured $250,000, which is not going to help much as most startups at SVB had significantly larger sums at stake,” one well-known VC investor, who didn’t want to be named, told Forbes India.

The companies most impacted are going to be the ones with deep relationships with SVB that often spanned deposits, payroll and venture debt. While all of these are important, meeting payroll will be one of the first immediate concerns as the end of the month approaches, the VC investor points out. For the ones that do bank with SVB and have large deposits and other relationships at the bank, it is going to affect their operations in the near term, the person says.

Sanjay Swamy, managing partner at Prime Venture Partners, which has backed several successful Indian tech startups, has a more optimistic view. “In the short term, most of the Indian companies are relatively isolated and in no immediate panic, because their money is split across countries,” Swamy said in an email to Forbes India.

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From a longer-term risk perspective, most companies that have a banking relationship with SVB have invested in money market accounts managed by firms like Goldman Sachs and Morgan Stanley—so actual exposure to SVB is limited. It is expected that all these funds will be made accessible very shortly, Swamy says. “I expect the situation to be resolved swiftly - possibly as early as middle of next week.”

Startups that may be banking with SVB exclusively “will have trouble” over the next two weeks if their working capital needs are more than the $250,000 that is insured by the US government for each depositor.

But this is likely to be a “very small number” and even those startups should be able to make alternative arrangements, Swamy says. “Companies that are in the process of receiving funding from VC funds that are banking with SVB may see a delay of a couple of weeks,” he adds.

Jolly, at Iron Pillar, notes that startups that took venture debt from SVB were often required to exclusively bank with SVB. Therefore, “many simply did not have a choice of diversifying or moving capital to other banks”. “That lack of diversification actually exacerbated both the cash crunch for startups and the bank run at SVB,” he adds.

As to whether depositors will get their money back, including those Indian tech startups that banked with SVB, “it’s too early to say”, Swamy says. “Timing of cashflows is always crucial for startups and that in itself may create a lot of issues even if they can recover their money over the long term,” he adds.  
One US-based VC investor in India’s startup scene, who didn’t want to be named, said there is talk of money being returned in phases: First, today, the $250,000 that is insured by the US government. Second, “some meaningful portion” available by March 17; the investor adds there are rumours that as much as 40-50 percent of the remaining deposits might be returned by then.

And third, there will be a longer wait, likely to be some months or even longer, depending on the time and mechanism of liquidating the remaining assets of SVB to distribute capital to depositors. “It's the third piece that will clearly have the most impact on startups, in terms of uncertainty of both quantum and timing,” the investor says.

The optimistic view, in general among most VC investors, is that losses will be small.

That said, in the short term, “the episode has had massive disruption to the ecosystem”, Jolly at Iron Pillar says, from the short-term issue of meeting mid-March payroll to much larger issues of overall cash and operations planning, creating and executing contingencies for cash conservation and further equity-based funding or loans.

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In the very short term, companies may have to borrow to meet March payroll, and irrespective of the size of the company, will likely have unplanned costs associated with that exercise, he says.

“I have spoken with several early stage, mid stage and growth stage startups in the past 48 hours,” Jolly says. Those that have a majority, or all their capital tied up with SVB are obviously the most worried, and are “scrambling to steady operations, bridge in the near term and think through other cash planning scenarios.”

Options being considered are pushing payables—which in turn will have an impact on other startups that may be vendors—accelerate receivables if possible; have enterprise customers pre-pay and pay early, with discounts for accelerated payments; reducing cash burn (on customer acquisition, for example) and even salary deferrals.

This is also an incredible opportunity for larger tech players such as Microsoft, Amazon, Google and others to show leadership and genuinely help startups during this crisis, Jolly says. “That goodwill will pay dividends for years to come.”

He also offers some commentary specific to Iron Pillar portfolio startups: Most of them are diversified or not banking with SVB, he says. Those that have been impacted are thinking in three phases: Short-term, mid-term and long-term, and modifying their plans for all three phases depending again on the timing and availability of capital.

Overall, in the ecosystem, the entrepreneurs themselves are stepping up to help each other, he says. There have been short-term cash solutions offered, with new-age fintech players coming out with emergency no-cost or extremely low-cost bridge financing options; entrepreneurs sharing templates for contingency and scenario planning; sharing notes around best practices for communicating with teams, partners and vendors; and senior employees stepping up to offer salary deferrals so that juniors could get paid.

This event will accelerate the shift towards focusing on profitability that had already started taking hold in the second half of 2022, as global macroeconomic conditions worsened. “As a result, real businesses will be created and 5-10 years from now, we will look back and talk about companies that actually got a huge positive inflection from this event, including Indian startups,” Jolly says. “While the pain is real right now, leaders will emerge from this episode and create generational companies.”