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Friday, June 21, 2024

SVB’s Collapse Is Causing Chaos in India’s Tech Sector

At 3 am on Friday, March 10, Kesavan Kanchi Kandadai was woken by a phone call from a friend in the US. Within hours, Kandadai, founder and CEO of HR tech startup ishield.ai, was rushing to arrange wire transfers. One hundred percent of his company’s funds were held in Silicon Valley Bank, which was collapsing. 

“This is a problem that no startup founder will anticipate,” Kandadai says. “It’s like a black swan event.”

When he spoke to WIRED, Kandadai hadn’t slept for two days, and had been attending back-to-back webinars with lawyers and accountants. Kandadai thought he’d got all but a fraction of his funds out, but as of Monday, March 13, they still weren’t showing in his Indian bank account. Access to his SVB account had been restored, but his wire transfers hadn’t gone through. International transfers are still suspended, leaving him in limbo.

The collapse of the California-based bank, sparked by a run on deposits late last week, has reverberated across India’s tech sector. SVB provided banking services to more than 2,500 venture capital firms and roughly half of the VC-backed companies in the US. That includes a large number of Indian companies with US venture capital funding, and much of India’s $13 billion software-as-a-service industry, which services American clients. Many founders, like Kandadai, have had to scramble to get their money out or risk being unable to make payroll and pay suppliers.

“This was a global catastrophe. A serious number of jobs were at risk everywhere from small towns in India that you’ve never heard of to San Francisco,” says Anand Krishna, founder of fintech startup Inkle. “A lot of startups in India are still remote and those jobs were at serious risk because people were running out.”

The rapid growth of India’s tech sector has attracted billions of dollars of VC funding from the US over the past decade, and brought many Indian companies into incubator programs such as Y Combinator. Heavyweight US investors have typically—and controversially—pressured global companies to set up domiciles and bank accounts in the US. 

SVB was popular among Indian founders because the bank allowed them to open accounts remotely, and unlike high street banks like JPMorgan Chase or Wells Fargo, it didn’t require them to have a social security number (SSN).

“They’ve been exceptionally good to tech founders, especially founders like ours, who don’t have an SSN number or a local presence in the US,” said Kandadai. “So they were able to really work with the founder sitting in India, open the account, get them access, and do all the paperwork digitally, and get started.” Kandadai had his SVB bank account set up and running in a couple of days.

It isn’t clear how many Indian founders were banked by SVB, but it’s likely to be in the hundreds. Local media reports suggest that around 60 Indian startups backed by Y Combinator have deposits over $250,000 each trapped in SVB—the US government typically guarantees deposits up to $250,000. Among publicly listed Indian technology companies, gaming firm Nazara Tech reported to the bourses that it has $7.75 million—around 11 percent of its cash—stuck in SVB.

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“In case of India, the number of Indian startups [impacted] is definitely very high compared to other nations, except for US, but the capital would not be as much,” says Smriti Tomar, founder and CEO of Stack, a Y Combinator–backed startup, which had some funds in SVB. “What we can safely assume from that is that most startups have an exposure somewhere between $250,000 up till $1.5 million—this was the bracket where the majority of the startups believe that the money is blocked.”

Over the weekend, after SVB went down, hundreds of WhatsApp groups, communities, and support forums emerged to help people figure out how to react. 

Many of them are customers of Krishna’s startup Inkle, which offers an accounting and tax filing product to companies registered in the US with an Indian subsidiary. Krishna says that on Thursday, March 9, most of his clients weren’t worried about their funds, but by Friday everyone started taking it more seriously. The biggest problem, he said, was that many of these founders did not have secondary bank accounts and instead relied heavily on SVB. Since then, founders have had to open dollar accounts across several banks, in GIFT City—India’s answer to Delaware—in Gujarat, which provides offshore accounts to non-residents and offshore entities. This means that once they are able to access funds in their SVB accounts, they will have an account to transfer them to.

Many startups feared for their businesses. Krishna says that one of his customers, whose entire funds were in SVB, told him that he was going to run out of money in his India account within weeks—and that if the US didn’t bail the bank out, he’d have to shut down and lay off his 100-person staff. “Founders were very, very anxious about that,” Krishna says.

Tomar says that she, along with other founders, started looking at where they could cut back to survive. “It was not a good situation to be [in]. We were almost going to push that button of extreme cost-cutting,” she says.

She’s now waiting to see what unfolds. The US government has said that depositors at SVB in the US will have their deposits protected and will be able to access their funds again, although it’s not clear when international wire transfers will resume.

However, the bank’s collapse means that many startups in India are rethinking how they calculate their risks, and will have to diversify their banking relationships in the US and in India—because nearly no one saw this coming.

“I’ve been around for 23 years in Silicon Valley and I’ve seen ups and downs and economic downturns, but for a bank as big and influential to shut down in two days, with no precursor, no signs of faltering, is unprecedented,” said Anil Advani, founder and managing partner at Inventus law, a global technology law firm, which also had some money in SVB. “Nobody, including [the] most senior management of SVB, had any idea. In fact, some of my friends told me [because] the stock had gone down, they were looking to buy more shares as recently as Wednesday of last week.”

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