Why Silicon Valley Bank collapse is a wake-up call for start-ups to domicile in India

In January this year, when fintech major PhonePe redomiciled in India, its investors had to fork out Rs 8,000 crore. But the decision was much-needed. Around that time, PhonePe's co-founder and CEO Sameer Nigam, in a public statement noted that the move back to India was a correct decision as it was where the company first started and is focused on. “I think for the mission PhonePe is on - which is solving for at-scale financial inclusion and digitisation - the move to India was right, India is where we started and where we are focused on. And to that end, for various reasons like being a highly regulated entity and wanting to eventually list here, the change of domicile to India for PhonePe as a business and as a company is the right answer,” he had noted. 

And now with the big banking crisis being unleashed on investors globally due to the collapse of US-based Silicon Valley Bank (SVB), the Indian investor ecosystem feel that it is time for more start-ups to choose India as their place of domicile.  

As per Vikram Gupta, founder and managing partner at the early-stage VC firm IvyCap Ventures, it makes more sense for Indian start-ups to be domiciled in India primarily because funding for these companies have substantially increased in the last few years. 

“Investors in India have increased, capital available for investment has also grown so it makes sense for more and more start-ups to domicile in India,” asserted Gupta

He is right. Sample this: India houses the world’s third-largest start-up ecosystem after the US and China. There are around 92,000 start-ups and 114 unicorns at the moment in India. 

Even though funding reduced significantly in 2022, Indian venture capital funding still accounted for 5.1 per cent and 6.3 per cent share of the global VC funding and volumes, respectively.

But a moot question remains: if the Indian investment ecosystem is growing steadily, and VCs are bullish, then where is the gap?

The gap

To understand the gap, let’s begin with understanding the scenarios in which start-ups domicile abroad. 

When the majority of the customer base of a start-up (typically more than 75 per cent) is based in the overseas market, that’s when start-ups domicile outside majorly, as per Gupta. He also noted that when the majority of the investors in the start-ups’ captable are US investors, that also influences the decision of a start-up entrepreneur. 

However, to reverse these scenarios, the ecosystem needs to focus on the simplicity of carrying out different processes, is what VCs believe. 

As per Saurabh Dhole, Investment Analyst at wealth management platform TrueBeacon, the reason why deeptech companies, especially, have been attracted to the US markets is because of the simplicity of raising capital there. “Most start-ups, particularly SaaS companies, prefer to be based in the US for a variety of reasons, including the simplicity of raising capital, the ability to serve international markets or to be perceived as a US company, and institutions like Silicon Valley Bank would be their leading banking partner as a result of their association with the major institutional investors in the world.” However, he does maintain that India is an "excellent market” to domicile, although it might not be “superior to the US.”

Another gap is the way taxation is structured in the country. Investors argue that cumbersome taxation restricts the flow in the movement of capital. For instance, angel tax (a tax start-ups are liable to pay on the capital they raise through issue of shares), which is levied in India, has caused a lot of heartburn for early-stage start-ups operating out of India.

Industry veteran TV Mohandas Pai is of the opinion that entrepreneurs starting out India suffer from a lot of predicaments, especially when they are starting out. “These are young entrepreneurs. If we make it hard for them to operate here, they will go outside,” he told BT, adding, “The tax men come knocking on the doors of start-up entrepreneurs which makes operating in India a nightmare.”

SVB - a wake-up call 

Intervention is needed from the policymakers to ensure that the challenges start-ups face reach a breakthrough if not a logical conclusion. 

Anisha Singh, Partner at She Capital, is of the opinion that the SVB incident is a wake-up call for everyone. “Government is going to be paying closer attention now because the movement of capital within the country and without is a tough task,” she told BT.

As the SVB saga unfolds, uncertainty continues to loom over start-ups, especially with the US regulators, including the Federal Reserve, FDIC, and the Treasury department, suggesting on Sunday that there would be no bailout. However, the US government did assure that the depositors will have access to their funds starting from March 13. 

Another way out to solve the domicile issue is suggested by IvyCap Ventures' Gupta. According to him, if a company has operations in the US or have majority of customers there, then it should open a subsidiary in the US market but the 'holding company' should be headquartered in India itself. 

Other areas where work can be done include encouraging more start-ups to list on the Indian stock market and providing greater exit opportunities to investors, among others. 

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