‘Ab number aayega inka…’: Ashneer Grover (On VC)
SVB Crisis Key Events:
8th Mar (Wed): US market shocked by the fund requirement news ($2.25 billion in stock) of Silicon Valley Bank (SVB). (Source: CNBC)
9th Mar (Thru): It’s understood that SVB’s CEO, Greg Becker, held clients meeting after a (-) 60% tumble in the stock on Thursday 9th Mar. (Source: CNBC)
(The SVB Financial Group stock price plunge – Image: Google)
10th Mar (Fri): SVB shares went down to (-) 62% in premarket trading. Regulators then shut down the bank and said the FDIC would protect insured deposits.
9:30 AM (ET); 40-year-old startup's Godfather, stopped by FDIC (Federal Deposit Insurance Corporation, USA) from further trades in the market.
The History Before the SVB Crisis
Silicon Valley Bank (SVB) is a US-based bank that provides financial services to technology and life science companies, as well as venture capital firms and private equity funds. It was founded in 1983 and is headquartered in Santa Clara, California.
SVB is known for its expertise in the technology industry and has become a go-to bank for many startups and emerging growth companies. The bank offers a wide range of financial services, including commercial banking, investment banking, venture debt, and venture capital services. SVB also has a significant presence in China, the UK, and Israel, providing support to local startups and innovators.
One of the key advantages of banking with SVB is the bank's understanding of the unique needs and challenges faced by technology and life science companies. SVB has a team of industry experts who are well-versed in the latest trends and technologies, and who can provide customized financial solutions tailored to the needs of each client. This has made SVB a popular choice for startups and emerging growth companies, who often struggle to secure financing from traditional banks.
Another advantage of banking with SVB is the bank's focus on innovation and entrepreneurship. SVB has established numerous partnerships with incubators, accelerators, and other organizations that support startups, providing resources, and mentorship to help companies grow and succeed. The bank also hosts events and conferences that bring together industry leaders and innovators to share ideas and collaborate. (Source: Wikipedia)
2 Major Cause of SVB Crisis:
SVB assets' devaluation:
Deposits fell from nearly $200 billion at the end of March 2022 to $173 billion at year-end. SVB anticipated single-digit percentage by year end of 2023. SVB Financial bought billions of dollars of safe assets, primarily longer-term U.S. Treasuries and government-backed mortgage securities. SVB’s securities portfolio rose from about $27 billion in the first quarter of 2020 to around $128 billion by the end of 2021. (Source: Wall-street Journal).
Longer-term U.S. Treasurys and government-backed mortgage securities: |
|---|
Longer-term U.S. Treasuries and government-backed mortgage securities are types of bonds issued by the U.S. government that provide investors with a fixed income stream over a longer period of time than T-bills. They are considered safer investments than corporate bonds because they are backed by the U.S. government. Long-term Treasury bonds have maturities ranging from 10 to 30 years, and pay a fixed interest rate over the life of the bond. Government-backed mortgage securities are pools of mortgage loans that are packaged together and sold as bonds to investors, with the principal and interest payments guaranteed by a government agency. (Source: Wikipedia) |
|
SVB wanted to sell them at the end of tenure they were assured to earn the promised rate of return. But, as the Feds in US increased the rates in recent months, the securities which were accumulated by SVB over the years suddenly worth less on the open market than they are valued. As a result, they could only be sold at a loss. The unrealized losses on its securities portfolio at the end of 2022 jumped to more than $17 billion. (Source: Wall-street Journal)
Deposit shrinkage:
With tech industry’s growth after pandemic, SVB’s deposits grew 233% ($ 200 billion from $ 60 billion). With the deposits growth SVB’s accumulated T-bills back fired with the Fed’s rate hike. Startup's funding began to dry up as private fundraising became more costly, causing its clients to withdraw funds. Getting new deposits became more expensive, with the Fed’s rate hikes. Deposits fell and which lead a serious dent on the bottom line of (-) $1.80 Billion. (Source: Forbes)
Story so far
Ans: SVB had to sell securities at diminished value to make up for the shortfall of the deposits that came from startups. High interest rates of the feds cause it to devaluate its holding securities. This dried up Startup funds and caused a huge loss to the bottom line.
Impact of SVB Crisis on Indian Banking & Capital Market:
As the news flashed, all major financial instruments showed some corrections. In US with S&P 500 corrected by (-) 56.73 points (-1.45%), Dow Jones (-) 1.22 points (-2.21%) and Nasdaq-100 (-) 165.60 points (-1.38%) on Friday. This led to weakness in banking & NBFC stocks. The Nifty Bank index crashed (-)771.30 points (-1.87%), along with it most major banking stocks also corrected on weekend trading. (Source: Google Finance)
e.g. HDFC Bank (-)42.60 points (-2.61%) & ICICI Bank (-)13.80 points (-1.61%).
Experts say it will have no impact on India. As Indian banks are fairly secured lending ration. Margins of Indian banks have improved in recent quarterly results. But the margin increase can be attribute to rate hikes in India. According to experts it’s also a small-time effect. And if prolonged rate hikes follow in India, we might witness similar outcome.
Fear mongering has already shown effect on the share market with come corrections. It will be interesting to see further impact on Monday. But if experts are to be believed it will have no to small time impact on our capital market as a whole.
Impact of SVB Crisis on Indian Startup:
Indian startups received $24 billion in 2022 a (-)33% fall from the $37 billion they raised in 2021 (Financial Express).
There is already a cash crunch in the Indian Startup eco-system. The news of the SVB crisis could not have come at a worse time. Majority of Indian startups have US exposure in some way or the other. Indian startups with considerate US exposure can have significant impact from this.
Some top Indian startup which raised funds from SVB are Bluestone, Carwale, InMobi and Loyalty Rewardz.
YCombinator- Backed Startup:
Y Combinator (YC) is a startup accelerator that provides funding, mentorship, and resources to early-stage startups. It was founded in 2005 by Paul Graham, Jessica Livingston, Trevor Blackwell, and Robert Morris and is headquartered in Mountain View, California. (Source: Wikipedia)
YC has become one of the most prestigious startup accelerators in the world, with a strong track record of success. Since its inception, YC has funded and mentored over 2,000 startups, including well-known companies such as Dropbox, Airbnb, Stripe, and Reddit.
60% of YCombinator’s startups having Indian founders and operations in the US or India, have exposure to SVB. SVB is the default bank for most YC-backed startups. (Source: Moneycontrol)
Some top YCombinator backed Indian Startups
2 Major Lessons from SVB Crisis
Banks & NBFCs:
Not much impact for Indian banking systems if experts are to be believed. They believe there is zero change of ripple effect for Indian Banking sector. We may witness short-term sentimental impact on the Indian Capital Market.
They have erred on the side of caution for the Indian central bank. Prolong rate hike could have similar impact on Indian Banking system and on the lending eco-systems.
However, the current market correction may be a blessing in disguise for long-term investors looking to purchase banking and NBFC stocks.
Startup Eco-system:
With significant US exposure, the startup Eco-space could have a significant impact in the coming days. Already, startup funding in India is declining; this news may have an impact on their day-to-day operations. YC-based ventures have already revealed that 30% of their backed ventures will struggle with payroll. As a result, the startup eco-system is at a crossroads.
Interested in discovering more topics like this? Subscribe to us now to stay updated on our latest articles and insights.
Reference List
1) CNBC News
3) Wikipedia.
5) Forbes website.
6) NSE website.
The SVB crisis seems like more of an unethical practice done by top management of the organization.
It's high time that one should realise and diversify their assets and cash reserves to avoid risking to much exposure from one identity