As the dust settles on the Silicon Valley Bank saga, India’s start-up and investor communities are treading with caution. Their biggest lesson learnt: diversify risks from day one

The immediate bullet has been dodged,” serial entrepreneur K. Ganesh tells us over a Zoom call, almost a week after US regulators took receivership of Silicon Valley Bank (SVB) and backstopped all deposits, triggering a collective sigh of relief in the global start-up founder community. “But start-ups should now be more careful about where they park their money.”

Hindsight is a wonderful thing, they say. And Ganesh, who mentors and invests in young Indian start-ups, has no qualms about it. “Even a month ago, I would’ve said SVB is 100 per cent safe,” he says. He’s also of the view that SVB wouldn’t have unravelled so fast if not for social media and the internet. “Today news goes viral and there’s instant panic. Then there’s mobile banking, which makes it possible to withdraw $42 billion in a day. So, we need to prepare for this internet era.”

Ganesh is, of course, alluding to one of the most dramatic financial meltdowns in history. SVB, a trusted banker to the global tech ecosystem for around 40 years, saw its deposits evaporate almost overnight after some investor-types rang the alarm bells on the internet, leading to a (digital) bank run of epic proportions. By the time SVB’s assets were seized by US regulators on March 10, over 37,400 start-ups and 1,000-plus VC firms globally were staring at a liquidity crunch.

Can one adequately prepare for a Black Swan event like this?

After the SVB collapse, several observers say that start-ups need to have clear visibility into the balance sheets of banks they partner with. But that may not be pragmatic. “It’s like asking a car buyer to do a technical evaluation of brakes and airbags before buying the car. This is supposed to be the job of a specialist regulator and we should let them do that,” says Anand Prasanna, Managing Partner at mid-stage VC firm Iron Pillar Fund. So, what would his advice to portfolio companies be? “Other than the standard treasury management best practices like distributing the cash across three-four sizeable banks, there’s nothing we will recommend,” says Prasanna.

This may have been the biggest learning from SVB’s collapse that left hundreds of founders and investors in the lurch for 72-odd hours. The need for diversification and risk management, or simply having a Plan B, has never been greater. But most early-stage start-ups—the worst hit by the SVB fallout—typically don’t have a Plan B. Heck, sometimes even their Plan A isn’t market-tested or crisis-proofed. They do what a hundred others before them did or, simply, what their investors tell them to do.

But that might be changing after the “extinction-level event”—as Y Combinator dubbed it—they were faced with recently. “For the first time, risk management is getting all the required attention. Neither VCs nor founders ever discussed this earlier,” says Neeraj Tyagi, Co-founder & CEO of WeFounderCircle, a global community of founders and angels. “Every investor wants to understand who your technology head is, do you have vendors, or are you building tech in-house, etc. But the finance stack is not even a slide on the pitch deck.” Tyagi adds that even in growth-stage start-ups, all the talk is about cash flows and profitability, not risk management.

SVB has changed that, perhaps for good. “Does the start-up have a Plan B? Should they have more than one financial partner? Should they go with an established bank? All this is becoming a part of boardroom discussions now,” says Tyagi.

With the growing chorus around risk management, the oft-asked question is: Should start-ups hire a CFO early in their journey, possibly after raising their first round? “When a start-up is at a very early stage, it’s still trying to figure out its product market fit. It can’t afford a CFO. And the CFO won’t be interested in that experience either,” says Ganesh. Adds Ashish Fafadia, Partner at Blume Ventures, a leading early-stage VC that is now mandating its portfolio companies to have deposits in multiple well-capitalised banks: “Not all companies have seasoned CFOs who understand the risk-reward equation adequately… The SVB crisis is a reminder to hire the right set of people early and, at the same time, have an ecosystem of supporters who can guide the company in such [financial] decisions,” he says.

This ‘ecosystem of supporters’ must necessarily include people who can underscore the need for diversification. “The very fact that SVB collapsed is because it didn’t diversify its portfolio; it kept investing in treasury bonds heavily,” says Gaurav Dani, Founding Partner at IndusLaw, a top law firm. “[Start-ups] have to diversify funds across banks to hedge the risks. If you have $100 million sitting in the bank, you don’t need all the money on Day One. Keep some to make the payrolls, and invest [the rest] in a manner that you have liquidity when you need it,” he explains.

Not putting all eggs in one basket has sure benefits, as Ruchit Garg, Founder & CEO of agritech start-up Harvesting Farmer Network, discovered amidst SVB’s fall. “While our investment was much more than $250,000, which FDIC [Federal Deposit Insurance Corporation] was insuring by default, we were not in the crunch mode to pay our vendors [because we were diversified],” he shares. “Start-ups should diversify and have multiple accounts. If they can afford [it], have offshore accounts, too. It’s good to have some money in each country because a bank run can happen anywhere.”

Parag Dhol, General Partner at Athera Venture Partners, concurs. He believes start-ups shouldn’t depend on any one party for anything—be it funding, customers, or banking partners. Eight of Athera’s active portfolio companies had operations in the US, with seven of them exposed to SVB. Calling the collapse an “isolated incident”, Dhol says, “I don’t know if we can have a playbook in advance. Three weeks ago, if you’d asked a WhatsApp group of founders which bank they bank with in the US, their unequivocal answer would’ve been SVB. It was well run, had very good customer surveys, and knew the Indian ecosystem well.”

The Indian government, too, seems to hold a similar view. In a recent Twitter Spaces discussion, Rajeev Chandrasekhar, Minister of Electronics and IT, and Skill Development and Entrepreneurship, said that hundreds of Indian start-ups “opt for banking in the US because it’s tied to their fundraising”. Per government estimates, over $1 billion worth of deposits made by Indian start-ups were stuck in SVB. “American banks that operate out of the Valley have had a long record of good services. The aura and reputation of the bank also play a role,” said the minister.

But, within a week of SVB deposits becoming accessible again, following the intervention of the FDIC, Indian start-ups moved over $250 million into GIFT City branches of local banks. “That’s the silver lining in this dark cloud. There is new-found awe and respect for the Indian banking system,” says Chandrasekhar. He reckons this could become an opportunity for Indian banks to become more start-up friendly. “They need to consider start-ups an important client base, connect with them, and smoothen the red tape for all US-based Indian companies,” he explains.

Ask founders and investors if GIFT City can be a good alternative to banking in the US, and they tread with caution. “There is apprehension in the start-up community that you won’t be able to easily remit the money outside India to fund operations,” Blume’s Fafadia reveals. “So, the government needs to take steps to assure start-ups that the money in GIFT City accounts will be treated as overseas capital and not be mixed with domestic capital.” He adds that the current situation is also an ideal opportunity for the government to position India as a stable destination for deposits, and educate people globally on the maturity of Indian banking.

Even outside of GIFT City, the consensus is that Indian banks need to become more “tech forward” and founder-focussed. It is time they stood by the country’s rapidly growing innovation economy. “While these banks may be hesitant to lend to start-ups, they could design products such as deposits, banking accounts, transaction banking and API integration around their needs. By supporting start-ups through the initial setup, large banks can unlock a significant mutually beneficial future opportunity,” Fafadia explains. Iron Pillar’s Prasanna agrees: “More and more Indian companies are now scaling globally. Providing truly global solutions for these companies in an efficient manner could be one starting point for Indian banks.”

But SVB went beyond just traditional banking—by offering sundry advice to founders to helping them on the operational side. “SVB stood out because of how it resolved issues,” says Shachin Bharadwaj, a serial entrepreneur dabbling in cross-border start-ups, who fortunately withdrew his money from SVB accounts. “Now, we’ve picked neo-banks like Brex and Truly Financial in the US. But it doesn’t give the comfort of a large bank. You can’t build a relationship with them.” Hence, it is all the more essential for SVB to come back to business. “Hopefully, they will put this behind and in the new avatar [under a new owner], go back to their original shape,” says Dhol of Athera.

The SVB crisis has also reignited the domicile debate. Tech veteran T.V. Mohandas Pai has gone on record to say that Indian start-ups should resist pressures from large investors to domicile outside, especially in the US or Singapore. However, for India-born SaaS start-ups, which have three-fourths of their customers overseas, there’s often little choice. “There are too many technical and economic difficulties in this [domicile in India] for it to be practical for companies that have the majority of their customers in the US,” says Iron Pillar’s Prasanna. “But for companies with a majority of business in India, it is something which founders should anyway consider.”

Why are so many Indian start-ups headquartered in the US? Of course, there’s SaaS—the great Indian export to the West after IT services. But some founders also have the desire to be acquired by US-based companies, and believe that proximity makes things easier. Dhol of Athera has a contrarian view. “Our position on this, unlike some large funds, has always been that we prefer you incorporate in India,” he says. “People think they can list on Nasdaq or a company in the US will acquire them and they may find it less attractive if they are India-incorporated. Our reading is entirely different. People will come and acquire you if you create something worthwhile, irrespective of your jurisdiction.”

However, it is not as if domicile can be changed overnight. PhonePe, one of India’s most valuable unicorns, recently footed a Rs 8,000-crore tax bill to shift its domicile from Singapore to India. CEO Sameer Nigam called it a “stiff shock” that an early-stage business would never be able to absorb.

But even if companies domicile in India, they are mandated to have bank accounts in the US if they serve customers there. “You need to have a US account because you have to pay your vendors, employees and suppliers there. So, you cannot avoid the local American bank altogether,” says Ganesh. “But what you can do is keep deposits only up to the insured limit, and bring the excess money to GIFT City or keep it in securities. That’s a good alternative [for funds] you don’t require in the short term.”