Explained | Will the collapse of SVB affect Indian start-ups?

the story So Far: On March 10, banking regulators in the US took control of Silicon Valley Bank (SVB), which typically catered to start-ups, venture capitalists and tech firms, after it suffered a sudden collapse. A few days ago, the bank, headquartered in Santa Clara, California, announced that it was facing a cash crunch, and failed to raise funds to run the bank by either selling shares — or itself — scaring off investors. Stayed. On Sunday, the US administration and regulatory authorities worked together to guarantee that depositors’ money would be repaid in full. And in India, Union Minister of State for Information and Technology Rajiv Chandrasekhar met Indian start-ups to assess the impact on them and help them deal with the situation.

What stand has the US government taken?

The Joe Biden administration decides to guarantee all deposits in the SVB with the Federal Reserve, the US Treasury Department, and the Federal Deposit Insurance Corporation (FDIC). It also seized another bank on Sunday, Signature Bank of New York, which has significant exposure for investors in the cryptocurrency and digital asset 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 the administration had support.

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

How is India’s startup ecosystem affected?

According to media reports, at least 21 start-ups in India had exposure to SVBs, which had total assets of about $209 billion and total deposits of about $175.4 billion as of December 31, 2022. Chandrasekhar said India’s start-ups have collectively deposited around $1 billion in SVBs. Earlier in the week, the start-ups apprised the minister about the fallout, specifically about difficulties in running their businesses due to interruptions in international wire transfers, lack of communication with US agencies, clearance limits, etc. Was told from Finance ministry officials said the failure of the SVB was likely to impact some Indian tech start-ups and IT firms, but any wider “infection” that might arise would neither reach Indian shores quickly nor Nor are they likely to trigger a “systemic risk”. ,

Many industry stakeholders said that the immediate impact due to the bailout would be minimal, but the change in sentiment could have some impact on the entire tech industry for some time. Peter Bender-Samuel, CEO of Dallas-based Everest Group, said Hindu Given that the US was guaranteeing all deposits, the direct impact on industry and Indian firms, “is likely modest.” Avinash Vashisht, chairman emeritus, Tholon, 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 affected and there could be challenges in making US payrolls and investments.” A week or so. For start-ups and venture funds with less than $250,000 per account in SVB, they should be a minor bottleneck.

What are the hurdles startups may face?

According to Mr. Bendor-Samuel, and many in the tech sector agree, the change in sentiment following the collapse of SVB would suggest more caution. Perhaps, another pull-back from the tech industry could have some impact on all start-ups’ ability to raise money and create some headwinds in their customer base. “It won’t kill space but slow it down,” he said.

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“Besides the delay, investment will probably go down,” Mr. Vashisht said. “This only adds to the uncertainty that is already in the markets as a result of inflation, Fed rate hikes and liquidity [concerns],” He added.

Are there lessons to be learned?

Constellation Research Inc. Principal analyst and founder R. Ray Wang expects big banks in the US like Citi, Chase, Bank of America and Wells Fargo to get bigger. “Start-ups need banks that are simple and helpful to their needs. We need more regional banks, not fewer. The second banking crisis in 15 years is troubling for the stability of investors and start-up founders.

Tech industry insiders say this is an excellent opportunity for start-up boards to form sub-committees for treasury management, especially those that raised Series A funding or higher rounds and is sitting on a significant cash pile. Indian start-up board members should prioritize financial planning and establish a clear strategy to distribute funds among two to three banks, he believes. Anirudh. A. Damani, Director, Earth India Ventures, said that prudent financial management should be an essential practice. “It can also help to put money to work, especially in a rising interest rate environment, to reduce burn and possibly extend runway by a quarter. This prudent financial management is critical to a company’s runway and can affect [possibly] Evaluate it,” he explained.

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

what lies ahead?

Phil First, CEO and principal analyst at UK-based HFS Research, said that while the SVB disaster will impact investment in the tech start-up space in the US, on the other hand, US companies may view the Indian sector as more stable in the long run. . -Term Bets. “Start-ups in India operate in a different market environment. Firms such as Microsoft and Google already invest in the Indian start-up ecosystem. There are still huge amounts of money parked in many global investment funds, and India’s start-up scene is starting to look much more attractive than Silicon Valley to many investors and VCs,” he said.

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Others, like Wang of Constellation Research, said it was a wake-up call for the start-up ecosystem to re-evaluate risk management strategies. “Policies that force banking relationships to remain tied to debt can increase the concentration of risk. It is best to diversify where you put your funding so that you don’t end up in a bank run and this type of scenario, “They told.


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