The crisis at Silicon Valley Bank (SVB) in the US has rattled some Indian investors and founders running SaaS companies with accounts at the lender. As the bank’s stock lost over 60% of its value on Thursday, venture capital funds checked in with homegrown startups, especially those headquartered in the US, about how much of their capital is held at SVB Financial Group.

While late-stage Indian-origin SaaS (software as a service) firms like Zenoti told ET that they moved out of SVB last year, early-stage SaaS firms do bank with the troubled lender. Saurabh Kumar, founder and CEO of early-stage firm Rezolve.ai, said the company was keeping a close watch on developments but is yet to pull out all the funds.

SVB is a preferred lender for a majority of startups and VC funds in the US. Companies also get payments in these bank accounts. According to information sourced from the lender’s website, it has business with nearly half of all the US-based venture-backed startups, and about 44% of the US venture-backed tech and healthcare companies that went public last year.

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New-age lenders Mercury and Brex have come up to be platforms of choice for most early-stage startups, largely operating in the software-as-a-service (SaaS) domain, multiple investors and founders told ET.

“We moved 90% of our money from SVB to Brex in the first half of Thursday–I did it even before recommendation of VC funds,” Lightspeed-backed Rephrase.ai founder and CEO Ashray Malhotra told ET. “I have had my personal money stuck in Yes Bank for a while. Big learning. As a result of that, I don’t care how good a bank is, safety of principal is important.”

Healthtech SaaS unicorn Innovaccer founder and CEO Abhinav Shashank told ET that there is a general concern.

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“Almost every VC has asked their portfolio companies to remove their funds from the bank. I think some larger bank is going to buy the bank, otherwise it could be very dangerous,” he said.

A startup backed by accelerator Y Combinator told ET that it had managed to completely move its funds out of SVB on Thursday and that it had been planning on doing this. “There was news about it for the last 10 days in different forms. A lot of people were moving out like we did last evening,” he added.

The founder of this early-stage SaaS firm told ET one of its global investors advised it to be cautious on the matter, telling founders to keep the minimum amount of money required in the bank and derisk themselves to the extent possible. This is apart from a similar note that went out from Y Combinator president Garry Tan.

Other SaaS companies with Indian-origin founders too have taken heed of advisories from investors and have started pulling out their funds from the bank as Federal Deposit Insurance Corporation (FDIC) backing will only help recover $250,000 from bank accounts if SVB were to face insolvency.

Hari Pragdish, the lead volunteer from SaaS Insider, a community of SaaS startups in India and the US, told ET that he has been helping about 30 companies in the space since Friday morning with transferring funds to HSBC from SVB. “I was just talking to one more investor. He has advised all… if you’re in the US, just walk into any bank, open an account and move at least six months of your operational capital to the new bank,” he Pragdish said.

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Transfer of assets

Founders and investors are worried any limit imposed on withdrawals could lead to multiple challenges.

“I think the idea is to just be safe with your capital. We are checking with everyone (founders) on their exposure and advising to be spread out across banks,” a senior executive at one of the venture funds told ET, after having spoken to his portfolio firms.

Startup founders are considering alternative options for transferring their raised capital overnight even as SVB has asked clients to stay calm and hold on to their bank accounts

About 11 of 15 Y Combinator (YC) startups with a public listing bank with SVB, with seven of them having begun with SVB Startup Banking, according to the accelerator’s website.

On the other hand, most late-stage SaaS companies have, over the years, de-risked themselves by opening accounts with several lenders, including traditional bankers. Spa and salon management software provider Zenoti for instance was with SVB until it reached $20 million in total annual revenue.

“Later we have completely moved to JP Morgan Chase and Bank of America,” founder and CEO Sudheer Koneru told ET. “While we ended most of our relationship with SVB a year ago, we started moving away maybe two years ago… now we have two banks rather than just one.”

Wait and watch

Some companies are staying put. Among those in India, enterprise service desk automations services startup Rezolve.ai wants to wait and watch instead of pulling out from SVB. Founder and CEO Kumar told ET that SVB continues to be the SIG Venture Capital-backed firm’s “active” banking partner. It also has accounts with other lenders.

“SVB has been an innovative financial service partner for the startup ecosystem. The news out of the bank yesterday was surprising and CFOs across startups are tracking the developments closely. Generally speaking, post 2008 crisis the US banking system is quite well capitalised and the regulators have institutional memory on how to avert a crisis,” Kumar said.

The company has raised close to $15 million so far and expects to reach $50 million in revenue by 2025.

Ankit Ratan, co-founder of Signzy, a digital infrastructure enabler for banks, said it would seem counterintuitive for startups and venture capital funds to pull out from SVB.

Mohan Kumar, managing partner at SaaS-focussed fund Avataar Ventures, agreed. He told ET that if startups start withdrawing their bank accounts, SVB will become insolvent the next day.

“Recommending companies to pull their bank accounts away from SVB is like shooting yourself in the foot. Banks cannot have all their customers withdrawing on the same day. They probably keep 3-4% of the cash, historically speaking. The other long-term products are not liquid,” Kumar said.

The spark

On Wednesday, the SVB Financial Group announced that it was raising $2.25 billion in a share sale, in addition to having sold securities worth $21 billion from its portfolio. The bank also said it booked an after-tax loss of $1.8 billion on the sale of these investments. This led to solvency fears, sparking the stock crash and scaring customers into pulling out deposits.

With the US Federal Reserve raising interest rates aggressively over the last year to rein in inflation, the value of existing bonds that were issued at lower interest rates has fallen. Banks, which own these bonds, are as a result of the falling values, sitting on steep unrealised losses.

While this is a typical phenomenon in a changing interest rate cycle, red flags started coming up for banks when they were forced to sell these securities to cover for withdrawals.

Another aspect of the rising interest rates was the decline in funding for startups as the venture capital ecosystem took its foot off the gas pedal. In India alone, VC funding fell by a third in 2022 from 2021.

The funding crunch faced by these startups, which are clients of lenders such as SVB, caused a decline in deposits to the level that was unexpected. In the US, SVB counts household new economy companies such as Shopify and Pinterest among its customers.

Following the fear of a possible insolvency situation among depositors, SVB chief executive officer Greg Becker reportedly held a call on Thursday in an attempt to inform the bank’s customers of its health, while urging them to not pull their deposits or spread panic about the lender’s situation.

In a letter to the bank’s shareholders, explaining the rationale behind the fundraise announcement, Becker wrote: “We are taking these actions because we expect continued higher interest rates, pressured public and private markets, and elevated cash burn levels from our clients as they invest in their businesses.”