A bank run and 100 hours of chaos | Mint – Mint

How did an Indian startup deal with the closure of Silicon Valley Bank, the confusion and anxiety? Here’s the story
Around 8.30pm on 9 March, Sujit Karpe was finally done with a long work day. Back home in Pune’s Swargate neighbourhood, he was about to bite into a piece of chicken, his dinner for the night. That’s when his chartered accountant called.
“You have a lot of money in Silicon Valley Bank (SVB), right? You need to withdraw that,” Lalit Valecha, the chartered accountant, told him. “It is going into a crisis.”
Karpe is the co-founder and chief technology officer of iMocha, a software company operated by Mocha Technologies. The eight-year-old company offers skills assessment services to enterprises, in India, the US and other parts of the world.
Karpe comes across as a reasonably calm man. But that night, he did get a tad jittery.
iMocha had raised $14 million in January 2022, in a funding round led by venture capital (VC) firm Eight Roads Ventures. Though it had a substantial amount of money in an Indian bank account, around $4 million of that capital was parked in SVB.
He immediately rang up a friend who once owned a bank in the US. Did he need to pull out the money? The friend had an assuring tone. “SVB is a stable bank; nothing will happen,” Karpe was told.
But then, WhatsApp groups started buzzing with other entrepreneurs voicing concern.
Sure, SVB was a big bank, with over $200 billion in assets. Most startups who do business in the US typically opened their first bank account with SVB. How did the bank become such a darling? The answer is simple. SVB was the most startup friendly bank. It went out of its way to court international and local startups as well as the tech community. For instance, it was the earliest bank to not require a US social security number for a bank account.
As startups grow bigger, they tend to diversify their banking partners. But smaller companies and early-stage startups mostly rely on one bank. iMocha, which closed 2022 with revenues of $5 million to $8 million, is a case in point. It relied exclusively on SVB in the US.
Things were bright and sunny up until last week. SVB reported a $1.8 billion loss after selling its short-term portfolio, which had declined in value with interest rates going up over the past year. The bank told shareholders that it was raising over $2 billion in equity to cover the loss and meet regulatory compliance.
The loss, nonetheless, spooked the market. Investors in the US have been particularly edgy after the collapse of the crypto-focussed Silvergate Bank, a regional bank, last week. On 12 March, another crypto-friendly bank, Signature Bank, closed down.
“People in WhatsApp groups, and the investor community, started advising (startup founders) to pull out our money,” 40-year-old Karpe said.
But that night, transferring all the money back to Indian banks was not something Karpe considered seriously. iMocha needed the capital for its expenses in the US. In any case, transferring $4 million to India would be difficult without proper documentation.
Before hitting the bed, at 2am on Friday, 10 March, Karpe hurriedly applied online for two new US bank accounts. One of them was with Mercury, a fintech company. “Apply in 10 minutes to try business banking as it should be”, Mercury’s website states.
‘peer-leading ratios’
Karpe woke up to better news. Mercury had accepted his application—within two hours of him applying. “It was super quick. Early morning, they (Mercury) sent an email saying the bank account is active,” he said.
Now, it was just a matter of hours before he could transfer money out of SVB. Or so he imagined.
What Karpe did not imagine was the panic, now widespread across the US and the rest of the world. More VCs took to social media to warn startups. Privately, they urged their portfolio companies to quickly get their money out of SVB.
Thus, began a tale of bank run.
Between Thursday and Friday, several startups and VCs pulled their money out. SVB later reported that depositors withdrew $42 billion, creating conditions for insolvency. Some depositors were faster than the others.
When the US banks opened that morning–Friday night in India–Karpe placed two wire transfers. One for iMocha’s India account and one for its new Mercury account in the US. Both failed.
Interestingly, around the same time, SVB was still trying to calm its clients. Investors and startups received emails from SVB executives with information on the bank’s assets and its ability to fulfil obligations. Karpe received an email from SVB executives at around 6pm, IST. Among other things, the email said: “SVB is well-capitalized, with a high-quality liquid balance sheet and peer-leading capital ratios.”
Four hours later, around 10pm in India, the bank was shut down.
‘Petrol tank in reserve’
Founded in 1983, SVB was headquartered in Santa Clara, California. Regulators in California appointed the Federal Deposit Insurance Corporation (FDIC) to take over the bank. FDIC offers deposit insurance to depositors in American commercial and savings banks.
The federal institution promised to insure deposits up to $250,000. This amount would be available on Monday morning, or 13 March, FDIC stated.
For iMocha, which had $4 million in SVB, this was a small amount. For the second night in a row, Karpe went to bed worried. The same would have been true for several other startups doing business in the Indo-US corridor.
“It was complete chaos. And unfair. Somebody else made a mistake, and it was impacting you and your employees. Not just one or two startups, but thousands of companies, and 100,000 employees,” Karpe said.
iMocha employs 240 workers across Pune and Bengaluru. But only a few key employees initially knew about the growing conundrum. “We didn’t tell our employees about our exposure to SVB. As founders, we needed to limit the negatives at our end,” Karpe said.
Amit Mishra, the second founder of iMocha, and Karpe previously ran a business process organization, which they exited in 2012, making “decent money”. iMocha started in 2015.
The founders took solace from the fact that they had some money in the bank in India. “Our middle class mentality of saving for an emergency saved us,” Karpe said.
Karpe and Mishra had been transferring small amounts from SVB to an Indian bank account each month before the crisis hit. The idea was to use the capital for employee expenses and also to maintain a buffer. However, there are limits to such transfers since Indian banking regulations require invoices and use of proceeds when money is deposited in an Indian bank account. Without the right documentation, such deposits can be treated as income and taxed.
In fact, they had enough money to pay salaries for over eight months. But SVB’s closure, and the stuck capital, could potentially impact their expansion plans.
Karpe, and other founders, soon discovered that they had a former FDIC executive in their community. Upekkha, a startup accelerator, had invested in iMocha. It had also invested in a HR-tech company called RippleHire. The founder of RippleHire, Sudarsan Ravi, had worked with FDIC during the Lehman Brothers crisis of 2008-09 and had first-hand experience of managing bank closures. On Saturday evening, 11 March, he got on a Zoom call with 30 startup founders.
He also made LinkedIn and WhatsApp posts about FDIC’s functioning—few Indian companies were aware of FDIC before the SVB crisis.
“SVB is like a Mercedes where the petrol tank went into reserve. Seems more a case of liquidity loss and an unfortunate bank run than anything else. SVB is a prime asset that most banks will want to bite off FDIC hands. In all probability, Monday morning, you will have positive news. At worst, another week or so. If less than 250k, then Monday morning is definitive. If more than 250K, a week max,” Ravi wrote on LinkedIn.
“Ravi’s experience and confidence boosted our confidence. My wife also sent me links, noting that no depositor in the US had lost money since the 1990s,” Karpe said.
‘Extinction-level threat’
Indian banks, meanwhile, started reaching out to local startups to set up dollar accounts in Gift City in Gujarat, an international financial services centre. Other funds, such as Recur Club, Klub, and GetVantage, offered interim financing. These companies are revenue financing firms or firms that arrange loans against invoice.
While iMocha had no immediate need for funds, it still had to strategize. Karpe, co-founder Mishra, and other senior employees huddled over the weekend to figure out the path ahead, just in case the SVB episode ended on a sour note for them.
“We had to plan on what we were going to do. How do we run our business; how do we still grow our business; what cost cutting we need,” Karpe said.
By Sunday evening, in India, news reports suggesting an auction of the bank poured in. While this was good news, influential VCs were calling for more.
For an economy that rides on innovations, SVB, some held, was a “too big to fail” sort of a bank, given its track record of backing small startups. Silicon Valley investors said that if the US government did not intervene, then startups with exposure to SVB would lose access to their working capital. This could trigger further layoffs for the industry. Garry Tan, president of Y Combinator, an American technology startup accelerator, called it an “extinction-level threat for startups”.
“What should FDIC do? @FDICgov to guarantee all bank deposits by Sunday night before Asia open and call a time out,” Bill Ackman, the chief executive of Pershing Square, tweeted on 12 March. Pershing Square is an American hedge fund management company. Ackman said he personally did not have any exposure but some of his portfolio companies may have held deposits in SVB.
“Leaders & anti-tech folks: 1,000+ startups just like this are about to implode—because they deposited their money in a bank account with a top 20 firm. The contagion has already started—you just can’t see it yet,” tweeted Jason Calacanics, an early investor in Uber and Robinhood. Lately, he is one of Elon Musk’s inner circle advisors.
There is a concern that the SVB’s collapse would cause a run on other banks, turning into a systemic risk.
The startup community in the US is powerful. It is often difficult for administrators to ignore their concerns. Early on Monday morning, around 4am in India, three US government bodies—the US Treasury, the Federal Reserve, and the FDIC–issued a note saying all deposits were secure.
‘Operate multiple accounts’
Indian startups such as iMocha woke up to this encouraging news. “That is when we found relief,” Karpe said. All he heard before Monday were reassurances.
By Monday evening, nearly 100 hours after the crisis hit, iMocha was able to access its SVB account and transfer funds to Mercury.
Karpe said he has learnt a valuable lesson, in de-risking. Over the past two days, the co-founder and his team researched top large multinational banks, such as JP Morgan and Bank of America. Eventually, the company would like to move their deposits to such banks. His core team is also emphasizing on better treasury management, so that the funds are not parked in fixed deposits.
“Our learning is to operate multiple bank accounts in the US and multiple bank accounts in India,” Karpe said.
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