On Friday, the 16th largest tech bank in the USA has the sudden collapse of silicon valley bank sent a shockwave to the startup community, which has a source of reliable capital and deposit partner, particularly for some tech companies
After the collapse, the bank run has started by the startup community, and investors withdrew the deposit amount. Of this issue, the Silicon Valley bank was shuttered by the California banking regulator in a bid to protect the depositors following dive into the value of its investments holding and rush of withdrawal.
Cause for the failure of Silicon Valley bank?
The downfall can be attributed to a bank run, which is a large number of depositors withdrawing their funds from bank all at once due to the fear of the banks. Insolvency due the hit hard by downturn in technology stock over past year. As well as the federal reserve aggressive plan to increase the increase rate to combat the inflation. Using the customer investment the bank bought the billion dollar worth of bond these are typically safe, but valve of these investment are safe, the valve of these investment are fell because of the lower investment rate.SVB customer are mostly tech centric company and startup companies that started becoming more needy cash for past few year. Venture capital funding was drying up, companies were not able to get additional rounds of funding for unprofitable business and therefore had to tap their existing funds. This led to withdraw their deposit make the bank to sell their own asset to meet customer withdrawal request. SVB customer are mostly wealthy which make more fear of bank failure of deposit $250000 is a government imposed limit on deposit insurance. This make bank insolvency. The most large problem is bank large deposit , the vast majority is insured due to its largely startup and wealthy customer base.
Impact on Indian startups?
There are several Indian startups such as PayTm, Bluestone, One97 communication & bharat finance have exposure to SVB investment now worried that their fund raise may now stuck. This could lead to cash crunch for many companies, which may be cut cost, delay project and lay-off employees.
SVB play a major role in many Indian startup companies to provide funding to many of the country’s most successful startup including Ola, Flip kart, Zomato etc., SVB has also help in an instrument in helping Indian startup expand in US market. Provide with necessary infrastructure.SVB help in diversifying their banking relationship to reduce their exposure to any one bank.