The American bank worked on a model that was favourable for fast-paced start-ups. If the Indian banking sector can emulate that model, while retaining its cautious approach towards lending, it can keep local start-ups insulated from upheavals like the one at the American bank
The Silicon Valley Bank (SVB), even as it sank, left behind some valuable lessons and insights for all. Last month, the 16th largest bank in the United States scripted the largest bank failure in the post-Global Financial Crisis era and the second-largest in American history after Washington Mutual Bank which closed in September 2008.
SVB was the lender for many start-ups and venture capital funds, including those from outside the US. At the end of 2022, it had assets worth $209 billion. However, an emergency brought about by withdrawals over the past year and exacerbated by a bank run after word spread about SVB selling $21 billion bonds for a lower yield to arrange for the liquidity to balance the withdrawals, eventually led to its collapse. The fall of SVB resulted in a large number of start-ups and VC firms losing access to their working capital.
A majority of the start-ups backed by American technology start-up accelerator YCombinator followed the practice of depositing their first cheques in the SVB. This was because YCombinator had an account in the SVB. India is reportedly the largest investment destination for the accelerator outside the US. YCombinator’s portfolio includes big names from India, like Meesho, Groww, Zepto and Khatabook among others. In case of gaming firm Nazara Technologies, its subsidiary firms Kiddopia Inc. and Mediawrkz Inc. had as much as Rs 64 crore stuck in the failed bank.
So, panic spread like wildfire in the Indian start-up ecosystem after the SVB news YCombinator’s president and CEO Garry Tan said that a third of the incubator’s portfolio start-ups were not in a position to pay salaries for the next month. In a petition to the US government, the marquee investor stated that the SVB debacle could impact nearly 10,000 start-ups. It also stated that one lakh employees could lose their jobs; however, it has not named the start-ups that are in trouble.
Investors and companies have acted swiftly to ensure that the SVB crisis does not become a catastrophe for Indian start-ups. New Delhi-based trading platform and fintech company Recur club allocated $15 million to help affected companies to fund payroll and other short-term expenses. Fintech major RazorPay came forward to extend a credit line of up to $2.5 lakh to its customers.
While start-ups are willing to help each other tide over the current crisis, it may still not be enough to save the day for many companies.
Due to the funding crunch, the Indian start-ups laid off around 20,000 employees last year. Companies like Byju’s, Unacademy and Udaan were forced to announce job cuts as well as expenditure cuts on marketing. A freeze on the working capital funds is likely to put further strain on the start-ups that do not manage to arrange funds from their investors or peers in the ecosystem.
Gaurav VK Singhvi, the co-founder of We Founder Circle, says, “A lot of start-ups might not have a bank account in the SVB, but the investors' confidence can get impacted for the short term in the US and global markets, which could result in a further slowdown in funding from global investors, affecting Indian start-ups.” However, according to him, Indian family offices have a good chance to increase their stake in the ecosystem.
Ease of Business or Compulsion?
According to the Minister of State for Electronics and IT Rajeev Chandrasekhar, Indian start-ups had deposits of around $1 billion in SVB. What made them go to the American bank when the country has a robust banking system of its own and the government gives a lot of emphasis to reforms in the sector? Does the country lack a credible banker for the new-age companies, or is it the structural compulsion deployed by foreign VCs to control the strings of Indian founders?
India’s banking system has total assets worth $2.67 trillion. With 12 government-owned and 22 private-sector banks at the national level, there is no dearth of options to choose from for Indian start-ups. However, experts believe that these banks are laggards when it comes to helping new-age companies.
Sandeep Verma, chief financial officer (CFO) of Campus365, argues that Indian banks fail to support start-ups when it comes to international transactions and access to venture capital. Additionally, they also lack in providing cutting-edge technologies to meet the operations of these companies. The result: Despite having operations in India, the start-ups were parking their entire money in a US-based bank, away from the homegrown banking system.
In an interaction with WIRED, Vai Gupta, the founder of real estate investment protocol BonfireDAO, said that SVB used to offer freebies through its mobile application much before the other banks came up with discounts. According to a Crunchbase report, the bank had a working style that was different from the traditional banks and it matched the pace of start-up networks by approving the loans swiftly. Where other US banks avoided risk-taking steps, SVB supported some companies in times when they did not have market-fit products. Verma added that SVB took a distinct position from the local banks by providing access to capital, advice and guidance, global payments and business expertise. It also had a dedicated team of experts, with many years of experience in the start-up space, who used to provide personalised services tailored to each company’s needs.
But the engagements are not all necessary because of the ease of doing business. In 2020, marquee Indian investor Sanjeev Bikhchandani questioned YCombinator’s practice of asking Indian start-ups to shift their headquarters to the US. Bikhchandani, along with the founder of GSF Accelerator Rajesh Sawhney, had urged the government of India to take note of the system as the practice of shifting headquarters of Indian start-ups led to a drain of intellectual property and data. “They like the Indian market and talent, but not Indian laws … Indian government should take a talk with them [have a conversation],” Sawhney had said in his tweet. While the government talks of Indian start-ups as the gateway for innovation and the country’s rise as the tech powerhouse of the world, the fact that these start-ups do not find a single Indian bank worthy of managing their working capital funds is a serious concern.
In an interaction with Outlook Business, Abhishek Rungta, founder and chief executive officer of Indus Net Technologies, says, that some accelerators ask the start-ups to move their headquarters to the US for their operational convenience and structuring. Some VCs also advise start-ups to domicile keeping their global customer base in mind. Nearly seconding his thought, Raghavan says that most of the VCs work as strategic investors and ask the companies to move to get access to strategic and venture capital. Verma adds that VCs prefer certain banks to provide favourable terms and specialised services that can help the start-up maximise its potential. However, they do not agree with the fact that the VCs put pressure on the founders to domicile.
Lessons for India
A section of start-up founders feels that things can change if the local banks to shape up. Krishna Raghavan, founder of UnlistedKart—an unlisted shares marketplace—suggests that Indian banks need to enhance their digital offerings to customers. He believes that they need to collaborate with fintech companies and expand their range of services, such as offering innovative savings and investment options, competitive loan products and flexible banking solutions that cater to the evolving needs of customers. Moreover, Indian banks need to build trust and reliability with the new-age companies—something that SVB was famous for.
Mohandas Pai, chairman of venture capital fund Aarin Capital says that banks like SBI and Axis in India have understood the need for the start-up ecosystem and are making an effort to provide new-age banking to young entrepreneurs. “The most important thing to remember while creating a bank for the start-ups is to have specially trained staff that understands the need of young techies, who are straight out of college and are trying to build a company. Unlike traditional businessmen, these techies do not understand finance, but they can build businesses very fast. Catering to them requires a different mindset and new fast-moving system where red-tapism does not lead to a delay in sanctioning of funds or other services.”
Pai adds, “A start-up bank like SVB should be able to provide working capital loans to companies on the basis of cash flows, unlike traditional banks that ask for collateral.”
Minister Chandrasekhar had said that he had taken up the issue with finance minister Nirmala Sitharaman, pitching for adapting the Indian banking system to the requirements of the start-ups. According to him, as much as $200 million worth of capital had been shifted from the US to the GIFT City bank in India, indicating that the country is in a position to quickly upgrade its banking system to help beleaguered start-ups struggling to stay afloat in the light of the uncertainty in the US banking system.
Some reforms are required, but the government needs to be careful about dealing with a fast-moving start-up ecosystem that is often accused of not caring for regulatory filings and maintaining accounting standards for compliance with Indian laws.