😲 Silicon Valley Bank Fall: Endgame for Indian Startups?
Silicon Valley Bank's collapse has sent shockwaves across the Indian startup ecosystem as startups have their money stuck. Is this endgame for the startup ecosystem?
The Silicon Valley Bank has fallen.
Yes, just a couple of hours ago, we had been wondering what would happen to the go-to bank for startups and VCs.
And just hours later, it was game over for the bank.
Now everyone’s wondering just two things:
What is the big deal about Silicon Valley Bank (we’ve covered this here)?
And how is its fall going to impact India and Indian startups?
So, let’s take a look.
📉 The Fall of Silicon Valley Bank
First, let’s see what caused the fall of the bank in 3 quick sentences.
Silicon Valley Bank had made some low-yielding investments when it had money. It wanted to rectify the situation by selling older investments and entering new ones.
It also wanted to raise some money to make sure its balance sheet was strong. But this news came when another major bank, Silvergate Bank, had shut down, leading to major panic among depositors.
So, investors and depositors tried to pull out $42 billion at once, leaving the bank with almost no money to return to the remaining depositors.
You see, banks don’t keep the entire amount you deposit within your lockers. It invests this money, loans this money, and builds assets.
So, the amount of cash in a bank is never enough to meet the needs of all depositors.
However, thankfully, the regulators stepped in and shut down SVB before depositors could completely suck in dry.
The bank is now under the control of Federal Deposit Insurance Corporation (FDIC).
It has created a new institution, Deposit Insurance National Bank of Santa Clara, to hold the deposits.
So, has the FDIC saved the day?Â
Umm, nope.Â
The situation is a bit more complex.
🤨 What Does the Move Mean for Startups?
You see, the bank still has $175.4 billion in deposits left.
But this is not going to be enough for all the depositors.
So, the FDIC took the bank under its control to ensure everyone gets the same amount of money: $250,000.
This is the amount of money that regulators insure in such bank run cases.
What happens to companies and startups that have more money than this lying in the bank?
Well, they’ll get their money under one of two conditions:
When SVB gets a buyer
When FDIC sells off its assets and pays them back
Both of these conditions could take a really really long time to fulfil.
So, what happens until then?
Many startups may have to raise money at lower valuations just to keep the lights on.
Many may have to let employees go or keep them without pay.
Some will have no choice but to close down the shutters.
And because of all of this, we just may get one step closer to the dreaded recession: something that no one wants but most experts are predicting.
Yes, the failure of one bank, just one bank, can cast ripples across the entire financial ecosystem.
But why should we care about a US bank?
There are two reasons:
A recession spares no one.
Over 60+ Indian startups have accounts in SVB.
Huh, why did Indian startups open an account with a foreign bank?
Because of one of these three reasons:
They got funding from a US-based accelerator like Y Combinator or Accel.
SVB invested in them.
They have operations in the US.
So, India could also see a slowdown in business and more layoffs.
But one good thing about a financial crisis is that everyone wants to avoid it.Â
So, all hands are on deck to prevent it from snowballing.
Companies like AngelList, RazorPay and other neobanks are trying to do exactly that.
They’re helping affected startups open new bank accounts and get payments routed to them so they can at least receive their funding or customer payments.
But will this be enough to stop this catastrophe?
How far-reaching will its implications be?
Only time will tell.
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