The collapse of Silicon Valley Bank (SVB) last week sent a shock wave through the tech industry as the largest lender of venture capital funds was suddenly seized. Since its founding in 1983, SVB – America’s 16th largest bank – has played a vital role in the development of the influential Silicon Valley ecosystem by providing critical financial support to startups and investors alike.
What led to the bank’s collapse?
During the Covid-19 pandemic, SVB was inundated with deposits, which it invested in US bonds and fixed-yield mortgage-backed securities. However, the recent rise in interest rates led to a fall in the value of its assets. As economic conditions worsened, Silicon Valley companies began withdrawing their deposits from the bank, causing SVB to sell its bonds at a significant loss and dilute its stock.
That eventually led to a run on the bank as customers withdrew their money fearing for 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 will it affect Africa’s startup ecosystem?
The immediate impact on Africa’s tech ecosystem appears to be mixed.
As Nigerian technology journalist Frank Eleanya pointed out 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 companies have had to deal with the affected bank. Chipper Cash, one of Africa’s seven unicorns (startups worth more than $1 billion), is one that could be directly impacted, having received a $100 million SVB-led investment in May 2021. Chipper Cash has not released an official statement on how much of that money is invested with the SVB.
Other companies seem to be 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 nevertheless noted that its team “works very quickly to build new account relationships with established global banking institutions as funds become available.”
In an interview with BBC Focus on Africa, Tanzanian startup founder Benjamin Fernandes, founder of cross-border payment company NALA, said he managed to withdraw the company’s money prior to its collapse after hearing of the bank’s difficulties. But he said some industry contacts in the US had failed to transfer their money on time.
However, he believed that the impact on the African technology sector may be limited given the small number of bankers at the SVB. The difficulty faced by African startups in opening US bank accounts may have shielded the continent from the worst consequences, he said.
But if ripple effects are not yet fully understood, observers believe the long-term implications may be greater.
Venture capital funds, in particular, may be less willing to take risks in the wake of the SVB’s collapse, potentially slowing start-up funding across the continent after a record year of $4.8 billion raised by the end of 2022.
“Expect a slowdown in investment on the continent, more term-sheets drawn and delays in getting that critical follow-on funding,” warns Ngozi Dozie, co-founder of digital finance platform Carbon, in a blog post published Monday.
A wake-up call for local investors
As with any financial external shock, there are calls to protect African companies by becoming less dependent on foreign capital.
Some experts see SVB’s collapse as an opportunity to strengthen Africa’s startup ecosystem and encourage more investment from local sources.
“When we rely on foreign investors, we expose ourselves to imported problems,” Dozie said, 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% came from North America, 27% from Africa and 21% from Europe.
As the tech industry grapples with the aftermath of SVB’s collapse, it’s clear that the lessons learned from this event will have far-reaching implications for startups and investors across the continent.