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A Lookback At SVB Crisis: Diversify Banking Partners To Mitigate Financial Risks
Investors will take several steps in the year ahead, including slower valuation increases, expecting sustainable growth rates from the ecosystem, cash-burning growth rounds becoming harder to raise, and B2B being preferred over B2C as it is easier to underwrite risks
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The recent collapse of Silicon Valley Bank (SVB) has sent shockwaves throughout the tech industry, especially among India-based SaaS startups and gaming firms who had deposited their capital with SVB or its subsidiaries. While some have attributed the collapse to sudden large withdrawals by startups, there were macroeconomic factors that also played a significant role.
Two primary factors contributed to the collapse of SVB: high-interest rates from the Federal Reserve leading to lower asset values, which caused liquidity problems for startup companies, and a slowdown in VC funding that resulted in a low deposit rate with SVB. Although liquidity issues occur every time the Federal Reserve raises interest rates, SVB failed to take necessary steps to address or avoid a bottleneck situation.
The impact of the SVB collapse on the Indian tech sector remains to be seen, and it could quickly escalate into a larger financial crisis that spreads beyond borders. To mitigate financial risks, startups should work with multiple banks to spread out their risk and reduce the impact of any potential issues with one bank. This strategy allows founders to negotiate better terms and rates for banking services and reduces their reliance on a single financial institution.
Alternative funding options like Revenue Based Financing or Venture Debt can be temporary solutions, and some VCs might take credit lines on their books to help with emergency cash for startups. However, there aren't many gains for VCs than flocking to more stable organisations.
Diversifying banking partners is an excellent strategy to mitigate financial risks, and having a Business Continuity Plan (BCP) is also essential. A BCP can help an organisation assess its financial situation, identify potential risks, and plan for contingencies to mitigate the impact of a financial crisis and ensure financial stability.
Looking ahead, investors may take a more cautious approach towards investments. This could result in slower valuation increases, greater emphasis on sustainable growth rates and difficulties in raising cash-burning growth rounds. Startups that focus on building a sustainable business model and have a proven track record of profitability may be more attractive to investors, while those relying on significant cash burn to grow may face more challenges in raising funding.
Startups should be diligent in choosing their financial partners, leaving no stone unturned. Organisations should look forward to ensuring a long runway that lets them do what they are good at - running and growing the business. Additionally, startups may need to cut slack in expenses for the foreseeable future. The recent government intervention, where the Union Minister of State for Electronics and IT, Rajeev Chandrasekhar, recently interacted with Indian startups and venture capitalists (VCs) affected by the collapse and assured them of the government's support to navigate through the crisis, is a positive development for the Indian tech sector. The government's support can go a long way in helping startups and VCs overcome any financial hurdles caused by the collapse of SVB.
The collapse of SVB was due to macroeconomic factors such as high-interest rates and the slowdown in VC funding. To mitigate financial risks, diversifying banking partners and having a BCP in place are essential. Investors will likely take several steps in the year ahead, and startups must choose their financial partners carefully.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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