Late on Friday, it was a long wait for several Indian start-up founders who had accounts at the troubled Silicon Valley Bank (SVB) with over $250,000 deposited there. That’s more than US regulators – who closed the bank – said they would be insured by, with the Federal Deposit Insurance Corporation (FDIC) asking companies with accounts with more than $250,000 to contact a toll-free number.
The panic had started. The tech industry is SVB’s largest client with a large number of Indian start-ups, especially in the SaaS (Software as a Service) sector serving US customers who have accounts with the bank.
“It’s 4 in the morning and we’ve been on hold for over half an hour at the toll-free number provided by the FDIC. We have around $2 million in our SVB account and need it to make payroll,” a founder told The Indian Express on Saturday morning.
As of December 2022, SVB has total assets of $209 billion and total deposits of approximately $175 billion. In a press release, the FDIC said depositors will have access to their insured deposits – limited to $250,000 – as of Monday (March 13). However, data submitted by the bank to the FDIC at the end of 2022 showed that 89 percent of its $175 billion in deposits was not insured. The bank’s crisis sent shockwaves across global markets, including India.
Depositors with amounts in excess of the insurance cap will receive receivership certificates for their uninsured balances, meaning businesses that have large deposits stuck in the bank are unlikely to get their money out anytime soon. This is where the real problem lies.
Apart from being a banking partner, SVB has also been an important lender to several Indian start-ups when the sector in India was starting to take shape around 2010-11. Among its most notable bets was an investment totaling $1.7 million in One97 Communications, the parent company of Paytm, which it later sold. Other start-ups that received funding from SVB include Bluestone and CarWale.
While the impact of the SVB failure on Indian start-ups will only begin to become clear from Monday, many founders said not being able to withdraw more than $250,000 from their accounts would hit them hard.
Amidst the funding winter, where the availability of funds for start-ups is shrinking, this can prove to be a major hindrance, especially for young businesses.
“If this persists for more than a few weeks, we may face problems even preparing payroll for our employees,” said one founder with more than $250,000 in the bank.
In a survey conducted on WhatsApp groups of Indian founders whose start-ups were incubated by US-based technology start-up accelerator YCombinator (YC), a majority of founders said they had more than $250,000 with SVB, Some of which were parked. Over $1 million in their SVB accounts. SVB was also a preferred personal banker to many ultra high net worth individuals in the technology sector.
On Saturday, leaders from several venture capital firms, including Accel, B Capital, Ribbit Capital, and Lightspeed Venture, met to discuss the aftermath of the SVB failure, which they described as “deeply disappointing and worrying.”
In a joint statement, they said that in the event SVB is purchased and appropriately capitalised, “we will strongly support and encourage our portfolio companies to resume their banking relationships with them”.
The crisis at the bank began when it sold all of its securities available for sale at a loss of $1.8 billion, mostly in the form of US Treasury securities.
SVB received huge deposits during the tech boom of 2020-2021 and invested the proceeds in long-term treasury bonds while interest rates were low. However, with rising interest rates in the US, the market value of these Treasuries fell significantly below SVB payouts, triggering withdrawal requests from depositors.
While the bank hit a 52-week high of $600 per share, it was trading at less than $40 in Friday’s premarket session.
One founder explained that SVB has traditionally been the default banking partner for most start-ups because of its heritage in technology and experience banking high-growth and high-burn companies.
Basically, it deals with businesses that traditional banks typically shy away from given the perceived risk of failure and lends to start-ups when other sources of funding are hard to come by. “I would say that till a few years back, it was SVB only; Start-ups today are starting to find other funding options,” said the person cited above.
Kunal Bahl, founder of e-commerce site Snapdeal, said that in the early days of the start-up, when it was facing a cash crunch, SVB had given a small loan to the firm to keep it afloat. “In 2012, in the midst of changing our business model from online coupons to e-commerce, we found ourselves short of cash because investors didn’t believe we could pull off. Silicon Valley Bank gave us a small line of credit, which kept us going.
SVB introduced an easier way for start-ups in India to deposit their cash, as companies can open their bank accounts without the need for a United States Social Security Number or Income Tax Identification Number. In addition, as one of the founders explained, SVB has a very strong network of lawyers and accountants in the United States who, for a fee, actively advise high growth start-ups to the bank.