The uncertain collapse of Silicon Valley Bank on Friday sent shockwaves around the world. The lender was viewed as an authentic source of capital and deposit partner, especially for some of the biggest tech moonshots. CEO’s of tech companies struggled to prepare payroll after the SVB Financial Group was closed by California banking regulators in a bid to protect depositors following a dive in the value of its investment holdings and a rush of withdrawal requests over two days.
What Caused Silicon Valley to Fail?
SVB’s downfall was caused by a bank run, which basically means when a huge number of depositors withdraw their funds from the bank all at once due to the fear of insolvency. In previous years, the SVB bank was hit hard by the downturn in technology stocks, as well as the Federal Reserve’s aggressive plan to increase interest rates to combat inflation. In the previous couple of years, SVB obtained around a billion dollars’ worth of bonds using customer deposits. These investments are typically safe, but the value became low because they paid lower interest rates than what a comparable bond would pay if it were issued in a higher interest environment.
Most of SVB’s customers are startups and tech-centric companies that have become more needy for cash in the past few years. Venture capital funding was drying up, and companies that were not benefiting from the business had to tap into their stored funds deposited in Silicon Valley Bank, which was shut down on Friday. So, those customers who had deposited their money in Silicon Valley Bank started withdrawing their money at once. The bank started selling its own assets to fulfill their withdrawal requests. The customers of Silicon Valley were largely businesses and the wealthy, who are more afraid of a bank failure, as their deposits are around $250,000, which is the government-imposed limit on deposit insurance. The bank had tried to raise additional capital through outside investors, but they were unable to find any.
What are the effects of Silicon Valley’s Bank Failure?
Many startups had ties to the bank, which resulted in their employees struggling for their salaries, fearing that they would have to stop their projects and even lay off or furlough their employees until they could access their funds. Silicon Valley Bank’s failure will be compared to the 2008 recession. At this time, advisers do not expect any issues to spread to the broader banking sector. Silicon Valley Bank was a large but unique existence by servicing nearly exclusively the technology world and VC-backed companies, whereas other companies are more diversified in other industries. The most recent round of “stress tests” has shown that all of them would survive a deep recession and a significant drop in unemployment. A lot of problems will arise in technology startups if the remaining money is not released immediately.
Impact on Indian Startups
The failure of SVB is causing a lot of effect on Indian startups. Many startups have funds deposited in the bank, and it will also cut the fundraising ability of Indian startups, as the US-based bank was a key source of funding for tech startups. Many Indian startups such as Companies like Bluestone, PayTM, One97 Communications, and Bharat Financial Inclusion, which have been invested in by SVB, are now afraid that their raised funds will be stuck. This has led these companies to cut salaries, lay off employees, and delay important projects.
SVB has played a major role in India’s startup ecosystem by providing banking services and funding to well-established startups such as Flipkart, Ola, and Zomato. SVB has also helped Indian startups expand into the US market by providing them with infrastructure and support to set up operations in Silicon Valley.
To reduce the impact of SVB’s failure, Indian startups whose funds are deposited in the bank may diversify their banking relationships to reduce their exposure to one bank. This may involve opening accounts with multiple banks