Silicon Valley Bank Fallout: Paying Staff First Challenge For Start-ups

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

Start-ups are struggling to move money out of the bank. With regulators shutting down operations, they will have to wait until Monday.

Abhay Singhal, co-founder, InMobi Group, who resides in Palo Alto, says SVB is an important bank in the San Francisco Bay Area. He says SVB made banking very simple for the start-up ecosystem, especially for Indian entrepreneurs.

“I am not surprised that many venture capitalists (VCs) recommended SVB to portfolio firms because its popularity in the Silicon Valley was more than the traditional big banks like JPMorgan, Chase, First Republic, etc,” he adds.

But the problems, many say, will begin from Monday, as the US has a semi-monthly payroll system.

“The immediate concern for many start-ups, including Indian entrepreneurs, will be access to liquidity as they have to meet payroll requirements this week and one towards the end of the month,” says Singhal.

SVB has been a preferred bank for a lot of Indian software-as-a-service and Y Combinator-backed start-ups, largely because of its flexibility and maintaining the ease of fundraising operations.

Garry Tan, president and chief executive officer (CEO), Y Combinator, in an interview with CNBC, said this is an extinction-level event for start-ups.

According to a petition on the Y Combinator website, one-third of start-ups with exposure to SVB used it 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 start-ups. If the average small business or start-up employs 10 workers, this will have an immediate effect of furlough, layoff, or shutdown, affecting over 100,000 jobs in the most vibrant sector of innovation in our economy,” reads the petition that already has the backing of 28,000 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 start-ups - directly and indirectly. Many start-ups have already migrated their bank accounts to a different bank. However, it is still being advised to not withdraw deposits from the bank. This makes sense as banks operate on limited reserves. But we have to understand that these start-ups operate on very limited runway and the effects could be detrimental to them if they do not withdraw their funds in time,” says Gaurav V K Singhvi, co-founder, We Founder Circle.

Dhruvil Sanghvi, founder, LogiNext, and an early-stage tech investor tweeted: “One of my portfolio companies had 75 per cent of funds with @SVB_Financial. They managed to talk to @FDICgov on the helpline after eight hours on hold. Here’s the link #FDIC gave them to file their claim and await resolution. The link will accept SVB claims, starting Monday. https://resolutions.fdic.gov/claimsportal/s/”.

The second impact could be on fundraising as well.

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

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