SVB Failure Impact; Can NBFCs Be The Friend In Need For Cockroach Startups?

What is a "unicorn" and "cockroach" startup?

In simple terms, a startup which is an early-stage company becomes a "unicorn" when its valuation reaches $1 billion without being listed on stock exchanges. Becoming a one billion dollar company is rare and majorly happens through fundraising in a series of rounds either led by venture capitalists or through raising funds from financial institutions such as banks.

Meanwhile, cockroach startups are those companies that are resilient and have the capability to survive in tough times. The term cockroach is because cockroaches have the unearthly ability to survive harsh and extreme conditions of the environment.

SVB was the largest lender to some of the biggest names in the tech sector, unicorns, and other startups. Its fallout during the time when funding winter has intensified comes as a drawback for these startups. Cockroach startups are now in focus than compared to unicorns!

Earlier this week, as per reports, Union Minister Rajeev Chandrasekhar has taken up the issue of the SVB failure with Finance Minister Nirmala Sitharaman. He has pitched for fine-tuning the Indian banking system according to the requirements of startups. According to Chandrasekhar, deposits amounting to almost $1 billion belonging to Indian startups were with the Silicon Valley Bank (SVB).

By end of the December 2022 quarter, overall, in SVB's deposit funding --- early-stage technology sector (tech startups) accounted for the most weight at 29%, followed by the technology sector at 20%, while international at 18%, US global fund banking at 14%, early-stage life science/healthcare at 8%, and private banks at 7%, as per JP Morgan report.

According to Karan Desai - Founder of Interface Ventures, the funding winter for startups in India had become a reality prior to the recent announcement of Silicon Valley Bank, along with some other US banks going bust. Funding for Indian startups fell by 33% to $ 24 billion in 2022, as compared to 2021 – 2023 appears bleaker.

So how can NBFCs help?

Desai explains that two clear themes are emerging from this financial turmoil. Firstly, Indian startups are realising the utility of domiciling their operations in India to have greater access to local funding, as opposed to the earlier model of depending completely on raising foreign capital. Secondly, one increasingly hears about startup cockroaches, as opposed to unicorns. This is the basis of the realisation that this will be a year of survival and bootstrapping, as opposed to hypergrowth.

Further, he added that the funding void left by large foreign banks can be filled to some extent by Indian NBFCs that focus on providing structured funding to new-age companies. There are a number of NBFCs that do a variety of structures including Term Debt, Working Capital lines, Acquisition Finance, etc., against the security of cashflows, promoter guarantees, and some secondary collateral which can be a hard asset &/or cash margin. While such funding is costlier than normal bank finance, it is available much faster, with a lot more room to structure the deal to suit the business. Typically, VC / PE backed companies are preferred by NBFCs for such transactions."

Meanwhile, Aditya Damani, Founder, and CEO, of Credit Fair said, the prevailing scenario of Silicon Valley Bank in India is one that demands close attention.

Damani added that with the possibility of SVB winding up its loans and portfolio, there is a potential risk of liquidity withdrawal that could impact the liquidity flow into the start-up ecosystem. However, as the funding winter continues, there are opportunities for NBFCs, revenue-based financing fintechs and venture debt funds to step in and support revenue-generating startups with positive EBITDA margins. In this time of funding stress, investing in start-ups requires a deeper understanding of the risk-reward dynamics. Lenders prefer to back those business models that prioritize stability and sustainable growth.

According to the India Venture Capital Report 2023 by Bain & Company and the Indian Venture and Alternate Capital Association (IVCA), India's venture capital investments experienced a recalibration in 2022 owing to the growing macroeconomic uncertainty and recessionary fears. Deal value in India plunged by 33% from $38.5 billion to $25.7 billion in 2021-22, with the majority of the decline taking place in the second half of the year as macro headwinds intensified. However, early-stage investments saw sustained momentum, resulting in more than 1,600 VC deals in 2022, and a slight expansion in deal volume. Notably, the report also highlighted that India created more new unicorns than China for the second consecutive year in 2022.

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