Banking Lessons from SVB failure for Indian Startup Founders

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Banking Lessons from SVB failure for Indian Startup Founders

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.

Spencer Schneier, founder and CEO of Commenda
Spencer Schneier, founder and CEO of Commenda

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.”

There were also warning trends in the market that all was not right with SVB even before the crash as the CEO of the bank had sold millions worth of SVB shares weeks ahead of the crash.
Founders and VCs who were clever enough to spot these warning signs made their early exits and transferred their funds elsewhere.

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.”

Startup founders may be experts in building products or managing human resources. Still, it is also equally essential to be in the know of macroeconomic trends and have an ear to the ground to know what’s happening in the world of finance.
Banking in the United States - Still a safe bet for Indian Founders
After the recent banking crisis, Spencer senses a need to address the questions that Indian startup founders have about banking in the US.

“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.”

He says many concerns that Indian founders have regarding banking in the US and the safety of the funds held in their bank accounts if the bank collapses, can be addressed by employing better banking practices like the ‘Sweep Network.’
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.

A poll by Indian YC-backed founders on SVB exposure

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 silver lining in this entire banking debacle is that the US government stepped in to guarantee depositors, they would get their deposits back. According to reports. almost all startups with accounts in SVB have got 90% of their deposits back, and maybe even 100% in some cases.

“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.

Now that SVB has gone bust, Spencer believes we have lost that neat, middle-ground banking option. He says we’ll now see many early-stage Indian startups look to the fragmented neo-banking industry as an alternative.

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.”

Spencer also adds a word of caution.
He says, “If you don’t have US operations, opening accounts with JP Morgan or Citibank is going to be hard, and the best solution here is a portfolio investment solution to diversify and have a couple of different banking options using Neo banking providers who work with multiple underlying banks to reduce risk.”

“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
Spencer also sees Singapore as an alternate destination for Indian founders to incorporate and raise funds – but that depends on “who you are raising funds from and what’s the source of your capital.”

“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.”

At the same time, Spencer is confident that the US is still open for business for Indian founders and offers valuable opportunities.

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.

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