With so many early- and mid-stage start-ups, the SVB issue has created an unpleasant scenario in the global start-up ecosystem. The SVB crisis resulted from a combination of factors and can be termed as a function of economic downturn, inflation, and the bank’s overall risk management strategies. As part of its Q1 2023 strategic actions update shared on March 8, the bank liquidated practically all of its Available-for-Sale securities portfolio worth $21Bn, reporting a loss of $1.8Bn which led to panic in the public markets.
In the past five years, the Indian Start-up ecosystem has raked in around $100 billion in venture capital funding. However, FY22 witnessed a drop in Indian VC funding to $25.7Bn (0.7x of 2021 funding) possibly due to the market pullback by VC funds that were picky about their investments. Nonetheless, FY22 investments were still 50% higher than investments in Start-ups in 2019.
Impact of SVB Crisis on the Indian Start-ups ecosystem
As per our research, the SVB crisis can potentially have both negative and positive spillover impacts on Indian start-ups as outlined below:
- Reduced funding from international investors
Due to increased caution and risk aversion among many international investors as a direct result of the SVB crisis, investments in Indian start-ups could possibly decline. The start-ups can become vulnerable to a funding crunch which can result in a scale-down of operations or shutdown. International investors are important for late-stage start-ups, the unicorns & decacorns, and so the slowdown in international investors can adversely affect the scaling-up plan of late-stage start-ups.
- Increased scrutiny of start-ups’ financial standing and its effect on innovation
The current crisis may result in investors giving more consideration to the financial stability and risk profile of Start-ups and giving more weightage to their revenue, profitability, and cash flows. Also, we expect a stronger emphasis from investors toward joint ventures & consolidations between new Start-ups and established ones.
- Potential positive spillover impact of the US economy
Despite the negative impacts, there are potential positive spillover effects from the risk of a slowdown in the US economy driven by high inflation, and the US investors are eventually forced to seek out higher growth regions such as India. Indian Start-ups especially late-stage Start-ups just need to navigate the brief period of volatility and slowdown in International capital. A slowdown in the US economy is expected to be positive in the medium to long term with a higher influx of capital into the Indian venture market.
- Positive impact on new opportunities for Financial Service Providers
There are many financial service companies in India that offer the same services as SVB, albeit on a smaller scale, and the collapse presents a chance for new businesses to offer new products and services. For instance, some of the active private sector banks in the Start-up space such as HDFC Bank, ICICI Bank, IDFC Bank, and Kotak Mahindra Bank, through their branches in Gujarat International Finance Tec-City (“GIFT City”), can use this opportunity to replace SVB as a safer home for the foreign currency Start-up capital that has been raised.
- Regulatory oversight and reporting
The SVB problem is expected to lead to further regulatory control and scrutiny of financial institutions, making sure that other banks and financial services providers are properly managing and disclosing their risks. However, in the near term, this would also throw up more opportunities for RegTech Start-ups.
- There could be a shift in investment focus to later-stage Start-ups
Investors may wish to change their focus from early-stage to later-stage Start-ups with tested business models and stronger revenue-generating skills as they become more risk-averse. One can also argue that a reduction in international funding and a shift of investment focus to later-stage Start-ups can put to risk the rate of innovation in India. However, we do not foresee this risk at this stage. There are officially 82,000 Start-ups and counting, along with a multitude of investors, Incubators, Accelerators & Government supported programs. So, we believe that the Indian start-up ecosystem has attained critical mass to sustain global shocks. From a funding perspective, India has a vibrant ecosystem of Government supported players & Angel investors; who have hitherto been largely unaffected by the SVB crisis. So, innovation at the founding stage is unlikely to be significantly affected.
Strategies for Indian Start-ups
In response to the potentially changing investment landscape, Indian Start-ups can adopt various strategies to navigate the challenges posed by the SVB crisis.
- Focus on profitability and sustainable growth
Start-ups will need to prioritize revenue, streamline operations, and make wise financial decisions while focusing even more on profitability and sustainable growth, and also consider securing funds from multiple sources such as Angel Investors, Venture Capitalists, or Crowdfunding Platforms to minimize the risk of relying on a single source and increase chances of long-term sustainability.
- Improve operational efficiency
Improving operational efficiency results in enhanced financial stability and attractiveness to investors. Start-ups will need to pay special attention to reducing their overheads and optimizing their marketing and supply chain strategy.
- Diversify funding sources
Indian Start-ups must look for alternate sources of finance and growth, such as forming alliances with other businesses, signing contracts with clients, accessing Venture Debt, and participating in government-sponsored programmes.
- Transparent governance and risk management
Start-ups will need to be more transparent to demonstrate their overall strength as an operational firm in order to assuage investor fears and improve their reputation.
- Government and Institutional support
Indian government should respond more aggressively to the SVB crisis to ensure there is no materially adverse impact on Indian Start-ups. The last 5 to 7 years have shown tremendous benefits to Start-up ecosystem from various visionary initiatives of the Government such as The Atal Innovation Mission, Start-up India, and the National Start-up Awards. Government should enhance the budget allocation to Start-up ecosystems & Start-up Seed Funds. Moreover, the government should create incremental discretionary allocations to invest in incubators and to make further capital available for investment in early-stage Start-ups. Incubators & Accelerators are force multipliers that catapult Start-ups to the next level.
In conclusion, the SVB issue may significantly impact Indian start-ups, investors, and the venture capital industry as a whole. Start-ups will be able to overcome many obstacles by focusing on profitability, operational efficiency, finding alternative sources of finance, and enhancing governance standards.
This article was originally published in Times of India.
Link to the article: https://timesofindia.indiatimes.com/blogs/voices/impact-of-svb-crisis-on-the-indian-start-up-ecosystem-a-comprehensive-analysis