SVB collapse an existential threat for startups, says Y Combinator's Garry Tan | What does it mean for Indian startups?

It has been a crazy 48 hours in Silicon Valley. 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 will likely liquidate the bank's assets to pay back its customers, including depositors and creditors.

This move was a 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 $2,50,000 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.

In the wake of the SVB's collapse, uncertainty within the startup community has only intensified. Founders are now concerned about accessing their funds, meeting payroll obligations, and covering operating expenses.

Garry Tan, president and CEO of Y Combinator, told CNBC late Friday night that, "Over 1,000 YC companies have been affected with a third not being able to make payroll in the next 30 days."

Calling the collapse of SVP an "existential threat for startups", he said that "these depositors will not survive without a government plan to ease this liquidity crunch."

Speaking for startup founders unable to access their deposits, Tan emphasised that the future of tech in America and the world is under threat "if we allow these companies to go under." This is a national security issue that will splash across the entire economy, he summed up.

Sam Altman, CEO of OpenAi and former president of startup accelerator YCombinator, said in a tweet that investors need to offer “emergency cash to your startups that need it for payroll or whatever.”

He added: “no docs, no terms, just send money.”

Meanwhile, Arjun Sethi of Tribe Capital Right tweeted on Friday that "now VCs are writing emails to disclose SVB exposure."

In an email interview, veteran investor, Kanwal Rekhi told me that "The worst-case scenario is too dire to contemplate. Almost all startups and VC funds in SV use SVB."

Calling the crisis, a perfect storm, Rekhi, explained," It does not appear from the balance sheet that the bank is actually bankrupt. It appears to be a liquidity issue caused by a perfect storm. VC business is slowing down so incoming deposits have slowed down while the old deposits were being drawn down to cover the expenses of the companies. Bank's reserves are tied up in long-term bonds that are not immediately liquid and are somewhat impaired because of the rising interest rates. Hence the cash crunch."

The nervousness is palpable, and reverberations can be felt in India too.

Padmaja Ruparel, co-founder of Indian Angel Network, which recently launched a Rs 1000 crore fund for early-stage startups, feels the regulators were too late to wake up to the crisis, "The SVB is in a worrisome situation. And it is very surprising that the regulator didn’t take action earlier."

However, the impact of SVB's collapse on Indian startups is difficult to quantify yet, according to most people I spoke to. "We are working with our portfolio companies and LPs to help mitigate the impact", a top investor based in the valley told me via chat. This is not going to be an easy weekend in the valley as founders scramble to regain control of their deposits, most of whom have not slept in the last two days.

In a phone conversation from Los Angeles late at night on Friday, Sanjay Nath, co-founder and managing partner at Blume Ventures, said that "while things are going to be clearer by Monday, the current situation was worrisome, especially due to the fact that SVB was deeply entrenched in the silicon valley economy."

"The market was surprised at how quickly the bank collapsed", he observed.

The scale of contagion, according to Nath, "will be limited to SaaS and generally, there is at least a 50 percent chance that most SaaS founders are backed by SVB given its visibility."

Working the phones all night to take stock of the situation, Nath said he has been speaking to bankers, LPs, and founders in the valley and at home and the "good part was that pro-active founders were able to pull out most of the capital before the FDIC came in."

As Nath continues to work with portfolio companies and partners to assess the damage, he expects the pain to continue in the medium term.

While Indian SaaS companies in the US are most likely to be affected by the closure, the broader Indian startup scene is relatively insulated for now. "Our companies haven’t yet been affected," Padmaja Ruparel reflected.

A much-admired company for its support to tech businesses, Silicon Valley Bank was the most preferred bank for VC firms and technology startups.

"I always had a great experience working with SVB since my days in US venture capital, seeing their support to startups post the 2008 financial crisis, so this rapid unravelling is very sad and shocking," Nitin Sharma, General Partner at global early-stage venture capital firm Antler told me.

In fact, earlier today, top VC firms including Accel, General Catalyst, B Capital, Khosla Ventures, Lightspeed Ventures and Ribbit Capital among others issued a joint statement in support of Silicon Valley Bank.

Words of support also came from entrepreneur-investor, Kunal Bahl who tweeted on Friday saying, "In 2012, in the midst of pivoting our business model from online coupons to e-commerce, we found ourselves in a cash crunch as investors weren't convinced we could pull it off. #SiliconValleyBank extended a small debt line to us that kept us going. Hope they get past this phase."

Antler's Sharma added that while "many India-US cross-border startups moved funds to other accounts yesterday, and some could not. The hope now is that over the weekend, the FDIC and one of the larger banks arrange for an orderly acquisition of the assets, such that the contagion is contained and uninsured assets above $250,000 deposits are protected. In some form, SVB could hopefully even make a comeback. Until that is clear, there will be a period of worry as a number of startups and founders sort out payrolls and credit lines. However, I am hopeful that the industry will come together and contain the fallout."

Kanwal Rekhi expects SVB to "be merged with one of the deep-pocketed banks very soon. The Fed may have to grease the skids by sweetening the deal. The government cannot let the first domino fall."

It is going to be tough to predict the long-term impact of this crisis on startups already reeling under an extended funding winter amidst an economic slowdown. As Sharma said, "What is harder to see is the downstream or second-order impact if there are significant layoffs and credit defaults. But by and large, the broader Indian startup scene is relatively insulated for now."