Silicon Valley Bank collapse: VCs, angel investors sense buying opportunities at easier valuations

Amid the gloom and doom around the impact of the Silicon Valley Bank collapse on Indian start-ups, there could be a positive side. Start-ups which are doing well, and have been able to show a path to profitability to potential investors, may find the process of fund-raising accelerated owing to the impact of the SVB crisis. Equally, venture capital firms and angel investors who have been involved in protracted negotiations on valuations may find the deals suddenly turning favourable in terms of valuations as start-ups rush to raise funds to mitigate the impact of the SVB hit. 

Start-ups which have operations in the US and money locked in SVB will be facing the heat since they will be unable to access more than $250,000, which is the amount insured. Hence, even making payroll will become a major challenge for such firms as they struggle to raise money.  

An angel investor who has a few of his portfolio firms with accounts in SVB says there is little option for him and others like him but to arrange for bridge funding for the portfolio firms to help them stave off the crisis and make payroll. “What option do we have? We have to help them. If their runway of funding is short, they will surely need help.”  

Assuming a start-up has $5 million locked in SVB, once the US authorities and the Federal Deposit Insurance Corporation (FDIC), which is the receiver, find a solution to the crisis by liquidating assets, the expectation is of money coming in a few weeks’ time. “Around 30-40 per cent may actually be recovered by the start-up in a few weeks as FDIC works its way through the crisis,” a leading angel investor told BT. “The critical point will be how long will it take for the sale of the assets and how much of the start-up’s money can come back.” 

In that situation, angels and VCs whose portfolio companies are facing such a situation will have little option other than to extend a kind of bridge finance to such firms. If some of these firms are doing well, and in the process of raising further funds, this bridge finance can even take the form of participation in a potential round at a discounted valuation, with the funding coming in earlier than what would have otherwise happened. “Those in the process of raising money can get this bridge funding as potential funding rounds at a discounted valuation, and get the money in early,” sources said. “This is not to say that angels or VCs will turn into vulture funds, but valuations may turn attractive.” 

Even as the start-up ecosystem is battling the jitters and the uncertainty around the SVB collapse and the real possibility of many Indian SaaS companies and others with operations in the US not even being able to meet payroll, the flip side is that despite all the talk of a prolonged funding winter, there is a distinct possibility of good deals being available where angels and VCs can get in at attractive valuations as companies bring forward fund-raising plans.  

SVB, which was an active player in the Indian start-up ecosystem in the early years, had become less relevant of late as far as its investments into Indian start-ups are concerned. In several cases, it had invested and then exited Indian firms several years ago. This is, however, quite different from the situation where Indian start-ups have money kept in SVB in the US and therefore are staring at a crisis. 

Some serial investors and angels are, however, keen to explain that while the situation for Indian start-ups with operations in the US is indeed grave, it is not as if all start-ups will be hit by the SVB collapse. In a detailed LinkedIn post, serial entrepreneur Krishnan Ganesh, who founded TutorVista and Bluestone among other ventures, and is a very active investor in start-ups, cautioned against unnecessary panic. 

Pointing to start-ups which had SVB investments earlier, Ganesh wrote that these startups “got money from SVB, not the other way round. SVB invested in them through the fund route, putting money into companies and getting shares in return. When these companies monetized or raised further rounds of funding, SVB sold its shares. End of story.” 

“So there's no ripple effect, no adverse impact, and no relevance of what's happening to SVB in the US to these Indian startups. We need to be clear about this differentiation and avoid spreading unnecessary panic,” he wrote. “Even if any of these Indian startups have SVB as a shareholder and still figure in the cap table, which is unlikely, it will have zero impact on them.” 

“However, that’s not to say that Indian startups with operations in the US aren’t facing a challenge. SVB has long been a favorite bank for them, and many have bank accounts there. But with the insured amount limited to $250K, anything above that is now under peril. This poses an immediate challenge for startups trying to meet their next month’s payroll, particularly those with bi-monthly payrolls. The big question now is when the balance money will become available and how many cents to the dollar it will be.” 

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