Silicon Valley Bank, which was founded in 1983, became a popular pick of the US startup ecosystem for banking needs. The bank witnessed a collapse last week, making it the second biggest banking failure in US.
Additionally, markets have been very volatile as in less than a week, three US banks have collapsed — Silvergate Capital, Silicon Valley Bank and Signature Bank.
Collapse of SVB has directly impacted Indian start-ups with deposits with SVB. The boards of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, and consulting with the president, and Treasury secretary, approved actions enabling the FDIC to complete its resolution of the Silicon Valley Bank in a manner that protects the depositors.
While the FDIC’s package takes away the risk of a loss beyond the insured US $250k and has provided reassurance to affected startups, minimising the potential impact of the collapse, using the entire deposit at SVB could be a challenge in the short term.
“Early stage startups are highly vulnerable to the impact of macro environmental events due to their fragile nature. Unlike large firms or mature stage startups, which have the ability to withstand larger shifts, early stage startups are susceptible to a level of uncertainty. However, we believe that the impact is behind us, given the Fed resolution,” said Manu Rikhye, Partner, Merak Ventures.
Manu also believes that the impact of the collapse is a bit of disruption and a more long term realignment of how people think about their banking relationships and deposits lying in banks.
Resonating to Manu, Sagar Agarvwal, Co-Founder & Managing Partner, Beams FinTech Fund said that he sees the SVB collapse as a passé event now, as bank has already been bailed out.
“However, there are multiple takeaways for startups — foresight for concentration risks like these and the ability to mitigate them on-time is a key component of running any business”, he said.
Commenting on a similar note, Ashish Fafadia, Partner, Blume Ventures highlighted that the consequences of the SVB collapse on startups could have been much more disastrous had the intervention not happened.
Many startups have offices in US and have open bank accounts with SVB. There are a few startups locating or domiciling in the US and that makes it imperative for companies to open their accounts with SVB or such banks.
Ashish said that the practice of such nature will certainly be questioned in the times to come.
“My broad outlook is that over the next few quarters startups are going to be much more sensitive in domiciling their company in the US just for the sake of it and will be diversifying their risks,” he further added.
While some investors are of the opinion that the resolution has brought down the impact and the affected startups will soon be in a better position now, some highlighted how investors have come into rescue and are managing the illiquidity.
“Investors have started putting together contingency funds to manage the illiquidity for their portfolio companies who have been deeply affected and need urgent help,” said Ruchir Lahoty, Managing Partner, MegaDelta Capital.
He further highlighted that it is complex for VC firms to invest for a very short tenure (working capital) and investing longer tenure capital (equity) has complexities around asset selection, quantum, valuation that need more nuanced decision making that can not be made overnight.
In the aftermath of the SVB collapse, Indian start-ups, especially those domiciled in the US, are turning to GIFT City to route their deposits.