The collapse of Silicon Valley Bank (SVB) last week has sent shockwaves through the tech industry as the largest lender to venture capital funds suddenly seized up. Since its founding in 1983, SVB – the 16th largest bank in America – has played a crucial role in the development of the influential Silicon Valley ecosystem by providing crucial financial support to startups and investors alike.
What led to the bank’s downfall?
During the Covid-19 pandemic, SVB found itself inundated with deposits, which it invested in US bonds and mortgage-backed securities with a fixed return. However, the recent rise in interest rates led to a decline in the value of its assets. As economic conditions worsened, Silicon Valley firms began to withdraw their deposits from the bank, leading SVB to sell off its bonds at a significant loss and dilute its stock.
That ultimately led to a run on the bank as clients withdrew their funds in fear of the bank’s stability. The Federal Deposit Insurance Corporation (FDIC) was forced to step in and seize SVB’s assets, leaving many in the tech industry reeling from the sudden collapse.
How does it affect Africa’s startup ecosystem?
The immediate impact on Africa’s tech ecosystem appears to be mixed.
As Nigerian tech journalist Frank Eleanya noted in a recent article for BusinessDay, “Nigerian startup founders say the impact on the local ecosystem will be minimal,” mainly due to the fact that only a small number banked with SVB.
But some firms have had dealings with the stricken bank. Chipper Cash, one of Africa’s seven unicorns (startups valued at more than $1bn), is one that might be directly impacted, having received a $100m SVB-led investment in May 2021. No official statement has been released by Chipper Cash regarding how much of that funding is banked in SVB.
Other businesses appear luckier. Future Africa, one of the largest Africa-focused venture capital funds, said on Sunday that its “funds have minimal exposure to Silicon Valley Bank”. The fund noted, nonetheless, that its team is “working very quickly to build new account relationships with established global banking institutions as soon as funds are available”.
In an interview with BBC Focus on Africa, Tanzanian startup founder Benjamin Fernandes, founder of cross-border payments firm NALA, said that he managed to withdraw the firm’s money prior to the collapse after hearing of the bank’s difficulties. But he said that some industry contacts in the US had not managed to move their funds in time.
However, he believed that the impact on Africa’s tech sector may be limited given the small number who bank with SVB. Indeed, the difficulty that African startups face in opening US bank accounts may have protected the continent from the worst of the fallout, he said.
But if ripple effects are not yet fully apparent, observers believe that the long-term implications could be more significant.
Venture capital funds, in particular, may be less willing to take risks in the wake of SVB’s collapse, potentially slowing down startup funding across the continent after a record-breaking year of $4.8bn raised by the end of 2022.
“Expect a slowdown in investments on the continent, more pulled term-sheets and delays in getting that critical follow-on funding,” warns Ngozi Dozie, co-founder of digital finance platform Carbon, in a blog post published on Monday.
A wake-up call for local investors
As with every financial external shock, calls to protect African businesses through reduced reliance on foreign capital have emerged.
Some experts see SVB’s collapse as an opportunity to strengthen Africa’s startup ecosystem and encourage greater investment from local sources.
“When we rely on foreign investors, then we expose ourselves to imported problems,” said Dozie, highlighting the need for more local investment in Africa’s burgeoning startup scene.
Max Cuvellier, founder of the startup deals database Africa The Big Deal, has reported that 1,400 investors were involved in at least one startup deal in Africa in 2021-2022. Among them, 36% were from North America, 27% from Africa and 21% from Europe.
As the tech industry grapples with the aftermath of SVB’s collapse, it is clear that the lessons learned from this event will have far-reaching implications for startups and investors across the continent.
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This article originally appeared in Tech54, the African Business newsletter that takes an incisive look at the continent’s tech scene. Subscribe to the newsletter here.