Surviving SVB Crisis: Why start-ups shouldn't ignore essential VC advice on cash reserves

In the aftermath of the Silicon Valley Bank (SVB) collapse, several Indian start-ups find themselves in dire straits, struggling to meet payroll and keep their operations running smoothly. These companies reportedly neglected a crucial piece of advice from their investors and board members - to maintain a cash reserve equivalent to 2-3 months of total expenses in a local country bank account and have multiple banking partners.

“When you raise money from a pedigreed investor, they advise you to have at least two-three months of fully-loaded burn always available in your local country bank account (assuming you are at zero revenue) and never bank with just one financial partner. Most start-ups do that in initial phase, but then they move into remitting money out once a month or quarter. Some have not exercised this at all, meaning they may have just month’s worth of payroll,” said an early-stage founder.

Earlier today, Garry Tan, president of Y Combinator (YC), said the collapse of SVB is an “extinction-level event” for start-ups and this will set start-ups and innovation back by 10 years or more. He said 30 per cent of YC companies, exposed through SVB, can’t make payroll in the next 30 days. As per YC founders, a significant majority of YC companies have some level of exposure to the troubled bank.

“It forces all of us to rethink. We shouldn’t have all eggs in one bracket. We do advise them to always have ‘X’ amount of cash first, and never in any one bank etc. Most founders have done that. They know what to do. Sometimes founders, they are busy, they are running around, mistakes happen because they feel comfortable with a particular bank. Nobody is thinking through this. Now it shows that your risk mitigation is weak,” Sasha Mirchandani, Managing Director and Founder of Kae Capital, said.

He said none of his portfolio companies has a large exposure to SVB.

“We have been lucky that we don’t have any companies with large exposure to SVB. Those that have some degree of exposure are already well capitalized, so it’s not going to be life threatening for any of our portfolio companies. We have been lucky, could’ve been worse. However, this situation shows that our risk mitigation needs to be stronger,” he added.

For years, SVB has been the preferred bank for start-ups and VCs worldwide. Several Indian SaaS companies with global market presence, especially US and start-ups within the portfolios of global VCs face significant exposure to the bank.

“Indian start-ups with significant US presence could be impacted. This is especially true of SaaS companies. SVB is the preferred choice for start-ups to open bank accounts, so many start-ups have exposure, not just Indian ones. Start-ups with Silicon Valley investors like sequoia, Accel, Lightspeed etc will be especially impacted,” a unicorn founder said.

According to another growth-stage start-up founder, early-stage start-ups are often forced to do more with less and are therefore more likely to fall into the trap of relying on just one financial partner for their banking needs.

“When a start-up hires a financial controller or a CFO, one of the priority focus areas is to look at counter party risk. He/she would make sure the company is doing business banking with at least two, if not three banks. I would imagine that a lot of people have not done this because usually you would hire a CFO only after raising a Series A. For several months now, due to the funding slowdown, start-ups have been trying to cut cost, so many of them may have postponed those hirings, and their funds would have remained in one bank, in this case, at SVB,” they said.