Next week’s developments could be critical for several Indian startups as they try to determine the fate of their funds held by the beleaguered tech and startup lender SVB Financial Group in California.
Quite a few Indian startups have claimed that they do not have enough money in Silicon Valley Bank (SVB) to pay salaries to their employees and fund their existing ventures.
Global banking and financial stocks plummeted on Friday (March 10) as US regulators shut down SVB Financial Group, a US-based commercial lender, following an accelerated decline in its inventory that resulted in a market loss of more than $80 billion.
Largest US bank to fail since 2008
SVB became the largest US bank to fail since the 2008 financial crisis, leaving billions of dollars belonging to businesses, investors, and depositors stranded.
The SVB crisis erupted in barely 48 hours following the bank’s statement that it planned to raise more than $2 billion to repair balance-sheet holes. This caused considerable concern among its clients and depositors and a significant selloff.
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When investor and depositor panic rose, SVB was compelled to abandon its fundraising strategy, but the harm had already been done.
California regulators closed the troubled tech and startup lender on Friday, and it has been taken over by the US Federal Deposit Insurance Corporation (FDIC). The night-time shock occurred as SVB’s stock dropped a further 60 per cent in premarket activity as terrified depositors hurried to withdraw funds.
“Unique, tech-forward bank”
Rajeev Chandrasekhar, Minister of State for Skill Development and Entrepreneurship and Electronics and Information Technology, tweeted, “The @SVB_Financial closure is certainly disrupting startups worldwide. Startups are an imp part of #NewIndia Economy. I will meet wth Indian Startups this week to understand impact on thm n how @NarendraModi govt can help durng this crisis (sic).”
Indian startups like Shaadi, CarWale, Sarva, Loylty Rewardz, TutorVista, Naaptol, and others have raised funds from SVB Financial Group. Gokul Rajaram, a US-based investor and advisor, in a tweet encapsulated the dilemma of the Indian startup founder in his tweet: “India-based founders don’t know who to turn to as an alternative to SVB. Likely true for founders in other countries too. From what I hear, SVB was the only bank who’d bank a Delaware C Corp with founders who didn’t have a SSN. Unique, tech-forward bank. Shame what’s happening.”
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According to TechCrunch, a US-based online publication that reports on startups, more than 60 YC-backed Indian startups have more than $250,000 in accounts with SVB, and nearly two dozen have more than $1 million, according to a survey conducted among the startups. In addition, dozens of young Indian startups backed by YC, Accel, Sequoia India, Lightspeed, SoftBank, and Bessemer Venture Partners banked with Silicon Valley Bank, sometimes as their only banking partner, and were unable to withdraw their funds on time on Thursday, TechCrunch said. YC, or Y Combinator, is an American technology startup accelerator launched in March 2005.
On its website, the Federal Deposit Insurance Corporation wrote that it would attempt to recover “the utmost sum possible from the sale of assets.” Several VCs and Indian startups are unable to withdraw their investments from the bank because they do not have an alternative US bank account. Indian startups operating out of India are incorporated in the US to serve international markets, TechCrunch said.
But Rajaram believes that SVB’s loan book (assets) is quite good, but they do not have enough cash to meet withdrawal demands, “and when that happens, you are not a bank anymore.”
He also pointed out fear and panic have killed a strong and healthy key ecosystem player. “Sure, interest rates led to a drop in bond prices, but the bonds themselves would still have paid out at maturity. SVB was solvent. They didn’t have the liquidity to pay all their creditors (account holders) simultaneously. I would bet that no bank, even the largest one, has that ability if all creditors showed up on the same day to demand their deposits back. I think this asset will be really good for someone to step in, buy and stabilize.”
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Analysts have said that startup founders should start connecting with their investors, set up a team to understand the crisis, and start scouting for alternative ways to raise money so that salaries can be paid.