SVB Bank failure serves as a wake-up call for Indian startups

• Since all deposits are accessible to SVB’s customers, day-to-day operations of startups will not be impacted much.
  
• For startups that have received equity funding from SVB, those shares are likely to be transferred to the acquiring entity.
  
• Going ahead, probably many Indian startups are expected to open their accounts in Gift City.
  

The French say Plus ça change, plus c'est la même chose — which means that the more things change, the more they stay the same. When SVB Bank failed, it was a repeat of the panic that gripped markets in 2008 after the Lehman crisis.

This sent shockwaves across the Indian startup community, as many startups, especially those incubated by American accelerator YCombinator, had deposited money with the bank.

According to reports, more than 60% YCombinator startups had deposits of more than $250,000 in the bank, which is the maximum amount insured by the Federal Deposit Insurance Corporation (FDIC), with some having parked more than $1 million with the bank.

Providing big relief to the Indian startup community, the Biden administration announced that depositors of the failed Silicon Valley Bank (SVB) will have access to all their money from March 13, and the government will make available additional loans to eligible depository institutions.

The effect on Indian startups

In a meeting with Indian startups, Union Minister of State for Electronics and Information Technology Rajeev Chandrasekhar gave them the assurance that the Indian government is working on ways to shield them from any economic uncertainty that may arise. He proposed a slew of measures to help Indian startups like enabling US fund transfer to Indian banks and development of innovative credit products like deposit backed credit lines.

Says Aviral Bhatnagar, VC at Venture Highway, an early-stage venture fund, “The impact will be more muted for India than the US because startups domiciled in India do not have SVB exposure. India potentially has 15-20% exposure (out of funded companies) to the US through being incorporated in the US. This is primarily SaaS companies and YCombinator companies. The ones that are sub-Series B are likely to have significant SVB exposure. I would imagine the total would be hundreds of millions of dollars through deposits.”

Startups may have exposure to SVB in one or more ways. First, they may have deposited money with SVB Bank. Second, they may have received equity funding from SVB Bank. Third, they may have received debt funding from them.

Since all deposits are accessible to SVB’s customers, a startup’s day-to-day operations will not be impacted too much since they can withdraw the amount. However, for startups who have received funding, the situation is different.

Says Oliver Heinrich, Partner at Picus Capital, privately financed venture capital company headquartered in Munich, which has investments in 10 Indian startups, “With regards to funding, if you have received equity funding from SVB, I suppose those shares will be transferred to the acquiring entity but for the startup itself, there should be no real immediate impact. On the debt funding side, it might be a bit more complicated, particularly on what happens to undrawn capital lines. While those obligations could also be bought by an acquirer, to my knowledge it is unclear whether all obligations would be bought up and/or at which terms.”

The lesson for Indian startups

The SVB Bank fiasco should serve as a wake up call for Indian startups. No one should take it for granted that the regulator will always step in, but rather have their own precautions and risk management in place.

“We would advise Indian startups to diversify their exposure by having accounts with different banks since the banking system allow, for bank failures and deposits are only insured up to a certain amount,” says Heinrich.

Agrees Sunil Goyal, managing director and fund manager, YourNest Venture Capital, a SEBI-registered early-stage venture capital fund, “Startups will be wiser to know that whenever they are parking money with any bank, if they can split the money in a more insured manner in several bank accounts, so that every deposit is insured.”

He adds that since the strength of the Indian banking system is very strong, startups would like to keep their money for a longer period in India. Startups send money overseas when they are hiring people, doing marketing spends or launches out there. Now, they could keep minimum money with US banks and keep their funds in India as long as possible.

“The situation is much better in India since here the RBI has the powers and (more importantly) is willing to use them. Going ahead, we are now going to see many Indian startups open their accounts in Gift City. Until now it was only funds that were looking at it, now even startups will start evaluating the option of having banking operations in the Gift City,” says Rahul Dev Gupta, CEO, Kuruvindum, an early stage venture capital fund.

In general startups should focus on low levels of cash burn and building a clear path to profitability. “Despite lower round sizes, we advise companies to make sure they can last with the funding for at least 24-36 months (or become profitable in later stages), to also sustain the tough part of the macroeconomic cycle, if necessary,” says Heinrich.

In the long term, Indian startups with business models that address real problems and have sustainable economics will continue to strive. And, many great companies have been founded and built in tough macroeconomic environments.