Why the Silicon Valley Bank collapsed and how it will impact Indian startups

Amrutha Pagad
Amrutha PagadMar 13, 2023 | 15:36

Why the Silicon Valley Bank collapsed and how it will impact Indian startups

Indian Minister to meet startups over Silicon Valley Bank collapse. GIF: South Park

Over the weekend, you must have heard of a bank crash in the US. By Monday, there was news of another bank crashing and burning. While the collapse of two banks - Silicon Valley Bank and Signature Bank - has turned the market in the US upside down, here's how the story is unravelling in India.

If your brain is already spinning with the thought of understanding banks and economics, don't worry we have tried to simplify it so that even a Golden Retriever can understand. 


Is India affected by the SVB and Signature Bank collapse? 

For India, the collapse of the Silicon Valley Bank has been bigger news than that of the Signature Bank shutting down. 

Before we start, NO the SVB that's collapsed is not the Indian "SVC Co-operative Bank Ltd", formerly known as "The Shamrao Vithal Co-operative Bank Ltd". These are two different and unrelated entities.  

A bit about SVB: If you don't know yet, the SVB, aptly named, was a famous bank for startups to park their investor funds. 

  • Like you and me, who go to regular banks to deposit our salaries, startups used SVB to deposit the funds they received from investors. 
  • The bank was also a lender to several startups, mostly in tech, around the world. 

The India connection: Reports say there are a few Indian startups that used SVB to deposit their funds or received loans from the bank. 

  • According to CNBC and the Mint, the situation seems to be "dire" for Silicon Valley accelerator Y Combinator (YC) backed startups in India. 

A startup accelerator is a mentor-based program that provides guidance, support, and limited funding in exchange for equity. There are hundreds of accelerators worldwide that have been instrumental in helping launch important startups (according to SVB website).

  • The Economics Times reported that there are at least 40 YC-backed Indian startups with $250,000 to $1 million each in deposits with SVB.
  • Over 20 startups have deposits of over $1 million each. 

Insured and uninsured deposits: The amount of deposit is important because the US feds have said that every depositor is assured $250,000 in insurance. 

  • So, startups with $250,000 or less can relax as they won't be losing any money. They may not be able to access their money at the earliest, but rest assured, their money is still safe. 
  • As for those with more than $250,000 in deposit, the ground is still shaky. 
  • And unfortunately, 90% of the deposits with SVB till December 2022 were said to be "uninsured". It is not clear if any Indian startups were also uninsured. 

But there seems to be some good news:

Depositors will have access to all of their money starting Monday, March 13.
  • Some Indian companies that were named in the list of companies exposed to the SVB, like Paytm and InMobi, have clarified over the weekend that they are no longer related. 
  • Paytm said that SVB is no longer a shareholder at Paytm. 
  • And InMobi said that they have never been a lender. 
  • On the other hand, Union minister of state for IT Rajeev Chandrasekhar said he will be meeting Indian startups affected by SVB this week to address their concerns. He also urged startups to have more faith in the Indian banking system.

In a nutshell, SVB collapse is unlikely to deeply affect Indian markets or startups. But there are some startup founders who had a hard time accessing their deposits with the bank.

What does it mean for startups? 

The Verge reports that startups may have a hard time rolling out paychecks to its employees, paying for external services like cloud, software, etc. This is just the tip of the iceberg. 

Is Elon Musk going to buy SVB?

  • Whenever there is a trending topic, there is Elon Musk. Musk said that he's "open to the idea" of buying Silicon Valley Bank after a Twitter user suggested it. 
  • As in all cases related to Musk and his tweets, his words should be taken with a bag of salt. 

What's happening to SVB now? 

  • So, there were speculations that the US government may bail out the SVB, but that option is no longer available. 
  • The US government said that after the 2008 financial crash, there were measures put into place to prevent such bailouts. 
  • A bailout usually means the US government using taxpayer money to stop the company or in this case a bank from going under. That's not happening. 
  • Instead, the US feds have created a new entity called the Deposit Insurance National Bank of Santa Clara - for all "insured deposits". 
  • Those with uninsured deposits need to wait a bit longer. 
  • Now, the US government is trying to squeeze out the maximum money from whatever is left of SVB, meaning its assets, to restore confidence in the US banking system. 
  • It can happen two ways - someone acquires SVB, it is considered the best case scenario as everyone will get their money back. 
  • If no one steps up to buy SVB, the US government will have to sell the bank's assets. This could take weeks or months. The proceeds will go depositors but the wait time will be high. 
  • The question in the above scenario is whether businesses, especially small ones, will be able to keep the lights on for that long. 

What happened to SVB? 

Let's brush up a little on what led us to this moment. Why did SVB collapse in the first place? 

  • You see banks do two things to run their business. They take the deposits of their customers and either use the money to lend it to others at an interest rate or invest it elsewhere. 
  • They earn money through these interests on loans or investments.
  • In SVB's case, the bank decided to be largely blamed for making really bad decisions. Even the banks don't understand economics really well or predict it. 
  • SVB invested some $80 billion in long-term mortgage-based bonds in the US in 2021, betting that interest rates won't increase. Why? To earn more money, simple.

It sounds like a dumb move but not unheard of. South Park has an episode on how banks burn your money:

  • Then, last year, the US Feds did exactly the opposite of what SVB was betting on and increased the interest rates. It eroded the value of the bonds. 
  • This resulted in SVB staring at losses on its balance sheet. 
  • Startups had their deposits with the bank and naturally wanted to withdraw some of it. However, SVB did not seem to have all the money. So, it tried to sell a $21 billion bond portfolio.
  • It did not go down well, and SVB incurred a loss of $1.8 billion. So, they needed to raise capital. 
  • SVB decided to sell $2.25 billion in common equity and preferred convertible stock leading to their stocks taking a plunge. 
  • And so, investors got spooked and started withdrawing their money in billions of dollars from the bank and telling others to do so. 
  • Observers said the collapse was hastened by the digital nature of our transactions today. Because in the old days, it would take a few visits and phone calls to move deposits and make a collapse slower. 
  • Some also said that the collapse could have been prevented if only investors had stayed calm. 

BTW, on the other side of the ocean, HSBC bought SVB's UK unit for 1 pound or nearly Rs 100.

Last updated: March 13, 2023 | 15:43
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