Silicon Valley Bank (SVB), which benefited hugely in the era of easy monetary policy, collapsed recently as central banks across the world began to tighten monetary policy in order to tame red hot inflation amid the Russia-Ukraine War.
SVB saw its deposits evaporate almost overnight after some investor-types rang the alarm bells on the internet, leading to a (digital) bank run of epic proportions.
The collapse had a cascading effect on India’s tech startup ecosystem. By the time SVB’s assets were seized by US regulators on March 10, 2023, over 37,400 start-ups and 1,000-plus VC firms globally were staring at a liquidity crunch.
As the dust settles on the Silicon Valley Bank saga, India’s start-up and investor communities are treading with caution. Their biggest lesson learnt: diversify risks from day one, K. Ganesh, a serial entrepreneur, told BT Magazine.
After the SVB collapse, several observers say that start-ups need to have clear visibility into the balance sheets of banks they partner with. However, industry experts believe that it may not be pragmatic.
In the aftermath of the SVB collapse Anand Prasanna, Managing Partner at mid-stage VC firm Iron Pillar Fund, recommended start-ups to follow the standard treasury management best practices like distributing the cash across three-four sizeable banks.
According to experts, the biggest learning from SVB’s collapse, which left hundreds of founders and investors in the lurch for 72-odd hours, is the need for diversification and risk management, or simply having a Plan B.
Neeraj Tyagi, Co-founder & CEO of WeFounderCircle, told BT, “‘Does the start-up have a Plan B? Should they have more than one financial partner? Should they go with an established bank?' All this is becoming a part of boardroom discussions now.”
“Not all companies have seasoned CFOs who understand the risk-reward equation adequately… The SVB crisis is a reminder to hire the right set of people early and, at the same time, have an ecosystem of supporters who can guide the company,” Ashish Fafadia, Partner at Blume Ventures told BT.
As per Gaurav Dani, Founding Partner at IndusLaw, start-ups need to diversify funds across banks to hedge the risks. "If you have $100 million sitting in the bank, you don’t need all the money on Day One. Keep some to make the payrolls, and invest [the rest] in a manner that you have liquidity when you need it,” he said.
Ruchit Garg, Founder & CEO of Harvesting Farmer Network also said that start-ups should diversify and have multiple accounts. If they can afford it, have offshore accounts, too, as it is good to have some money in each country because a bank run can happen anywhere.
At the moment even companies with domicile in India are mandated to have bank accounts in the US if they serve customers there. Experts advise such companies to keep deposits only up to the insured limit, and bring the excess money to GIFT City or keep it in securities.
Within a week of SVB deposits becoming accessible again, following the intervention of the FDIC, Indian start-ups moved over $250 million into GIFT City branches of local banks. That’s the silver lining in this dark cloud, according to Rajeev Chandrasekhar, Union Minister of State for Electronics and Information Technology.
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