Explainer: The Silicon Valley Bank Collapse

Silicon Valley Bank (SVB), which collapsed last week, was a hit as a banking partner among tech startups, especially in the US.

Silicon Valley Bank, banking
Founded in 1983, SVB became a popular pick of the US startup ecosystem for its banking needs. (IE)

Silicon Valley Bank (SVB), which collapsed last week, was a hit as a banking partner among tech startups, especially in the US. American authorities announced on Sunday that all depositors will be paid back in full. Tushar Goenka takes a look at how SVB became the preferred bank for startups and what led to its collapse

What transpired at SVB

Founded in 1983, SVB became a popular pick of the US startup ecosystem for its banking needs. During the Covid years, when startup valuations soared, SVB saw its total deposits grow from ~$65 billion in 2020 to over $145 billion in December 2022. But, last Wednesday, SVB reported a loss of ~$1.8 billion, after selling $21 billion worth of bond assets. The bank also took investors by surprise when it said it was raising $2.5 billion through share sale.

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Regulators found that SVB had a negative cash balance of around $958 million. These events caused a bank-run, and SVB was shut down, with the Federal Deposit Insurance Corporation (FDIC) as its receiver. On Sunday, US authorities said all depositors will get their full deposits back, but didn’t specify a deadline.

Why startups favoured SVB

Startup founders said account-opening was the easiest with SVB as it did not require a social security number (SSN) nor did it mandate a US address. Further, they could only open an account with SVB through the reference of an investor, which also ensured high levels of access and service from the bank to founders.

SVB was also a one-stop solution, or a full stack platform, that even extended venture debt and other financing options. The deal was further sweetened by SVB’s all-digital approach. Several founders, more in the US than in India, used their SVB account for working capital needs, meet payroll requirements and other immediate expenses. And since these funds were locked for a few days, several founders feared they would be unable to pay salaries and would have to sack employees. However, the panic was much lower in India.

Mounting banking tensions in the US?

While the US government was still dealing with the crisis at SVB, it had to also shut down Signature Bank on Sunday. Signature Bank had exposure to digital assets such as cryptocurrencies. While the fall of SVB was the second-largest crisis in the US’s banking history, after the Washington Mutual collapse in the 2008 financial crisis, Signature Bank is third-biggest bank to shut down.

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Signature Bank had assets worth over $110 billion, and its total deposits stood at nearly $90 billion in December 2022. SVB and Signature Bank shutting down within a span of a few days is likely to put pressure on several small and regional banks in the US as investors fear for their money, despite government assurances. SVB’s heavy investment in long-dated US government bonds proved to be its undoing, with the Federal Reserve raising rates sharply and quickly—this led to SVB’s bond portfolio bleeding value.

What SVB’s collapse means for Indian startups

Very little. VC firms had sensed troubles at SVB about 10 days ago and had written to their Indian portfolio companies, asking them to withdraw their deposits. The timely communication, coupled with minimal exposure at SVB, resulted in Indian startups being relatively insulated from the banks’ collapse.

But several founders in the US were advised to now park their money in different bank accounts, instead of concentrating funds in a single account, or with a single bank. And companies affected in India, especially those backed by YC—which used to advise its portfolio companies to maintain an account with SVB—are exploring ways to bring their deposits back to India, from the US banks. These include the opening of Nostro accounts with banks like ICICI Bank and Kotak Mahindra Bank, among others.

A few new-age companies were also seen bringing money to accounts in GIFT City, in Gujarat. Fintech giant Razorpay was also seen helping startups set up Nostro accounts and reduce reliance on foreign banks.

Even revenue financing options like Recur and Klub pooled in money to disburse to founders, which ensured they had enough funds to meet immediate salary and other requirements.

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First published on: 14-03-2023 at 04:45 IST
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