A majority of YCombinator-backed startups, which typically deposit their first cheques in Silicon Valley Bank (SVB), are scrambling for working capital as the bank collapsed.
About 60 percent of YCombinator’s startups having Indian founders and operations in the US or India, have exposure to SVB, people familiar with the matter told Moneycontrol. Moreover, according to YCombinator’s President and CEO Garry Tan, a third of the incubator’s portfolio startups will not be able to make payrolls in the next 30 days. Tan said that in an interview with CNBC.
SVB is the default bank for most YC-backed startups, and while it is not mandatory for founders to open accounts with the Silicon Valley lender, most tend to do business with the bank, thanks to its relationship with investors from the Valley.
“There are YCombinator companies that exclusively bank with Mercury, bank with Brex, bank with JP Morgan Chase, and other corporate banking partners. But I still feel the overwhelming majority of us bank with SVB because they have such good inroads with the investor community,” said Rahul J Mathur, Founder and CEO, Verak Insurance, a YCombinator-backed insurance tech startup. Mathur sadi that Verak's deposits with SVB are fully insured.
More than 60 percent of Indian YCombinator startups had $250,000 plus in SVB, while the rest have an exposure of up to $250,000, according to a person familiar with the matter. The source of the information is a WhatsApp group of YCombinator founders, where there was a poll, which showed this, the person said. According to him, very few YCombinator startups have nil exposure to SVB.
Corroborating Mathur, Shantanu Gangal, Founder and CEO of Prodigal Tech, said, “SVB has been quite supportive to founders. As a result, a lot of YC founders do end up banking with SVB.”
Moneycontrol has sent queries on the matter to YC and this story will be updated when they respond.
Silicon Valley Bank’s parent SVB Financial Group informed the market late on March 8 that it sold about $21 billion of securities from its portfolio, due to which it will have an after-tax loss of $1.8 billion in the first quarter. This triggered a massive sell-off of its shares on Wall Street, triggering panic.
After multiple deposits worth millions of dollars were pulled from the bank in fear of a major financial crisis, California regulators closed down the tech lender late last night and put it under the control of the US Federal Deposit Insurance Corporation (FDIC) as receiver for later disposal of its assets.
“A hitherto unknown or underestimated risk for startups and venture capitalists has emerged from the left field ― the risk of concentration of funds of very many startups in deposits with one bank in the US. This risk is not limited to just US startups, but also extends to those based out of India that are domiciled overseas,” said Sanjeev Bikhchandani, Founder of Info Edge.
The biggest risk is for smaller or younger YC startups that do not have multiple bank accounts. Two YC-backed Indian unicorns and one soonicorn that Moneycontrol spoke with said that they have already moved most of their money from SVB.
For instance, the soonicorn founder said that the company had $15 million in SVB around a week ago, but moved most of it to a Citi Nostro account as soon as they heard about the problems. As of now, they have around $250,000 left in the flailing bank. However, he said that the company had 90 percent of its cash in Indian bank accounts even before this chaos unfolded.
“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 VK Singhvi, Co-founder at angel fund We Founder Circle.
Controlling the damage
While the companies are expected to get a $250,000 federal insurance claim on their deposits starting Monday, they are already out on the street looking for short-term loans to tide over the crisis.
Venture debt investor Ravi Chachra said that if startups don't get the bulk of their money back, they will be unable to run payroll by the month end. This will create a huge problem and they will have to rationalise their workforce, and this may even be the demise of many small startups.
“In the past 24 hours, we have been getting many calls from startups to provide emergency funding. We have also created a small $50,000 emergency venture debt funding to help YCombinator companies with emergency debt. Companies can pay back via equity if cash is not available,” he added.
According to the founder of a payments company which has hundreds of startups as customers, while the FDIC money will come in on Monday, the uncertainty over the rest of the money will linger on for a while even as the process of liquidating SVB’s assets starts.
He also indicated that Indian entrepreneurs and investors are in a huddle to figure out ways of moving their money quickly from US-based neobanks as there are some fears of a contagion gaining ground.
“Bringing money to India through FDI will cause a lot of issues, including tax implications. The best way is through the GIFT City option. We are also setting up some forums to help companies transfer their money through GIFT city,” he added.
Startups are building products to help SVB-impacted startups that need emergency capital. For instance, AngelList, a US-based startup investment platform, has launched Lifeline Agreement. This Agreement offers a Promissory Note with a standard interest rate (7 percent) for a short-term loan from investors lending enough to meet urgent needs.
“We have built a product that will help startups in arranging standardised loan agreements and docs (temporary loan from investors) with online signing, funding and built-in banking access (if your company needs it),” wrote Sumukh Sridhara, Co-founder of AngelList.
But, the question is, why have so many Indian startups been caught in the chaos?
For starters, being a YC-backed startup is seen as a stamp of approval as the incubator investor has backed as many as 217 startups in India, including some of the most valued ones like Meesho, Razorpay and Groww, among others. According to data by Tracxn Technologies, globally, YCombinator has backed more than 4,300 companies and counts 70 unicorns on its portfolio. In the summer cohort of 2022, YCombinator selected 19 Indian companies.
The YC backing also comes with an onerous rider. Indian companies have to flip their corporate entities to the US – typically in the state of Delaware – to avail of funds from the incubator. A couple of years back, Indian startup investors had spoken out about this rule.
For example, Bikhchandani of Info Edge had tweeted at the time, “Shades of the East India Company type of situation here ― Indian market, Indian customers, Indian developers, Indian workforce. However, 100 percent foreign ownership, foreign investors. IP and data transferred overseas. Transfer pricing issues (are) foggy.”
Why does YC need to force Indian companies to flip to US structure?
This flipping creates so much of extra work for founders & early Indian investors who backed the company.
They like the Indian market & talent, but not Indian laws.
Indian Govt should take a talk with them.
— Rajesh Sawhney.
However, veteran SaaS entrepreneur and investor Pallav Nadhani is of the view that the companies in the sector don’t necessarily need bank accounts outside India.
“Our customers used global payment gateways or wire money to our bank account. But the difference is we were annually renewable, as opposed to monthly or quarterly subscriptions for many SaaS companies,” he said.
Also, we've not raised money from VCs and didn't have team members outside. So, we didn't need a US account for that. If you've to spend money outside India, sending money outside is a pain. So, yes, it's necessary to have bank accounts outside in that case,” he added.