Silicon failure Valley Bank (SVB) sent waves across startup ecosystems around the world last week, with millions of dollars held by the bank’s African startups and venture capital funds appearing at risk until the US Federal Reserve steps in to save the day.
Following the bank failure, founders in Africa were forced to evaluate banking options to protect their startups from such an event. UK-based, Africa-focused mobile money transfer startup Nala, which was able to cash out before SVB’s collapse, told TechCrunch that it is exploring new partnerships with large corporate banks, hinting that the stricken pan-African fund Future Africa’s “less exposure” is interested in opening an account with a global banking institution. He has given.
“We’ve got penetration at a lot of banks…but they know that banks want to know a lot of information about companies, their revenue, the amount of money the company has with them and so on.” Nala CEO Benjamin Fernandez said.
The impact of the collapse is so great that even the unscathed are exploring additional defenses. Kenyan construction technology startup Jamba is looking to multiply its deposits, with co-founder Kagure Wamunyu telling TechCrush that the startup will open an additional account in the US with a “big bank”. In many bank accounts in large financial institutions, it is generally considered safe.
African startups affected by SVB’s failure
It is not yet clear how many African startups and VCs have been affected by SVB’s collapse. According to a widely circulated report from due diligence company Castle Hall, several funding vehicles for African start-ups including 4DX Ventures were liquidated by SVB; It is not clear whether they were injured.
Meanwhile, African fintech unicorn ChipperCash is among the startups that failed to raise a portion of their funding. TechCrunch learned of a Dutch wealth manager that offers investment banking and corporate services to Egyptian startups, including opening an SVB account. According to this report, about 50 technology companies were affected.
Most of the venture capital that African startups raise comes from US-based investors, forcing these startups to keep the money in US bank accounts. They still recommend SVB because of its track record in tech businesses and the incentives and benefits the bank provides to startups that are hard to find in other financial institutions.
Fernandez said the bank, alongside better interest in deposits and partnership transfer fees – has offered African startups services that cost more to break into large institutions.
The lender also offers loans, many startups are unable to get into conventional banking institutions due to their high risk profile.
Just last year, SVB was a strategic partner of the International Finance Corporation (IFC) and US-based Funding Partners for Growth (PFG) – collaborating to provide loan capital to early to mid-stage companies in emerging markets.
According to Deepak Dave, an analyst at Toronto-based Riverside Consulting, one of the reasons startups based in other parts of the world are taking on SVB accounts is because of such incentives for high-risk businesses.
“In Africa (in Africa) we don’t have a remotely mature financial system to deal with start-up financing. The reason why SVB can give a loan in the US is that the value in those countries is very different from ours, assets such as half-created IP can be valued for it. That is simply out of the question here. First of all, of course, the IP doesn’t even give permission to start; It has been licensed to an offshore vehicle controlled by VC investors,” said Dave.
“Not only do we not have banks that are mature enough to handle it, we don’t have a regulator that understands what this type of lending is. They don’t have that deep financial connection with institutions here. But they may have marketing contacts in established institutions here,” said Dave.
But according to founders who spoke to TechCrunch, including those who were accepted even at accelerators like Techstars and Y Combinator, setting up an SVB bank account for their startup was no walk in the park. They cited reasons ranging from not meeting certain criteria such as SSN and proof of address in the US to citizenship status and the lack of SVB jobs in Africa. As a result, banks have turned to platforms like Brex and Mercury, which recently expanded its FDIC insurance to $3 million, to process bank transactions.
“If you want a US-based banking service that builds credibility with investors, these are your options,” says Stephen Deng, founder and managing partner of Africa-focused early-stage VC firm DFF Lab. I think what changes founders need to know is how to manage the associated risk. Sweeping networks and treasury management are all top of mind.
For African startups, banking through such platforms can be tricky as they can be unpredictable. Last year, Mercury restricted accounts linked to African tech startups, including those backed by Y Combinator. Such an event comes into the regulatory gray zones of banking-as-a-service platforms where partner banks are subject to KYC/KYB requirements and transactions in emerging markets are viewed as “high risk”.
The founders of this incident – which happened repeatedly last year – and the SVB fiasco reinforced the need to build in-house solutions (It’s a floating example. “The further away you are from the service provider, the harder it is to differentiate against ‘Africa’-related risk. The deposits made by African technology may not be enough for those banking providers to make improvements to their KYC/KYB controls.”
