SVB’s demise forces African startups to rethink their banking options
The Fall of Silicon Valley Bank (SVB) last week caused ripples in the startup ecosystem around the world. It is now emerging that the millions of dollars held by African startups and venture capital funds at the bank are at stake until the US Federal Reserve acts to the rescue.
Founders in Africa are now forced to consider their banking options. Nala, an Africa-focused and UK-based mobile money transfer startup that managed to pull money out of SVB before it collapsed, told TechCrunch it was exploring the relationship with SVB. working with new large corporate banks, while the Pan-African Future Africa fund, which has had a “minimum exposure” also implies that it is keen to open an account with a global banking institution.
“We have reached out to some banks… but you know, banks always want to know a lot of information about companies, their revenue, the amount of cash the company will keep with them, etc. Director running Nala, said Benjamin Fernandez.
The impact of the collapse has been so widespread that even unaffected entities are exploring additional safeguards. Jumba, a Kenyan construction tech startup, is looking to diversify its deposits, with co-founder Kagure Wamunyu telling TechCrunch that the startup is opening an additional account with a “bigger bank” in the United States. This comes as many startups increasingly prefer to hold their money in multiple bank accounts at major financial institutions, which are generally considered safer.
African startups affected by SVB’s collapse
It remains unclear how many African startups and VCs were affected by SVB’s demise. ONE widely circulated report from due diligence firm Castle Hall pointed out that several funding vehicles for startups in Africa, including 4DX Ventures, were dealing with SVB before it went bankrupt; It is not clear if they are affected.
Meanwhile, African fintech unicorn Chipper Cash is also among a number of startups unable to access part of their capital. TechCrunch also learned about a Dutch asset manager that provides investment and corporate banking services to startups in Egypt, including opening an SVB account; follow this reportAbout 50 tech companies were affected.
A significant amount of the venture capital that African startups raise comes from US-based investors, who force these startups to put money in a bank account. goods from the United States. So far, they have recommended SVB because of its history with tech businesses and the incentives and benefits it offers startups that are hard to find in financial institutions. other.
Fernandez said the bank offers cash management features in addition to better deposit rates and cheaper wire transfer fees than its counterparts — services that would be more expensive for a company. African startups to reach larger institutions.
Lenders also offer loans that many startups cannot obtain in conventional banking institutions due to their high risk profile.
Just last year, SVB was a strategic partner of the International Finance Corporation (IFC) and the US-based fund manager Partners for Growth (PFG), which provide debt financing to companies. early and mid-stage in emerging markets.
According to Deepak Dave, an analyst at Toronto-based Riverside Advisory, such incentives for high-risk businesses are one of the reasons startups in other parts of the world have an account at SVB.
“We don’t have (in Africa) a financial system that is remotely mature enough to solve the problem of funding startups. The reason that SVB is able to lend in the US is because the range of assets valued in those countries is very different from ours, assets like half-generated IPs can even be worth for it. That is simply out of the question here. First of all, almost certainly, IP won’t even be licensed to the startup; it will be licensed for an offshore vehicle controlled by VC investors,” said Dave.
“Not only do we not have a bank mature enough to do that, but we also don’t have a regulator that understands what this type of lending is. They will not have a deep financial relationship with the institutions here. But they may have transactional relationships within institutions based here,” said Dave.
However, according to founders who spoke to TechCrunch, including those who have even been accepted into accelerators like Techstars and Y Combinator, setting up SVB bank accounts is for startups. Theirs is not easy. They cite reasons ranging from not meeting specific criteria such as SSN and proof of address in the US to citizenship status and the lack of SVB activities in Africa. As a result, they have moved to platforms like Brex and Mercury, recently FDIC insurance expansion up to 3 million USD, to perform banking transactions.
“If you want a U.S.-based bank where a reputation is established,” said Stephen Deng, co-founder and managing partner at Africa-focused early-stage venture capital firm DFS Lab. still) with investors, those are your options. “I think what has changed is that founders have to know how they manage counterparty risk. Network scanning and treasury management, all of which are of primary concern.”
For an African startup, banking with such platforms is difficult as they can be unpredictable. Last year, Mercury restricted account is affiliated with African tech startups, including those backed by Y Combinator. An event like this leads to regulatory gray zones where banking platforms are subject to the KYC/KYB requirements of their partner banks and transactions from emerging markets are considered. is “high risk”.
The founders say the event – which usually happens last year – and the failure of SVB have reinforced the need to build home-grown solutions (Floating is an example.) But that in itself comes with its challenges, Deng said. “The further you move away from the service provider, the harder it is to nuance around the risk associated with ‘Africa’. The African tech-driven deposit base may not be large enough for those banking providers to make modifications to their KYC/KYB controls.”