For the global start-up and venture capital (VC) community, it was a chaotic weekend. After Silicon Valley Bank (SVB)—the trusted banking partner of the tech ecosystem—went down on March 10, with the Federal Deposit Insurance Corporation (FDIC) seizing its assets, scores of founders and investors who had hundreds of millions of dollars locked into deposits, scrambled to make sense of it all.
There was panic as immediate working capital concerns pinched start-ups all over the world. At least a dozen India-born SaaS unicorns—and several other B2B start-ups—are headquartered in the US and have subsidiaries elsewhere in the world. Most early- to mid-stage start-ups typically put all their monies into SVB accounts as soon as they raise venture funding. According to the US-based VC body National Venture Capital Association, over 37,400 start-ups and small businesses had (uninsured) deposits of over $250,000 each in SVB at the end of 2022, amounting to about 90 per cent of its total deposits of $175.4 billion. This was mainly due to the insistence of VCs, who preferred to bank with “tech-forward” SVB, which had built a reputation of be ing “founder-friendly”. As a result, young start-ups relied solely on one bank, depositing anywhere between $2 million and $5 million (above the FDIC insured limit of $250,000). “Early-stage start-ups have been hit the most, especially in SaaS, which have to do payrolls globally,” says Abhishek Patil, Co-founder of GrowthX, a community of founders.
While some start-ups managed to wire out funds a day in advance, following advisories issued by their investors, most were stuck in a loop of uncertainty. Several VC firms— including General Catalyst, Kleiner Perkins, Ribbit Capital and Light speed Venture Partners—stepped up to help their portfolio firms by offering them low-interest loans. Wealthy investors like OpenAI CEO Sam Altman and Vinod Khosla of Khosla Ventures also wrote personal cheques to founders. In India, a bunch of home-grown fintechs like GetVantage, Razorpay, RecurClub, Salt.pe, etc. sprung into action to assist affected parties with either interest-free credit lines to meet their working capital needs or helped them with opening accounts in neo-banks or GIFT City branches.
Then, on the evening of March 12, as one part of California lit up with the 95th Academy Awards, the other side, too, saw a glimmer of hope when the US Treasury Department, Federal Reserve and FDIC an nounced that they would fully protect all depositors. Founders heaved a sigh of relief. If this measure hadn’t been taken, 10,000+ start-ups globally could have been affected by an intensified capital crunch, possibly leading to mass layoffs and furloughs. But why did most start-ups bank with SVB? There were clear benefits for founders. It offered ease of doing business benefits, an area where more traditional financial institutions often lagged. For instance, SVB provided banking solutions tailored for PE and VC funds, making it easier for them to invest in start-ups. It also reduced compliance for start-ups expanding in the US, making it easier for them to open SVB accounts even without a social security number.
SVB also customised its banking services based on the stage a start-up was in, almost becoming a default plug-and-play banking solution. “SVB has been a great bank for founders. But the lesson learnt here is: don’t put all your eggs in one basket,” says a CA who advises start-ups. Sudarsan Ravi, a former Big Four consultant at FDIC during the 2008 crisis, says SVB was a professionally run bank, and VCs would support whoever acquires it. “It’s just a matter of being patient before everybody gets every penny back,” he says. Incidentally, the UK division of SVB has already been acquired by HSBC, while it is believed that JPM organ is interested in the US entity even as the Fed scouts for buyers. While the crisis may have been averted for now, what are the lessons learnt? Alok Mehta, Finance Lead at Blume Ventures, says it should serve as a lesson in risk management for start-ups. “As the Indian start-up ecosystem matures, I hope robust risk management practices would become embedded in the governance structures that founders put in place,” he says