The collapse of Silicon Valley Bank (SVB) last week sent ripples in startup ecosystems around the world, and it is emerging that millions of dollars held by African startups and venture capital funds at the bank were at stake, until the U.S. Federal Reserve acted to save the day.
In the wake of the bank’s collapse, founders in Africa have been forced to review their banking options to cushion their startups from such eventualities. Nala, a U.K.-based and Africa-focused mobile money transfer startup that managed to pull its funds out of SVB before it collapsed, told TechCrunch it’s exploring partnerships with new large corporate banks, while the Pan-African fund Future Africa, which suffered “minimal exposure” also hinted that it was keen on opening an account with a global banking institution.
“We’ve gotten inbound outreach by several banks…but you know banks always like to know a lot of information about companies, their revenue, the amount of cash the company would hold with them and so on to bring them on board,” said Nala CEO, Benjamin Fernandes.
African startups impacted by SVB collapse
It is not yet clear how many African startups and VCs were affected by SVB’s collapse. A widely circulated report from the due diligence company Castle Hall showed that several funding vehicles for African startups, including 4DX Ventures, banked with SVB before it went bust; it’s unclear if they were affected.
Meanwhile, African fintech unicorn Chipper Cash was also among several startups that could not access a portion of their funds. Also affected was a Dutch wealth manager offering investment banking and corporate services, including opening SVB accounts, to mainly Egyptian startups. Most were likely part of the nearly 50 startups from the North African country exposed to SVB’s closure.
Chipper had insignificant exposure to SVB ~$1m. Most of our funds are in various other banks in US & around the world. SVB was a great supporter & partner of Chipper and entire Silicon Valley ecosystem. Sad to see them go down. My full statement here – https://t.co/gI8oKqmUS3
— Ham Serunjogi (@HSerunjogi) March 12, 2023
A significant amount of venture capital that African startups raise comes from U.S.-based investors, who mandate that these startups domicile the funds in U.S. bank accounts. They have until now recommended SVB because of its history with tech businesses and the incentives and benefits the bank provides to startups that are hard to find in other financial institutions.
Fernandes said the bank provided cash management features alongside better interests on deposits and cheaper wire transfer fees than its counterparts — services that would be costlier for an African startup to access in bigger institutions.
The lender also provided loans, which many startups are unable to get in conventional banking institutions owing to their high-risk profile.
Just last year, SVB was a strategic partner of the International Finance Corporation (IFC) and U.S.-based fund manager Partners for Growth (PFG) — collaborating to provide debt capital to early- to mid-stage companies in emerging markets.
Such incentives for high-risk businesses are among the reasons startups domiciled in other parts of the world held accounts at SVB, according to Deepak Dave, an analyst at Toronto-based Riverside Advisory.
“We don’t have (in Africa) a financial system that is remotely mature enough to deal with startup financing. The reason that SVB can do loans in the U.S. is that the range of assets that has value in those countries is very different from ours, assets like half-created IP can even have a valuation to it. That is simply out of the question over here. First of all, almost certainly, the IP won’t even be licensed to the startup; it will have been licensed to an offshore vehicle controlled by the VC investors,” said Dave.
Dave said despite the immature financial system, regulators in Africa are not evolving fast enough to cater to the needs of emerging businesses.
“…we also don’t have a regulator who will understand what this type of lending is. They (startups) won’t have as deep a financial relationship with [banking] institutions here, but they can have a transactional relationship,” he said.
However, according to founders who spoke to TechCrunch, including those who even got accepted into accelerators like Techstars and Y Combinator, setting up an SVB bank account for their startups wasn’t a walk in the park. They cited reasons ranging from not meeting specific criteria such as SSN and proof of address in the U.S. to citizenship status and lack of SVB operations in Africa. As such, they turned to platforms such as Brex and Mercury, which recently expanded its FDIC insurance to $3 million, to carry out banking transactions.
For an African startup, banking with such platforms is dicey as they can be unpredictable. Last year, Mercury restricted accounts linked to African tech startups, including those backed by Y Combinator. An event like this comes down to regulatory grey zones where banking-as-a-service platforms are beholden to KYC/KYB requirements of their partner banks and transactions from emerging markets are viewed as “high-risk.”
Founders say this event — which frequently occurred last year — and the SVB fiasco have reinforced the need to build homegrown solutions (Float is an example.) But that itself comes with its challenges, said Deng. “The further you move away from the service provider, the harder it becomes to have nuance around risk related to ‘Africa.’ The deposit base resulting from African tech is likely not large enough for those bank providers to make modifications to their KYC/KYB controls.”
