Surviving the Closure of Silicon Valley Bank (SVB)
This time last week, US-based Silicon Valley Bank (SVB) sent a wave of panic rippling across the world. The preferred bank for venture capitalists and start-ups closed shop.
Silicon Valley Bank was a state-chartered, commercial bank headquartered in Santa Clara, California. It failed on Friday, March 10, 2023, with holdings now managed by the Federal Deposit Insurance Corporation. SVB was the 16th largest bank in the United States and the largest bank by deposits in Silicon Valley.
On Wednesday, March 8, SVB surprised investors with news that it was seeking to raise $2.25b to maintain liquidity. Within the next few hours, a bank run occurred after venture capitalists advised their start-ups to withdraw their funds from SVB. By the following day, customers had withdrawn $42b worth of deposits, according to a California regulatory filing, causing a negative cash balance of about $958m at the close of business on that day. Friday, March 10 saw the US Federal Deposit Insurance Corporation close the bank and seize its deposits; thus, making SVB the largest US banking failure since the 2008 financial crisis.
How does this closure affect African start-ups?
One of Africa’s unicorns, Chipper Cash, has SVB as one of its investors and led its Series C fundraising, according to the bank’s website. Barely a month ago, the start-up had been in the news for yet another round of layoffs after letting go of 12.5% of its staff last year.
In a statement on Sunday, March 12, Chipper Cash revealed that about $1m of its funds was trapped in SVB. The Chief Executive Officer, Ham Serunjogi, said: “In the wake of both Silvergate Bank and Silicon Valley Bank (SVB) being shut down within a few days of each other, I wanted to come out and share a few thoughts. The most important of which is to clearly state that fortunately, Chipper Cash has had overall insignificant exposure to both these events.”
He added, “As such, we had a very limited amount of money (only about $1M) held in our SVB account at the time the bank was taken over by the California regulator. We have already received confirmation from the FDIC that we can expect about half the funds back by Monday, March 13. Furthermore, there was absolutely no impact on our customer operations around the world.”
Chipper Cash is one of many start-ups associated with SVB. And recent reports say that it is considering a sale. Could this be true?
Other African startups had funds in SVB. The bank lent to startups and asked startups to have deposits with it as collateral. It also offered cash flow loans and loans against shares for founders. The closure of the bank caused well-founded fear on the continent.
Y-Combinator’s president, Garry Tan, wrote on Twitter: “30% of YC companies exposed through SVB can’t make payroll in the next 30 days”. Y-Combinator has over 80 African start-ups in its portfolio. One of its founders tweeted: “All the start-up founders groups I’m in are in full-on panic mode. Everyone is moving money around. Nobody knows which banks are safe.”
Iyinoluwa Aboyeji, founder/CEO Future Africa, stated that several Nigerian startups could be impacted by the collapse of SVB. He said that most startups might move their funds to other banks. “SVB was well known for treating our start-ups with respect, unlike a lot of the big banks which tended to be less receptive to banking relationships with African start-ups. I’m worried that not only is there significant exposure to SVB in the community but that the ‘flight to safety’ will actually force a lot of start-ups to take their money to other banks that may also struggle. At the end of the day given the situation right now, safety means a top 5 banking relationship which many of our startups do not have.”
But according to Williams Fatayo, Chief Executive Officer, TruQ, “Only few African startups might be impacted by the collapse of SVB. Very few startups in Africa have their funds there… You need to have a certain ARR (annual recurring revenue) before you can open an account with them. There is this restriction and most African start-ups might not be able to open accounts with SVB… whether or not we have accounts with SVB, the problem is that a major meltdown like that will affect everyone. Investors that want to write a start-up a cheque might have money trapped there. Investors that you want to pitch in a couple of months’ time might have their money trapped.”
Fatayo raises an important point—the indirect impact of the closure. The SVB effect on the African ecosystem starts with deposits, then jobs and extends to funds from potential investors too.
Y Combinator recently stated that one-third of its start-ups used SVB as their sole bank account. This, in turn, will affect over 10,000 small businesses and start-ups and may result in the loss of about 100,000 jobs in the US.
For Africa, the figures are likely to be a fraction of the above but the ecosystem won’t be insulated from the aftershocks of the closure.
Any light at the end of a dark tunnel?
Many stakeholders are calling on the US to bail out the bank, and the US Treasury Secretary, Janet Yellen, disclosed that she was working closely with banking regulators to respond to the collapse of SVB and protect depositors.
On Monday, March 13, the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Treasury jointly released a statement that assured all SVB depositors of total protection from losses.
The statement read in part: “Depositors will have access to all of their money starting today (Monday, March 13). No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
Meanwhile, on the other side of the ocean, the UK Government and the Bank of England facilitated a private sale of Silicon Valley Bank UK to HSBC, securing all depositors’ money with SVB UK, and ensuring the continuity of banking services. In other words, SVB UK did not go into insolvency.
And back home, Iyinoluwa Aboyeji, founder/CEO Future Africa, proposes a specialized bank for tech start-ups. “In Nigeria, we need to have a conversation on how we can develop our own tech bank. The bank needs to work slightly differently from the way normal banks operate. Some frameworks being explored in the Nigerian international finance centre would enable the creation of such a bank. So, what the Nigerian government needs to do is to speed up that process, so that we can protect our technology start-ups hub,” Aboyeji explained.
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