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Thursday, March 23, 2023

Explained | Will the SVB collapse impact Indian start-ups?

The story so far: On March 10, banking regulators in the U.S. took control of the Silicon Valley Bank (SVB), which typically catered to start-ups, venture capitalists and tech firms, after it suffered a sudden collapse. Days earlier, the bank, headquartered in Santa Clara, California, had announced that it was facing a cash crunch, and failed to raise money by either selling shares — or itself — spooking investors and leading to a run on the bank. On Sunday, the U.S. administration and regulatory authorities acted in concert to guarantee that depositors’ money would be repaid in full. And in India, Union Minister of State for Information and Technology Rajeev Chandrasekhar met Indian start-ups to assess the impact on them and to try and help them tide over the situation.

What stand has the U.S. government taken?

The Joe Biden administration moved in quickly with the Federal Reserve, the U.S. Treasury Department, and the Federal Deposit Insurance Corporation (FDIC) deciding to guarantee all deposits at SVB. It also seized another bank on Sunday, New York’s Signature Bank, which had a large exposure to investors in cryptocurrencies and the digital assets sector. “Your deposits will be there when you need them,” President Biden said at the White House, an announcement aimed at reassuring the American public that the country’s banking system was sound and had the backing of the administration.

He also made clear that taxpayers would not have to foot the bill for the government’s actions, and that the money would come from the fees that banks pay into the FDIC.

How is India’s startup ecosystem affected?

According to media reports, at least 21 start-ups in India had exposure to SVB, which had approximately $209 billion in assets and about $175.4 billion in total deposits as of December 31, 2022. In a Twitter Spaces interaction on Thursday night, Mr. Chandrasekhar said India’s start-ups collectively had about $1 billion of their funds deposited in SVB. Earlier in the week, the start-ups had apprised the minister about the fallout including specifically about difficulties in carrying on their business due to blockages in international wire transfers, lack of communication from U.S. agencies, limits on withdrawals and so forth. Finance Ministry officials said the failure of SVB was likely to impact some Indian tech start-ups and IT firms, but that any broader “contagion” that might arise would neither reach Indian shores in a hurry nor were they likely to trigger “systemic risks”.

A number of industry stakeholders said while the immediate impact would be minimal because of the bailout, the change in sentiment may have some dampening effect on the entire tech industry for a while. Peter Bendor-Samuel, CEO, Dallas-based Everest Group, told The Hindu that given that the U.S. was guaranteeing all deposits, the direct impact on the industry and Indian firms, “is likely to be modest.” Avinash Vashistha, Chairman Emeritus, Tholons, a New York-based global innovation advisory and investment firm that had a banking relationship with SVB, told this newspaper: “Many start-ups will be impacted and may have challenges in making U.S. payroll and investments for a week or so. For start-ups and venture funds that have less than $2,50,000 per account at SVB, they should have a minor hitch.”

What headwinds are start-ups likely to face?

According to Mr. Bendor-Samuel, and many in the tech sector agree, the change in sentiment after the collapse of SVB, will lead to more caution. Perhaps, a further pull-back from the tech industry may have some dampening effect on all start-ups’ ability to raise money and create some headwinds in their client base. “This will not kill the space but slow it down,” he said.

Editorial | Lessons learnt: On the Silicon Valley Bank episode

“Besides delays, possibly investments will be reduced,” said Mr. Vashistha. “This just adds to the uncertainty that already is in the markets as a result of inflation, Fed rate hikes and liquidity [concerns],” he added.

What are the lessons to be learnt?

R. Ray Wang, Principal Analyst & Founder, Constellation Research Inc., expects larger banks in the U.S. like Citi, Chase, Bank of America, and Wells Fargo to get bigger. “Start-ups do need banks that are simple and supportive of their needs. We need more regional banks, not less. A second banking crisis in 15 years is troubling for the stability of investors and start-up founders,” he said.

Tech industry insiders stress that this is an excellent opportunity for start-up boards to form sub-committees for treasury management, particularly for those that have raised Series A rounds of funding or higher and are sitting on a significant cash pile. Indian start-up board members must prioritise financial planning and establish clear strategies for dividing funds across two to three banks, they opine. Anirudh. A. Damani, Director, Artha India Ventures, said prudent financial management should be an essential practice. “It can also help put the money to work, especially in a rising interest rate environment, to reduce burn and possibly increase runway by up to a quarter. This prudent financial management could significantly impact the company’s runway and [possibly] its valuation,” he pointed out.

The recent crisis at SVB highlights the need for Indian founders to take treasury management seriously, tech investors said. “Founders of all sizes must diversify their deposits across multiple banks and establish board-approved treasury plans that outline a clear strategy for managing funds, including approved liquid and money market funds,” Mr. Damani said, echoing others across the sector. “By doing so, startups can mitigate risks and protect their businesses from unexpected financial upheavals. As an early-stage startup investor, I urge founders to learn from the SVB crisis and take action to ensure their businesses are well-prepared to weather any financial storm that may come their way,” he added.

What lies ahead?

Phil Fersht, CEO and Chief Analyst at U.K.-based HFS Research said that while the SVB disaster will impact investments in the tech start-ups space in the U.S., on the flip side, U.S. firms may view the Indian sector as more stable for long-term bets. “Start-ups in India operate in a different market environment. Firms like Microsoft and Google already invest in the Indian start-up ecosystem. There are still huge amounts of money swelling many global investment funds, and India’s start-up scene is starting to look a lot more attractive than Silicon Valley for many investors and VCs,” he said.

Also read | HSBC acquires British arm of stricken Silicon Valley Bank

Others like Constellation Research’s Wang said it was a wake-up call for the start-up ecosystem to reassess risk management strategies. “Policies that force banking relationships to be tied to loans can exacerbate concentration of risk. It’s best to diversify where you put your funding so that you don’t head into bank runs and this type of a scenario,” he pointed out.

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