Let’s face facts. The warning signs were evident even before the Silicon Valley Bank’s (SVB) collapse. There are key lessons in banking that Indian founders can learn from shrewd players who spotted the ominous trends early and found lifeboats before this startup ‘Titanic’ sank.
Spotting trends early is second nature to Spencer Schneier, the founder of Commenda. Spencer saved many Indian Startup founders from the SVB fiasco by getting their funds out early before the collapse of the once-revered and now-beleaguered banking destination for startups.
Since Friday, Spencer and his team have been operating a 24*7 hotline offering free advisory meetings to help startup founders find a safe haven after the largest banking failure since the 2008 financial crisis.
In this story, Spencer and Team ProdWrks bring you important lessons and insights in banking that Indian founders can learn from the SVB fiasco.
Spotting ominous trends early
The collapse of SVB may have been a shock to many, but it was expected, says Spencer who highly recommends startup founders to read financial newsletters like ‘The Diff’ written by Byrne Hobart – who he says “thinks a few steps ahead” and warned the readers.
“In February, Byrne wrote that SVB was highly leveraged 100 to 1, and its books were not solvent. Though it's hard to predict how these things play out, we heard some rumblings and we saw the imminent collapse coming. So we proactively moved out 100% of the accounts of the handful of our clients who were banking with SVB, into safer places.”
Spencer for instance had transferred his accounts and those of his clients to banking alternatives like Mercury – a fintech company providing diversified banking services. He says, “We can proudly say that 100% of our clients were protected and not impacted as a result of spotting trends early and acting proactively.”
Banking in the United States - Still a safe bet for Indian Founders
“I think people are confused. They're asking questions about the macroeconomy, whether US banks are secure, and if they can trust their funds there. It's hard enough to understand the business regulations and the business environment in your own country (India), let alone in a second country where you've never even been,” says Spencer.
Despite the lingering doubts about the US banking ecosystem in the minds of Indian founders, Spencer still believes that incorporating Indian startups in the US and banking there offers a better bet.
“One of the appeals of setting up a US company and a US bank account for Indian startups is that it's a good business environment. Incorporating in the United States is better as there are lower regulations and taxes and bigger funding opportunities. This is one of the reasons why C-Corp model (parent company model) has been growing in popularity.”
Safer banking using Sweep Network to diversify funds
Sweep networks are a way for customer deposits to be spread across a network of banks. The standard Federal Deposit Insurance Corp (FDIC) insurance covers up to $250K in deposits for each client at a bank in the US, regardless of the amount of money held in that account.
However, Indian startups banking with just a single bank in the US tend to have more money in their bank accounts than the $250K insurance that FDIC guarantees.
“The first thing we're saying to Indian founders is you should have multiple accounts when banking in the US. We've been explaining to our clients who are Indian founders that some of our banking partners use the Sweep Network, where they keep your funds in multiple banks to increase the amount of deposit insurance you have. Your deposit remains insured for all of your funds,” says Spencer.
As of 2022, 89% of SVB’s $175 billion in deposits were uninsured. These deposits include funds from a large number of Indian startups which were in limbo after SVB collapsed.
“The US is supposed to be a good place to do business. And this (the SVB failure) is a major concern regarding the US being a good place to do business. But, I think that the FDIC, the Federal Reserve, and the Treasury Department stepped in to offer some peace of mind to depositors,” says Spenser, radiating hope that not all is gloom and doom in the US startup and banking ecosystem.
The Key to choosing the right banking partners
Until a month ago, Silicon Valley Bank offered a “middle ground for Indian startup founders” evaluating options between larger banks and new-age Neobanks. SVB was considered a reputable, prestigious old-school banking brand, and at the same time, they were forward-thinking and easy enough to deal with for Indian founders.
But Spencer advises that to minimize the risks of conducting business in unstable economic environments, businesses must be more careful while choosing banking partners and must stick to established players.
“The best solution for startups is to try to open a bank account with a systemically important financial institution like JP Morgan or Citibank - these are the big banks in the US that the government has deemed too big to fail.”
“If you can spread your funds across a few of these platforms, like Brex and Mercury, you’ll be in better shape. That’s what we’re recommending to our customers, but it’s hard to offer that as broad advice to every business in India without knowing the specifics of their circumstances,” he says.
Singapore vs United States
“Singapore is not a bad option. They have a phenomenally impressive regulatory approach. They're very intelligent, you know, they very much understand what's going on.”
The US is still a good place to do business, and the #bankingsystem is more or less going to be in good shape once the dust settles. But this is still a period where people will need to be a little bit more vigilant.
