SVB fiasco could hit the ability of startups to make payroll payments

Indian startups with US exposure are in chaos as the Silicon Valley Bank (SVB) was shut down by US regulators. According to industry players, the immediate issue that many startups need to tackle is payroll payment, which has to start from Monday, March 13 in the US.

Startups are struggling to move their money out of the bank, but with the regulators shutting down operations they will have to wait till Monday.

Abhay Singhal, co-founder of Inmobi group, and who resides in Palo Alto said that SVB is an important bank in the Bay area. He said that SVB made banking very simple for the startup ecosystem, especially for Indian entrepreneurs.

“I am not surprised that many VCs recommended SVB to portfolio firms because its popularity in the Silicon Valley was much ahead even than the traditional large banks like JP Morgan, Chase, First Republic etc,” he added.

But the problems many say will begin from Monday, as the US has a semimonthly payroll system. “The immediate concern for many startups, including the Indian entrepreneurs, will be access to liquidity as they have to meet the payroll requirement in this week and one towards the end of the month,” explained Singhal.

SVB has been a preferred bank for a lot of Indian SaaS and Y Combinator-backed startups largely because of its flexibility and maintaining ease of fundraising operations.

Garry Tan, CEO of Y Combinator in an interview with CNBC said that this is an extinction-level event for startups. According to a petition on Y Combinator website, in the Y Combinator community, one-third of startups with exposure to SVB used SVB as their sole bank account.

“As a result, they will fail to have the cash to run payroll in the next 30 days. By that measure, we can estimate that payroll-related furlough or shutdown will impact more than 10,000 small businesses and startups. If the average small business or startup employs 10 workers, this will have an immediate effect of furlough, layoff, or shut down, affecting over 100,000 jobs in the most vibrant sector of innovation in our economy,” said the petition that already has the backing of 2,8000 founders and CEOs that employ 180,000 people.

“The news comes as a big shock and the shockwaves could have a limited impact on Indian startups directly and indirectly. Although many of the startups have already migrated their bank accounts to a different bank. However it is still being advised to not withdraw deposits from the bank which makes sense as banks operate on limited reserves, but we have to understand that these startups operate on a very limited runway and the effects could be detrimental for them if they do not withdraw their funds on time,” said Gaurav V K Singhvi, co-founder at We Founder Circle.

Dhruvil Sanghvi, founder LogiNext and an early-stage tech investor in a tweet said: “One of my portcos had 75% of funds with @SVB_Financial. They managed to talk to

@FDICgov on the helpline after 8 hours on hold. Here's the link #FDIC gave them to file their claim & await the resolution. The link will accept SVB claims starting Monday. https://resolutions.fdic.gov/claimsportal/s/”

The second impact could be on fundraise as well. “The deals won’t go away, they will be put on pause as VCs would prefer to focus on their own portfolio firms. But this could be a very short-term impact,” added Singhal.

Many are hoping that SVB will get acquired by one of the bigger banks. Elon Musk already tweeted that he would like to acquire SVB.