Why SVB Collapsed? Understanding the Sequence of Events & Analysis

The story of SVB, Pandemic, Startup Economy, and the Funding Winter is a fascinating tale for entrepreneurs to understand. The catastrophic bank crisis has left many Indians in doubt! Infact, many people are asking if any Indian bank can fall into the same trap as SVB? 

So let’s start with the beginning of the end for Silicon Valley Bank.  

The Curious Case Of SVB Crash, Pandemic, Startup Economy, and The Funding Winter

In 2020, the world was hit by an unknown virus, COVID, which led to a global shutdown, resulting in minimal commercial activity and a drop in consumer consumption. Many businesses failed due to the global shutdown caused by COVID-19. As a result, venture capitalists, angel investors, businessmen, and banks found themselves with idle cash and deposits

To revive economic activities, the United States announced pandemic packages that were essentially free cash, which meant almost interest-free loans to businesses. The US could print dollars as much as it wished. This was given to businesses in the form of packages. The Federal Reserve reduced interest rates on deposits to the point that capital was available at almost zero interest.

Also Read: What’s Elon Musk’s ‘End Game’ Behind His Tweet On SVB Collapse?

Since money was available in the market, VCs, Angel Investors, and HNIs were more than willing to invest in the business. This is because deposits & bonds could not earn much due to negligible interest rates. 

Image Courtesy: Visual Capitalist  

Once Upon a Time in Silicon Valley

This led to the Startup funding boom in 2021, and most investors started putting their money into Startups, mostly tech and health tech Startups. Silicon Valley-based Startups received funds as they had never seen before. Valuations skyrocketed, and everybody thought this golden period would never end. 

According to the PwC India report, after reaching a record high of $35.2 billion in 2021, funding for Indian startups dropped by 33% to $24 billion by the end of 2022.

On the global front, a report by Crunchbase shows that venture funding for Startups hit $300 billion in 2020, which was a 4% increase from 2019. In 2021, global venture investment hit a record high of $643 billion, which marks 92% growth from 2020.

Also Read: Indian Government Assures Startups Amidst Silicon Valley Bank Collapse

Was Silicon Valley Bank Getting Easy Money?

All this funding has actually helped banks too! Silicon Valley Bank, in particular, has seen a boost in deposits, likely because of its stellar reputation, brand, and location. As per available data, by the end of 2022, SVB had a total deposit of $189 billion, of which 83 percent came from just 37000 accounts. As lending rates were low in the market, SVB invested most of the money into bonds, which were yielding not high but decent income and were safe and secure. 

Image Courtesy: Visual Capitalist  

The Russia-Ukraine War & Funding Winter

However, by 2022, countries understood that a total lockdown was disastrous for the economy. Consumer demand was rising sharply due to artificially created liquidity in the market. Due to high demand and supply chain disruptions, the world started feeling the heat of inflation, which hurt people. The Russian-Ukrainian war put further pressure on the global economy. Baring India and a few other countries, the West and Europe fell into double-digit inflation. This started hurting the political economy of world leaders. 

Also Read: 1K Startups Impacted; 100 Jobs at Risk n SVB Debacle 

Fed Rate Hike & The Political Economy

So to control inflation and suppress demand, the Federal Reserve started hiking interest rates, sucking liquidity out of the market. New sovereign bonds were launched at higher interest rates, and suddenly, all those VCs, Angel Investors, and Banks had better investment options. They preferred investing in upcoming bonds with higher yields and other investment opportunities like real estate. Thus, the massive funding winter of 2022-23 came into being.

Image Courtesy: Visual Capitalist  

Show Me My Money! 

New Startups had no option but to eat into their deposits in banks, instead of availing loans at higher interest rates. SVB was hit the deepest as it was the beneficiary bank of these deposits. Suddenly, when Startups started using its deposits, SVB fell into a liquidity crunch. The bank had invested the deposits in sovereign bonds at a time when interest rates were low. However, now that inflation has risen and the Fed has raised interest rates, newly issued bonds are floating at higher interest rates. This causes the market value of the SVB's bond holdings to crash. Even by selling those bonds, SVB could not have been able to meet the withdrawals by Startups.

Also Read: SVB Collapse; How IT Startups Are Feeling The Heat? 

How Safe Are Banks In India?

This scenario has led many people to wonder if any Indian bank could fall into the same trap as SVB. Open-source research shows that Indian banks have been more conservative in their lending practices. This means that they are not as exposed to the same risks that SVB was. However, the story of SVB, the pandemic, the Startup economy, and the funding winter is a fascinating one for entrepreneurs to understand. It shows how quickly the tides can turn in the world of business and how crucial it is to be prepared for any eventuality. 

As the world recovers from the pandemic and the funding winter, entrepreneurs and investors will undoubtedly be keeping a close eye on the market. They will also be taking steps to mitigate their risks.