Kochi/New Delhi: The collapse of the US-based Silicon Valley Bank (SVB) is having its echo on Indian shores too. It is estimated that 61 Indian startup firms have deposits in the bank based in the famed tech hub of Silicon Valley in Northern California.
Kerala-based firms, too, have investments in SVB since they have received foreign funding. Two firms alone reportedly have an investment of Rs 80 crore.
However, the US Federal Reserve and US Treasury have allayed fears saying that even if insurance does not cover the investments, the whole money will be refunded.
“While I was with US software company Kalsoft, we had invested with the SVB. On the basis of that experience, I can say SVB is a good bank. This is only a temporary crisis for startups. There is no need for concern. It won’t affect the funding too. Ups and downs are regular features of funding,” said Sam Santosh, Founding Chairman, SciGenom Labs, which is based in Kakkanad in Kochi.
However, with money stuck in a failed bank abroad cash flow will be hit.
“The disbursal of salary and payment to dealers will be affected if the money can’t be withdrawn soon. The employees will quit if salary is delayed. Actions for solutions should be taken on a war footing to prevent the after-effects of the collapse,” said Senu Sam, CEE of Mykare Health.
Why funds are parked abroad
Companies in India or elsewhere that receive funding from American venture capitalists often park their funds in American banks and withdraw money only as per their needs.
Moreover, if SVB had advanced loans, all other transactions too were like carried out through it. Thus all the money of the companies, including Indian ones, was channeled to the same bank that has now failed.
How the bank of startups became vulnerable
The SVB is renowned for backing startups in Silicon Valley. These small companies often got a very good valuation and big funding for their creative ideas. Most funding in this way took place in 2021. The firms, after meeting their working expenses, kept the surplus money in the bank.
When such money heaped on, the bank reduced the cash reserve and invested the rest of the money in bonds. With inflation soaring and federal reserve interest rates increasing, the yield from bonds fell substantially.
When funding evaporated, the startups started to withdraw money to meet their expenses. To ensure liquidity, banks like SVB started to dispose of the bonds. The loss incurred thus is estimated to be USD 180 crore.
When there was a drain on its capital, SVB resorted to selling its shares to shore up US$200 crore, and sensing danger, the startups began to withdraw their money, triggering the ‘bank run’
If SVB is liquidated, all investors will get their deposits back in installments. If any other bank takes over SVB, the whole investment will be secured. Those who want to withdraw can do that as well.
Startups to hold a meeting today
Meanwhile, Union Minister of State for IT Rajeev Chandrasekhar will preside over a meeting of startups being held today to assess the impact of the collapse of the Silicon Valley Bank on them.
The big threat to startups has diffused with the US Federal Reserve and other agencies like Federal Deposit Insurance Corporation (FDIC) announcing that actions that fully protect the depositors have been taken, the minister said.
The development is a lesson for the Indian startups to lay more faith in the Indian banking system, Rajeev Chandrasekhar pointed out.