The last 48 hours have been alarming for many Indian-based startups in the US. The failure of Silicon Valley Bank (SVB). I literally have been hearing from hundreds of founders from various industry sectors asking for help on how they can get through this. They are asking, “Do I have to lay off my workers?”
The SVB crisis unfolded in just 48 hours, following the bank’s announcement that it was planning to raise funds worth more than $2 billion to plug gaps in its balance sheet. This led to widespread panic among its clients and depositors and also triggered a massive selloff.
As panic grew among its investors and depositors, SVB was forced to shelve its fundraising plan, but the damage was already done.
What is Silicon Valley Bank?
Silicon Valley Bank offers financial and banking services to help, as you capitalize on business opportunities, raise capital, protect equity, manage cash flows, and access global markets.
Silicon Valley Bank was a favorite lender among tech startups and VCs prior to its downfall as it lent money to eve
What Led to this Bank Crash?
Normally, a bank accepts deposits from its customers and uses the deposits to extend loans to other customers. They also invest some of the money elsewhere. They do this on the assumption that these depositors will not withdraw their deposits at the same time.
SVB also did the same and invested the depositors’ money into safe instruments like bonds that can be withdrawn only at maturity but can be sold in case of emergency. Post the 2008 depression, the interest rates were very low in the US. Low interest means cheaper loans, leading to VCs investing in startups, which in turn benefitted the banks like SVB as these startups deposited their money at the bank.
Things turned around and last year the US Federal Reserve started hiking the interest rates – it went up to 4.75%. This led to reduced returns on the bonds and a slowdown in startup funding, further reducing the deposits at SVB.
In early March, SVB sold securities worth $21B for a loss of $1.8B to ensure that it stays liquid. There were also plans to sell $2.2 billion worth of shares. Things didn’t go as planned and Moody’s downgraded the bank’s credit rating. VCs asked portfolio companies to pull out their deposits, leading to the bank’s inability to fulfill withdrawal commitments. This led to the bank trying to sell itself. Regulators stepped in and shut the bank.
In the case of SVB, it occurs that a lack of liquidity, rather than a capital shortage, was at the root of the events that led to its collapse. Ambiguity related to internal operations and an unwillingness to account for the more extraordinary needs of SVB’s clients may have also contributed to the blind sighting of regulators and SVB’s abrupt collapse.
Impact of SVB on Indian Startups
Many Indian startups who wish to expand globally, especially in the US, are the clients of SVB due to its easy regulatory norms. These companies need not necessarily have to have their office in the country. The US-based bank invested in 21 startups in India, but the amount of investment is not clearly specified. Other startups that received funding from SVB include Bluestone, Carwale, InMobi, and Loyalty Rewards. Accel Partners, among the VC players, has a partnership with SVB. The SVB website stated that the Accel India founders opted for SVB to accelerate growth. Indian startups that had accounts with SVB are likely to suffer. To answer the question, “Will there be layoffs?” Likely, for these startups if they are not in a strong position. It is just a matter of time – till the liquidity issue is solved.
So, who will be hurt most by the SVB crisis?
There is a growing sense of tension among SVB’s uninsured investors, who have parked substantial amounts in the bank. These depositors, which include many start-ups, venture capitalists, and tech companies among others, will now have to wait and watch as the situation evolves.