In the aftermath of the sudden collapse of Silicon Valley Bank (SVB), questions about what’s next for the global startup ecosystem linger in the minds of startups and venture capitalists. A bank run that wiped $42 billion in customer deposits led to the takeover of the California-based lender — which banks nearly half the startups in the United States — by America’s Federal Deposit Insurance Corporation (FDIC) on March 10.
The past two weeks have been a dark moment for tech startups worldwide, especially in Africa, where a large chunk of venture funding comes from U.S.-based investors. These investors insist that the backed startups keep their money in U.S. banks, with the now-collapsed SVB as the top choice because of its attractive offerings.
For context, several African fintech startups are yearly admitted into Y Combinator and Techstars — the two US-based accelerators that partner with SVB. Y Combinator has backed more than 80 African startups since 2012.
“30% of Y Combinator companies exposed through SVB can’t make payroll in the next 30 days,” YC’s president, Garry Tan tweeted in the wake of SVB’s crash. But American authorities have assured affected customers that they would get 100% of their deposits back.
A teachable moment for African startups
When news broke that SVB had collapsed, it sent ripples in the African tech ecosystem, leaving many tech investors and founders confused about what would happen to venture funding. According to Africa: The Big Deal, a newsletter that tracks funding, African startups raised a record high of $4.8 billion last year. As this Semafor article argues, the panic showed the reliance of African startups on banking relations abroad and increased consideration for home-grown solutions.
Chipper Cash, the fintech unicorn listed as one of SVB’s customers, was the first to downplay the impact of the collapse. In a statement, CEO and Co-founder Ham Serunjogi said that the company only had “only about $1m” in SVB but had “absolutely no impact” on its business.
However, Bloomberg reported that Chipper Cash – backed by the collapsed cryptocurrency exchange FTX – is exploring a sale or seeking new investors. Last year, the company saw its valuation slashed from $2 billion to $1.25 billion.
“The craziest thing from this SVB debacle is African startups remained largely untouched due to SVB making it nearly impossible for founders from Africa to open up an account with them,” Chika Uwazie, a former CEO at TalentBase, a Silicon Valley-backed startup, wrote in a tweet. What remains unclear is the number of African startups affected by the crash, but a number of VC firms reportedly took the hit.
According to local reports in Egypt, nearly 50 startups and two VC firms in North Africa are exposed to SVB’s closure. Future Africa, one of the largest Africa-focused venture capital funds, also said that its “funds have minimal exposure to Silicon Valley Bank”.
Meanwhile, a number of African VCs are said to be open to returning their deposits to Silicon Valley Bridge Bank, SVB’s replacement. Some have reportedly turned to alternative platforms such as Brex and Mercury – to carry out banking transactions. Similarly, African founders have been forced to review their banking options to ensure the safety of their funds.
Let’s go local
SVB’s sudden crash and its attendant implications on the African tech ecosystem bring the need to jerk up local funding to the fore. Per Africa: The Big Deal, about 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.
“The over-reliance on a few, overseas funders can alter the perception of capital availability within the continent and, when or if these overseas investors decide to pause or slow their down their investment activity in times of crisis — such as during COVID-19 or the bubble burst of mid-2022 — late-stage companies that had grown the period of capital abundance, may struggle to find available money pools,” Briter Bridges warned in its Africa Investment Report 2022 report [pdf].
For most industry watchers, the SVB debacle will force most U.S.-based investors to hold back on their money, possibly leading to a possible slowdown in venture funding in Africa. With the troubles of the global VC space — funding freezes, layoffs, valuation plummeting, and business shutdowns — 2023 is poised to be a rocky year for African startups. Bruce Nsereko-Lule, a general partner at Seedstars Africa Ventures, an early-stage VC fund, told TechCrunch that investors on the continent would maintain a judicious approach to investment.
“We need local investors who can help us on the ground. It may mean more education for both parties but definitely more humility on the part of founders,” Ngozi Dozie, co-founder of the Nigerian fintech startup, Carbon, wrote in a blog post.
But going local comes with its fair of troubles: inadequacies of Africa’s banking sector and regulatory uncertainties. However, the adoption of startup acts — which offer incentives for startups, among other things — across the continent offers some optimism about the future.
Last week, Nigeria launched Investment in Digital and Creative Enterprises (i-DICE), a $618 million tech fund for young people in its tech and creative sectors.
According to the African Development Bank (AfDB), the fund will see investments across 200 tech and creative startups and 450 tech-powered SMEs. A government-backed tech-focused initiative of this kind, no doubt, will inspire confidence in the regulatory landscape on the continent.
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