The uncertain collapse of Silicon Valley Bank on Friday sent shockwaves around the world. The lender was seen as a genuine source of capital and warehousing partner, especially for some of the larger technology projects. CEOs of technology companies struggled to prepare payroll after California banking regulators shut down SVB Financial Group in a bid to protect depositors following a plunge in the value of their investments and a deluge of requests for retreat for two days.
What caused the failure of Silicon Valley?
The fall of SVB was caused by a bank run, which basically means that a large number of depositors withdraw their funds from the bank at once for fear of insolvency. In previous years, SVB bank has been hit hard by falling technology stocks, as well as the Federal Reserve’s aggressive plan to raise interest rates to combat inflation. In the previous two years, SVB earned around $1 billion worth of bonuses using customer deposits. These investments are typically safe, but they went down in value because they paid lower interest rates than a comparable bond would pay if issued in a higher interest environment.
Most of SVB’s clients are startups and technology-focused companies that have become more cash-strapped in recent years. Venture capital funding was drying up and companies not profiting from the business were having to tap their stored funds on deposit at Silicon Valley Bank, which closed on Friday. So those customers who had deposited their money with Silicon Valley Bank began withdrawing their money immediately. The bank began selling its own assets to meet its withdrawal requests. The Silicon Valley clients were mostly businesses and wealthy individuals, who are more fearful of a bankruptcy as their deposits hover around $250,000, which is the government-imposed limit for deposit insurance. The bank had tried to raise additional capital through outside investors, but was unable to find any.
What are the effects of the Silicon Valley bank failure?
Many startups had ties to the bank, causing their employees to fight for their salaries, fearing they would have to halt their projects and even fire or furlough their employees until they could access their funds. Silicon Valley Bank’s failure will be compared to the 2008 recession. At this point, advisers don’t expect any problems to spill over into the broader banking sector. Silicon Valley Bank had a large but unique existence serving almost exclusively the world of technology and VC-backed companies, while other companies are more diversified into 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. Many problems will arise at tech startups if the remaining money is not released immediately.
Impact on Indian startups
The failure of SVB is having a lot of effects on Indian startups. Many startups have funds on deposit with the bank, and it will also reduce the fundraising ability of Indian startups, as the US-based bank was a key source of funding for tech startups. Many Indian start-ups, such as companies such as Bluestone, PayTM, One97 Communications and Bharat Financial Inclusion, which SVB has invested in, now fear that their raised funds will get stuck. This has led these companies to cut wages, lay off employees, and delay major projects.
SVB has played an important role in the Indian start-up ecosystem by providing banking and financing services to well-established start-ups such as Flipkart, Ola and Zomato. SVB has also helped Indian startups expand into the US market by providing infrastructure and support to set up operations in Silicon Valley.
To reduce the impact of SVB’s bankruptcy, Indian startups whose funds are on deposit with the bank can diversify their banking relationships to reduce their exposure to a single bank. This may involve opening accounts with multiple banks.