SVB fallout: Indian start-ups staring at uncertain future

Indian start-ups breathed a sigh of relief after the UK government facilitated the acquisition of the now-defunct Silicon Valley Bank’s (SVB’s) British arm by HSBC.

In a bid to allay fears, the US Federal Deposit Insurance Corporation (FIDC) announced recently that it had transferred all deposits of start-up-focused SVB to a newly created bridge bank and all depositors would have access to their money.

President Joe Biden also sought to reassure jittery depositors that they can have confidence that the US banking system is “safe”.

“The government is bailing out depositors, and that ensures continued faith in the US banking system for the start-up and VC ecosystem.

"We were also part of a petition from Y Combinator which requested the government to intervene.

"For me, personally, the support received from the entire ecosystem, existing investors, and other fellow founders was pivotal; it also showed the power of the community we belong to,” said Sourabh Deorah, co-founder and CEO, Advantage Club.

Nitish Mittersain, founder and CEO of Nazara Technologies, is of the view that the situation is challenging for younger start-ups that had SVB as their only banking partner.

“Depending on when funds are made available, cash-flow issues may arise.

"The biggest concern right now among start-ups is taking care of immediate short-term liquidity requirements,” he said.

Among the first companies to say that they have exposure to SVB, Nazara Technologies, a listed entity, in a regulatory filing earlier revealed that two of its step-down subsidiaries — Kiddopia and Mediawrkz — hold cash balances at SVB to the tune of $7.75 million (around Rs 64 crore).

Its shares took a beating in early Monday trade but recovered most of the losses to end almost flat at Rs 516.40 apiece.

The company claimed that both its subsidiaries are well capitalised and have been generating positive cash flows, along with profitability.

“We expect no impact on their day-to-day operations, business performance and growth plans due to the SVB event,” Mittersain told Business Standard.

Neither are all as comfortably placed as Nazara nor are many like SaaS-major Freshworks, which said its exposure to SVB was minimal relative to its overall balance sheet.

“We are working with our customers and vendors, who were using our SVB account, to migrate to alternative bank accounts.

"We do not foresee any disruption to our employees or customers,” said the company in a statement.

Though the US Federal Reserve’s swift response sought to allay fears of capital loss among several start-ups, lingering concerns remain.

Ashish Kumar, co-founder and general partner of Fundamentum, a Nandan Nilekani-backed venture capital firm, said the impact of the SVB crisis in terms of the challenge and as an opportunity would be understood fully in the next few days.

“Though FDIC has saved the deposits of SVB, if I was somebody in the US, I would worry about other local and regional banks.

"How many banks would FDIC save? I have spoken to people in the US, and I know that people are thinking about moving their deposits from smaller banks to larger banks,” said Kumar.

“I don’t think there is going to be much impact on the deposits of Indian SaaS companies.

"But the issue is that some of these SaaS companies ]provide services] to small and medium businesses in the US and they may be customers of SVB or other smaller banks.

"So, there could be a second-order effect,” said Kumar.

But, he said, the SVB crisis throws up an opportunity for entrepreneurs to come up with new ways and business models to manage money for people in the right way.

Rajeev Chandrasekhar, minister of state for electronics and information technology, on Monday tweeted: “With this US government action, looming risks to Indian start-ups have passed. Learning for Indian start-ups from this crisis — trust the Indian banking system more.”

The minister is slated to meet Indian start-ups and industry stakeholders on Tuesday to assess the impact of the crisis and how the government could help them.

Although many start-ups have already migrated their bank accounts to other banks, experts are urging firms to not withdraw their deposits.

However, Gaurav V K Singhvi, co-founder at We Founder Circle, said: “We have to understand that these start-ups operate on a very limited runway and the effects could be detrimental for them if they do not withdraw their funds on time.”

In the short term, SVB’s collapse could create friction in terms of day-to-day business activities for financing among start-ups headquartered in the US.

The concern is not just about paying employees but also about funds that many founders would have received from their VC investors.

SVB has been the preferred bank for many Indian software-as-a-service (SaaS) and Y Combinator-backed start-ups, largely because of its flexibility and maintaining ease of fundraising operations.

This, coupled with extensive experience working with start-ups and venture capitalists, made it a popular choice among budding companies.

“One primary concern is whether the new management at SVB in the US or HSBC, which acquired SVB in the UK, will continue to provide the same level of support and expertise as SVB did for four decades,” Anirudh A Damani, managing partner, Artha Venture Fund, told Business Standard.

“SVB was a trusted partner for Indian start-ups, offering customised financial solutions, a comprehensive network of investors and industry experts, and a start-up-centric approach that instilled confidence.

"Losing this support could make it difficult for start-ups to secure funding and expand their operations in the US,” Damani said.

According to industry watchers, many Indian start-ups backed by VCs, such as Accel, Sequoia India, Y Combinator, and SoftBank, banked with SVB.

Indian SaaS start-ups and those backed by Y Combinator, which set up their US companies and raised initial rounds, had SVB as their default bank. A big chunk of Y Combinator firms even in India use only SVB.

“However, larger and more mature Indian firms headquartered in the US are not much dependent on SVB.

"Most of them have diversified portfolios, with institutions like Citibank and JPMorgan,” said an industry player.

Damani of Artha Venture Fund, however, maintained that the failure of SVB would hurt start-ups as they were much ahead in terms of tapping into the ecosystem.

“It offered customised financial solutions, international reach, and support for innovation.

"SVB’s user-friendly interface, business-centric approach, and global presence instilled confidence in founders, who viewed it as a trusted partner.

"SVB also invested in start-ups and recommended them to other funds, providing valuable support to numerous founders in their fundraising efforts.

"SVB’s ability to facilitate the swift and hassle-free opening of local bank accounts in the US or UK was also an advantage,” said Damani of Artha Venture Fund.

Nazara’s Mittersain concurred by saying: “The process of onboarding Indian start-ups in the US by SVB was much faster and easier compared to other banks.

The bank offered tech start-ups frictionless and smooth services, which is why our team chose to bank with SVB.”

With inputs from Sourabh Lele