The last three days were crushing, bemoaned Vaibhav Domkundwar, founder of Better Capital, as he reflected on the weekend that saw the collapse of Silicon Valley Bank, the tech sector's go-to bank.
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"We are coming out of three crushing days. I have been an entrepreneur for 20 years and I don't think I have had an experience like this where you suddenly are told that you may not have access to the only bank account that runs your company."
Better Capital, one of India's most active investors in early-stage startups, saw about 30 percent of its portfolio affected by the crisis. Even as Domkundwar worked with his founders to control the damage, it wasn't easy.
"On Thursday evening, when reports came out, fear came in. A whole ecosystem around the world banks with SVB. We all wanted to be responsible around not causing more damage, but I think the fear just took (on) another proportion and I think every founder was really forced to figure out what's next," he said.
Recapping the events of the weekend, Domkundwar recalled, "Between Thursday night and Friday afternoon (India time), everything became a 100 times worse. People were just not able to wire money. Founders who were supposed to make payrolls — a lot of them found out about the FDIC insurance for the first time. I don't think anyone was able to sleep for the last three days."
On Friday, regulators in California shut down Silicon Valley Bank (SVB) and handed control over to the US Federal Deposit Insurance Corporation (FDIC). As a receiver, the FDIC was working to liquidate the bank's assets to pay back its customers, including depositors and creditors.
This move was the culmination of a shocking 48 hours during which concerns about the prominent tech lender's liquidity prompted startups to consider withdrawing funds and raised fears of contagion risk for the wider financial industry.
Before being shut down, SVB was the 16th largest bank in the United States, operating a total of 17 branches in California and Massachusetts. The bank had $209 billion in assets and $175.4 billion in deposits. It is currently unclear how much of the bank's deposits exceeded the $250,000 insurance limit at the time of its closure. The bank was estimated to be working with over half of the VC-funded startups in the valley.
To prevent a feared systemic panic caused by the collapse of Silicon Valley Bank, the US government along with the US Federal Reserve and the FDIC devised a plan on Sunday to support depositors with money in SVB.
Additionally, depositors at Signature Bank in New York, which was also shut down due to similar contagion fears, will have full access to their deposits. Signature Bank was a popular funding source for cryptocurrency companies.
“Depositors will have access to all of their money starting Monday, March 13”, a joint statement read.
The US Treasury Department identified SVB and Signature as systemic risks and authorised the unwinding of both institutions in a way that fully protect all depositors. The FDIC's deposit insurance fund will cover depositors, including those who were uninsured due to the $250,000 deposit cap.
Furthermore, the US Federal Reserve announced the creation of a new Bank Term Funding Program to safeguard institutions affected by the market instability caused by the collapse of SVB.
The support for depositors came in after a hectic weekend with investors and entrepreneurs petitioning the authorities to intervene.
Garry Tan, president and CEO of Y Combinator, called the collapse of SVB an "existential threat for startups", adding that "these depositors will not survive without a government plan to ease this liquidity crunch. Over 1,000 YC companies have been affected with a third not being able to make payroll in the next 30 days".
The tech investor called on the Congress to act more decisively to save SVB after it was taken over by regulators on Friday.
Tan wrote a petition to Treasury Secretary Janet Yellen, Chairman Martin J. Gruenberg, Chairman Sherrod Brown and Chairman Patrick McHenry asking, “for relief and attention to an immediate critical impact on small businesses, startups, and their employees who are depositors at the bank.” The petition is signed by over 600 CEOs and founders.
“We are not asking for a bailout for the bank equity holders or its management; we are asking you to save innovation in the American economy,” the petition read.
A much-admired company for its support to tech businesses, Silicon Valley Bank was the most preferred bank for VC firms and technology startups, and now the big question, is who can fill the gap?
“In my opinion, SVB was banking a high quality of borrower, it was fueling the innovation economy. The longer-term question is which of the other banks will step up in India for Indian startups but also globally to create the same kind of offerings and services that founders had gotten used to with SVB,” rued Nitin Sharma, co-founder and General Partner at global VC Antler.
“If you’re a 23-year-old founder in life sciences and you get your first angel investor — your first believer to give you a cheque — not many banks until recently would even talk to you because you’re too small for them. So, SVB played a very important role there. And I think time will tell as to what will fill that gap but it’s a big setback for the venture capital ecosystem globally,” he added.
While the immediate threat is contained, there are lessons to be learnt, says Vaibhav Domkundwar of Better Capital, “While it is a shock that none of us wanted, it has also been a great learning experience — for me personally as well as for many of our startups that we worked with for the last three days. What we are basically taking away is: how do we become more resilient? You can’t really say that we parked money in one place and did not know what the FDIC insurance covered; we never went through something like this, so we don’t know — that cannot be the case anymore.”
“A question I have been putting to myself over the last few days is, how can a startup right from the seed stage have access to a fractional CFO who essentially gives them the oversight that is required to help them think through all the things that matter, including treasury and how they are parting the funds that they are raising,” he pondered.
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“I have been a founder all my life, and we are all very focused on just business milestones and several of these things get overlooked. This is an important lesson that the world of startups and the innovation economy has learnt. I know that all our founders and everyone I have spoken to over the last three days are going to take it seriously — they are already putting the next steps in place and you’ll see that we will all come out stronger,” Domkundwar added.
