The aftermath of the SVB collapse makes it clear that startups should focus on their domiciles, and Indian regulators must facilitate easier business conduct in the country.
Here are some measures that startups can think about in light of this banking crisis:
Spread your funds, spread the risk
Startups should distribute their funds across multiple banks, reducing the impact of a bank failure. The SVB event has again underscored the importance of risk management strategies, including the need to spread funds and diversify. Startups can also consider alternative sources of funding, such as crowdfunding, angel investing, or venture debt, to reduce their reliance on traditional financial institutions.
Another important strategy is to cultivate strong relationships with customers, suppliers, and other stakeholders. The trust and collaboration built through these relationships can provide essential support to startups during a financial crisis for their funding in security instruments or fixed deposits.
Focus on Treasury Management
Typically, startups with less than US$ 25 million in funding have only one person handling treasury management tasks such as vendor payments, sourcing, negotiating rates, salary payments, and financial management of cash surplus. Early-stage startups may not have the bandwidth to diversify or de-risk their investments, but a bank sweep-in account can help with de-risking. By keeping only the minimum balance in the current account and investing the surplus funds in a sweep-in account, startups can earn profits and keep their funds liquid, isolated, and protected. Most banks offer sweep-in facilities with current accounts.
The fallout from the SVB crisis left many startups unable to pay their employees’ salaries leading to panic. This is where using Indian banks for overseas treasury functions can become a viable option.
Avoid Panic Withdrawals
In case of a financial crisis like the SVB collapse, startups should avoid panic withdrawals of their money, which can worsen the situation. The 2008 financial crisis is an example of how panic withdrawals led to a bank run, causing the bank to be unable to pay its obligations. This creates a larger delay for the bank to accumulate adequate funds to run the business and repay their depositors.
Test your stress for financial success
To prepare for such events, startups should also hold occasional stress tests to assess the impact of a potential crisis on their business. This can help identify areas of weakness and develop contingency plans. Furthermore, investing in good fund management corporations can provide startups with capital insurance.
The Road Ahead
SVB has played a big role in fostering and nurturing the startup and innovation ecosystem around the world. The loss of an estimated US$100 billion from the ecosystem could result in several startups shutting shop prematurely. In light of this, startups must re-examine their strategies and be cautious when they operate bank accounts overseas when their business is in India. On the other hand, regulators must improve the ease of doing business and create a conducive environment for entrepreneurs. The SVB situation provides all the stakeholders with a unique opportunity to fix some of these problems and accelerate the growth of the Indian startup system.