Experts discuss the impact of SVB’s collapse on the Asian start-up ecosystem
Experts discuss the impact of SVB’s collapse on the Asian start-up ecosystem
The abrupt downfall of Silicon Valley Bank (SVB) has had far-reaching effects beyond American soil. The bank was once a trusted gateway as a one-stop shop for US funding and banking services for many Chinese and Indian start-ups, but the future now looks murky. Many tech start-ups and venture capitalists in the region are feeling the ripple effects.
SVB’s ties with Indian and Chinese start-ups
For many Indian founders of US businesses, SVB has long been the go-to bank, albeit for a lack of a better alternative. India's state minister for technology, Rajeev Chandrasekhar, has said SVB holds deposits of around $1bn for hundreds of Indian start-ups. The Indian government's primary concern now is facilitating a seamless transition of these start-ups from the complex cross-border US banking system to the Indian banking system. Chandrasekhar has proposed that Indian banks could provide a deposit-backed credit line to start-ups that hold funds in SVB, using their SVB deposits as collateral. Over 60 Indian start-ups that received support from the renowned US start-up accelerator Y Combinator have banking relationships with SVB.
In China, SVB established a foothold in 1999 and in 2012, formed a 50:50 joint venture with the state-owned Shanghai Pudong Development Bank (SPD). The resulting SPD Silicon Valley Bank (SSVB) operates as a separate entity with its own balance sheet, stating it is business as usual ‘in accordance with Chinese laws’. With offices in Beijing, Shanghai, and Hong Kong, the SSVB facilitated the opening of bank accounts for Chinese start-ups, particularly those in the tech and healthcare industries. It also enabled venture capitalists to access US-dollar funds and foreign investments.
As the first technology bank in China, SVB played a pivotal role in fostering the growth of the burgeoning innovation economy. Some of its clients include notable start-ups like AI giant SenseTime and bike-sharing firm Mobike. There is speculation that SPB may buy out SVB’s Chinese subsidiary, following HSBC’s buyout of the UK subsidiary, making it a wholly-owned entity that could inadvertently limit capital flows from the US. Either way, regulators will likely impose more stringent oversight on account holders to mitigate credit risk. As discussed in our daily newsletter, Preqin First Close, when the news broke last week, it's likely that the aftermath of the SVB crisis will lead to further debate over banking regulation.
SVB’s collapse comes amid APAC VC fundraising struggles
The venture capital (VC) industry has already been grappling with raising funds with a dearth of available capital and collapsed risk appetite. VC fundraising in APAC has steadily declined since 2018, dragged down even further by a cooling Chinese economy and stricter industry regulations. In 2022, only $29.4bn was raised across 217 funds, down nearly 50% from the $57.4bn raised across 550 funds in 2021. As discussed last week in our latest Research Note, VC firms seeking funding in the future may encounter limited credit availability on less attractive terms, as SVB's credit lines are generally considered more favorable than traditional bank financing. Despite this setback, market experts believe it’s unlikely that SVB’s downfall will cause a major contagion effect in Asia.
We spoke with two industry experts on the implications for VC in the region: Ming Liao of Prospect Avenue Capital on China, and Sanket Sinha of Lighthouse Canton on India and Southeast Asia.
Ming Liao, Founding Partner, Prospect Avenue Capital
Following the collapse of SVB, we expect LPs will scrutinize Asian GPs and their portfolio companies' banking arrangements, with more demanding access to well-established global and regional banks such as Citibank and Singapore-based DBS Bank. Their strict compliance process, including Know Your Customer (KYC), would make it challenging for many early-stage start-ups and less reputed GPs to open banking accounts. For us, opening a bank account with Citibank Hong Kong took a year. For those who can prove their worth, these banks will gain more of these clients as they have been supportive of the region's venture ecosystem. However, we are skeptical that many early-stage start-ups and emerging GPs in Asia will be able to meet these banks' high standards, and so the banks are unlikely to change their KYC processes to cater to start-ups.
Although SVB’s downfall may lead to a more stringent regulatory environment, which is bad news for fund managers and start-ups, it could well benefit the industry in the long run by eliminating overleveraged players that once relied on cheap credit.
When investing in China, LPs typically adopt a top-down approach, where the top three considerations are geopolitical risks, changing regulations, and industry potential. SVB’s collapse is relatively insignificant when it comes to LPs’ commitments in the country, compared with these broader, overarching considerations.
Sanket Sinha, Head of Asset Management, Lighthouse Canton
Since SVB had already limited banking operations in APAC, we expect the impact of its collapse to be commensurately limited in the region. In Southeast Asia and India where Lighthouse Canton operates, only a few start-ups and VC firms held deposit accounts with SVB. Portfolio companies in our funds, LC Venture Debt Fund and LC Nueva Alternative Investment Fund (our India-focused VC fund), do not have direct exposure to SVB or other regional banks that have felt the pressure since the collapse of SVB.
We expect fundraising in APAC to be less affected by the SVB crisis. With the Fed’s newly launched Bank Term Funding Program, the risk of contagion and fear among SVB customers has reduced substantially. Additionally, the SVB crisis was catalyzed by failures on account of treasury management, (i.e., duration mismatch between high-quality assets and deposit liabilities), and not because of credit portfolio deterioration caused by slowdown in the growth sectors. The crisis was a bank asset/liability management issue rather than one caused by the start-up or the venture ecosystem.
Commentary in this article is provided by experts from the Preqin Expert Voices network.
Preqin Expert Voices is a global network of alternative asset professionals with in-depth industry knowledge and valuable ideas to share. We invite senior leaders and highly experienced commentators from across the industry to share their opinions in our forum, including fund managers, investors, consultants, advisors, academics, and more.
Are you a senior executive or thought leader? Are you a regular industry speaker? Are you a frequent commentator in the press? If this sounds like you and you would like to become an Expert Voice, then please get in touch at expertvoices@preqin.com.