Silicon Valley Bank is Contagion on the Global Equity Market from Monday

 

Don't be shocked that before the collapse information came to light that the Silicon Valley Bank employees received their annual bonuses Friday just hours before regulators seized the failing bank, according to people with knowledge of the payments. The size of the bonuses has not been determined but Glassdoor.com states that they typically range from $12,000 for associates to $140,000 for Managing Director.

The collapse of the Silicon Valley Bank (SVB) is going to be a big blow for the Indian tech unicorns and SaaS startups which were the biggest customers of SVB. Yes, this might sound to be too harsh but the truth is that liquidity crunch carnage is about to begin and we will witness a serious impact on many companies that are listed in the market across the globe. Since a majority of YCombinator-backed startups, typically deposit their first cheques in Silicon Valley Bank (SVB). They are now scrambling for working capital as the bank collapsed. Nearly $175 billion of the bank's customer deposits are now under the control of the Federal Deposit Insurance Corporation, or FDIC.

This carnage is a contagion that will spill over to other assets and markets. For example, the SVBCollapse has also caused hefty share price losses for German banks. Half of this year's price gains have been wiped out within less than a week. German Banks Index trading at 1980s levels. Silicon Valley Bank. Silicon Valley Bank closed in 2nd biggest bank failure in US history, sending shock waves around the world. The market is treating this as a potential contagion risk.

Startup companies that had Silicon Valley Bank accounts with more than the $250,000 maximum insured by the FDIC have become unsecured creditors, banking experts. The bank lost $1.8 billion in part to losses in a $21 billion Treasury bond portfolio. Fears of contagion have reached Canada, where the bank’s loan book has doubled in the past year. SVB had branches in China, Denmark, Germany, India, Israel, and Sweden, too. Founders are warning that the bank’s failure could wipe out startups around the world without government intervention. As of December, more than 95% of the bank’s deposits were uninsured, according to regulatory filings. Many of these depositors are startups, and many are concerned that they will not be able to make payroll this month, which in turn could spark a wide wave of failures and layoffs in the tech industry.

Global indices will correct and will fall since as many startups will not be able to make any payment as the liquidity is now trapped under the beds of SVB. Markets will take this hit for a long until the problem of liquidity is resolved. Many layoffs might happen and this will have an impact on global consumption.  At the same time MSME exchanges will get a massive hit and short selling might be a risky trade. Further many billionaires will rush to buy SVBs in pursuit of getting hold of startups across the globe. Questions on valuations will rise and getting funding will be difficult when the VC and Pe have already pulled their hands off the funding.

Emergency funding programs might come up from the government end but in the scenario of high-interest rates, it would be interesting to witness whether these programs are zero interest ones how they pan out to be.  The biggest impact will be on the countries like India where the startup impact will be extended and funding will dry down completely.

Fund managers are reworking currently the new investment framework due to rising interest rates creating alternative opportunities for investing apart from equity or VC funding. The current dry-down is creating opportunities and cleaning up the system of high valuations. Gone are the day when napkin a business proposal used to get funded even before the product came to life.  Strategies of startups have come under big questions and now running the business is tougher since

VC funding has dried up and one of the key reasons is that they raise money from Limited partners such as endowments and pension funds.  Since 2020 these funds failed to generate a return from the Debt product segment as interest rates were zero. With the sudden hike in interest rates debt has become more attractive and hence the ocean of VC has dried up.  With this SVB issue, the crisis will deepen and spill over to major uncertainties.