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Silicon Valley Bank (SVB) collapse
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The Silicon Valley Bank was closed by US regulators last week. Photo: Reuters

SVB collapse: Asian start-ups largely unscathed but US Fed’s rate hikes raise spectre of wider crisis

  • Asian start-ups did not have much exposure to the Silicon Valley Bank, but the crisis could now prompt them to review who their portfolio companies bank with
  • Continued Fed hikes could make conditions tougher for start-ups to raise capital, affect global economic recovery, observers note
The impact of the Silicon Valley Bank (SVB) collapse on Asia’s start-ups is likely to be limited but the relentless interest rate increases by the US Federal Reserve to beat back inflation have raised concerns of a broader financial crisis, analysts have said.

SVB collapsed over the weekend after investors flocked to withdraw their deposits as high interest rates eroded the value of the firm’s long-term bonds.

In moves to protect deposits and alleviate concerns, US regulators have set up a new facility to allow SVB customers access to their funds, while the British government and Bank of England facilitated a private sale of SVB’s UK subsidiary to HSBC.

Why did Silicon Valley Bank fail and what does it mean?

“Asian start-ups did not have much exposure to SVB, and tend to be funded more by the local VC (venture capital) ecosystem, as well as local banks,” said Jamus Lim, associate professor of economics at ESSEC Business School Asia-Pacific.

“Some businesses will be reviewing who their portfolio companies bank with, and there may be, at the margin, a shifting of assets from smaller to larger, more established banks,” he added.

What could prove tricky for Asian start-ups, such as those in India, is if the Federal Reserve maintains its pace of rate increases and the easy access to cheap overseas funds dries up.

Ajay Jain, co-founder and managing partner at Silverneedle Ventures, said Indian start-ups that banked with SVB could see “short-term impact, but overall, there should be no major hiccup”. Some banks, however, had seen higher withdrawals in the past couple of days, he added.

Central banks across the world had offered cheap money in a bid to stimulate the global economy amid the ravages of the coronavirus pandemic. India had been a beneficiary, witnessing a rush of funds into tech start-ups during the pandemic as China cracked down on tech companies, with Southeast Asian nations enjoying a similar boom in the industry.

The Russia-Ukraine war, however, disrupted the supply of raw materials, causing prices to rise and resulting in the Federal Reserve raising interest rates to control inflation.

Police officers watch over bank customers waiting outside a branch of Silicon Valley Bank in Wellesley, Massachusetts, on Monday. Photo: EPA-EFE

While Indian e-commerce and consumer internet companies raised US$15.4 billion last year, almost twice the funding in 2020 (US$8.2 billion), only US$2.8 billion of this capital was invested in the second half of 2022, according to data from Indian venture capital firm Peer Capital.

Ankur Pahwa, managing partner of Peer Capital, said a “funding winter” set in during the second half of 2022 when money needed for start-up development dwindled, even if funding at the seed stage was still available despite the tough global financial environment.

“I think the macro [environment] is harder to predict as the Federal Reserve continues to increase interest rates. I expect to see some green shoots by the first quarter of next year,” Pahwa said.

In February, the Federal Reserve raised its benchmark interest rate by a quarter percentage point – its eighth increase since March 2022 – but gave no indication when the cycle would end.

That hiking cycle has prompted other central banks such as the Reserve Bank of India to follow suit, making conditions tougher for smaller firms in India as they struggle with raising capital, according to Nikhil Kamath, co-founder of stock brokerage Zerodha and asset management firm True Beacon.

Silicon Valley Bank fallout spreads around world from London to Singapore

Continued rate hikes could dampen investors’ appetite for risk as funds available to them became more expensive, observers note.

“Many of them are left with six to eight months of runway [before they run out of cash] and I would not be surprised if some large start-ups shut down,” Kamath said.

Other analysts said the SVB impact on Southeast Asian start-ups was likely to be contained, given the region’s strict regulatory environment. However, they warned the conditions which led to the bank’s collapse, triggered by the high interest rates, would have an impact on businesses globally.

“This event will not directly contribute to the funding winter but other macroeconomic issues such as slowing global economic growth,” said Arun Sugumaran, CEO of AWST, which helps companies launch NFT collections.

The British government and Bank of England facilitated a private sale of Silicon Valley Bank’s UK subsidiary to HSBC. Photo: EPA-EFE

Duco van Breemen, CEO of Haymarket HQ, a start-up hub supporting companies in the ecosystem, said the sudden closure of a Silicon Valley institution “creates only more fear in an already shaky funding environment”.

While most Asian start-ups “don’t have to worry about short-term payroll” unlike their Silicon Valley counterparts, the SVB collapse meant “they will face an increasingly tougher environment to raise funds in”, he added.

Another Singapore-based executive with a venture capital firm said start-ups needed to be prudent even when plenty of money was available.

“I have been advising founders for five years that you must run a robust business model,” said Murli Ravi, co-founder and managing partner of Tin Men Capital.

“But there were founders who were too casual. They pitched to us when their product was not ready. Those companies would not get funded today.”

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