SVB collapse forces African startups to rethink their banking options
Reading Time: 3 minutesThe 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.
‘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 Fernandez.
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.
A significant amount of venture capital that African startups raise comes from US-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.
Fernandez 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 US-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.
‘If you want US-based banking, which does instill credibility (still) with investors, those are your options,’ said Stephen Deng, co-founder and managing partner at Africa-focused early-stage VC firm DFS Lab. ‘I think what changes is that founders must know how they manage counterparty risk. Sweep networks, and treasury management, are all top of mind.’
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.’
Ref: techcrunch
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