Silicon Valley Bank (SVB), which was closed down last Friday by the US Federal Deposits Insurance Corporation (FDIC) was the bank of choice for most startups and venture capitalists. This explains the panic waves that the news sent through the African tech community, especially the startups.
The bank was closed down due to lack of fluidity and insolvency.
SVB had been home to half of all venture backed startups for the past 40 years, both home and abroad. Many African startups are reported to have their OPEX and capital funds domiciled in SVB as the bank was a lender for startups and required them to have deposits in the bank as collateral.
More than a few Nigerian startups backed by venture capital firms like YCombinator also have ties to Silicon Valley Bank. As a result, African startups and their fundings are tied to SVB, either directly as lenders or indirectly through the VC firms backing them.
While the US government has already begun exploring austerity measures to rescue affected US companies, the severity of impact felt will differ with the level and type of connection. Startups that are funded directly from SVB may feel a heavier impact especially if they have deposit accounts that house money for operational expenses.
Gary Tan, YCombinator’s president said in a tweet that 30% of YCombinator companies exposed through SVB can’t make payroll in the next 30 days.
It would be necessary to mention that YCombinator has over 80 African startups in its portfolio. Given SVB’s collapse, a slow down in investment is expected to follow.
Psychological impact of SVB collapse on economies
A collapse of this magnitude will no doubt alter the psyche of investors and operatives.
The flow of money and resources into the system will also be hindered and this can in turn affect other activities as most startups depend on the resources and support provided by the bank, including access to venture capital, mentorship and networking.
Job losses can also be anticipated. The shock of the sudden collapse can trigger double layoffs as a coping mechanism to deal with shortage of running funds.
Beyond job cuts, many a startup will owe salaries as a result of SVB’s collapse. Staff of these companies will also need to figure out other means of accessing their personal funds as many also had their salary and savings accounts domiciled with SVB.
Adedeji Olowe, founder and CEO of Lendsqr is however hopeful as he is reported to have said that startups may have funds trapped in the collapsed SVB, but the funds have not disappeared.
The silver lining
Before now, there have been calls for African venture capitalists to be more involved in the backing of local solutions. These calls have been heeded quite impressionably, however, a deference for foreign investors and a persistence of the west’s savior mentality remains a thorn in Africa’s flesh.
Also, beyond funding from foreign VC’s and SVB being the melting pot of these funds, African banks are touted to be one of the most advanced in a sense; compared to their western counterparts. This event provides an opportunity for local banks to further strengthen their service proposition and collaborate with startups to build a formidable structure akin to SVB.
Regrettable and unfortunate as it is, SVB’s collapse demystifies the god-like status of systems that on the outside appeared très parfait. It provides an opportunity for everyone to get more financially literate and is also a wake up call to banks all over the world to tidy up their operations because more and more customers are getting knowledgeable about their internal workings.