The recent collapse of Silicon Valley Bank (SVB), which was shut down by the Federal Deposit Insurance Corporation (FDIC) last Friday after the bank announced that it lost $1.8 billion in the sale of treasuries and securities has sent shockwaves throughout the global tech community, particularly in Africa, where the bank was the preferred lender for most startups and venture capitalists. With several African startups holding funds in the bank as collateral, the impact of this catastrophic event is expected to be far-reaching and long-lasting.
Notwithstanding that the FDIC has assured SVB’s customers that insured depositors will have access to their funds by Monday (today). However, deposits are only insured up to $250,000, and non-insured depositors will receive an advance dividend in the coming week. According to the FDIC, future dividends may be paid as SVB’s assets are sold in the near future.
However, help is on the way for customers, as HSBC Holdings Plc (HSBA) announced today that its UK subsidiary, HSBC UK Bank, will acquire Silicon Valley Bank UK for £1 ($1.21). The transaction, described as a strategic acquisition to strengthen HSBC’s banking franchise in the UK, will help to limit the economic fallout from the bank’s failure.
Taking into account how startups will be affected, Garry Tan, Y-Combinator’s president, in a Twit, wrote “30% of YC companies exposed through SVB can’t make payroll in the next 30 days”. Y-Combinator has over 80 African startups in its portfolio. One of its founders tweeted yesterday, “All the startup founders groups I’m in are in full-on panic mode. Everyone is moving money around. Nobody knows which banks are safe.”
How SVB collapsed will affect African Startups
Foreign investors and venture capitalists have been drawn to the continent’s young and dynamic population, as well as its untapped markets, fueling the rapid growth of the African tech startup ecosystem in recent years. However, the SVB crisis is likely to make foreign investors and venture capitalists hesitant to invest in African startups, slowing the ecosystem’s growth.
The African investment landscape is not diverse, according to a report from the Tony Blair Institute for Global Change. Between 2014 and 2020, 57 percent of investment came from venture capital and private equity investors, while only 1% came from institutional investors and 10 percent came from corporations. Local funding for tech startups was scarce, with only 22 percent of investors participating in African VC deals, compared to nearly 40% from North America.
Furthermore, because many African startups rely on SVB for payroll and other financial services, which may now be disrupted or completely unavailable, they are likely to face difficulties in paying salaries, as well as layoffs and hiring freezes. Also, most foreign VCs will likely withhold their investment until such a time when confidence will return to the space. This is expected to cause significant disruption to the operations of African startups and may result in the closure of some.
Now the act of survival …the how
This crisis, however, provides an opportunity for African startups to look inward and explore local solutions in order to reduce their reliance on foreign VCs, investors, and banks. African startups can become more self-sufficient and less susceptible to the whims of the global financial system by doing so.
One way to achieve this is by leveraging local investors and VCs. While foreign investors have played a crucial role in funding African startups in recent years, there is also a growing pool of local investors and VCs who are eager to support promising startups in their own communities. By seeking out local investors, startups can build stronger relationships with their backers and benefit from their local knowledge and connections. However, for these local VCs to be able to match the current volume of investment from the foreign VCs there is a need for a round table discussion among stakeholders with the respective African government to boost their confidence as well as mobilize resources for this noble course.
Another opportunity is to look into alternative funding sources like crowdfunding, grants, and impact investment. Crowdfunding platforms such as Kickstarter and Indiegogo have become increasingly popular in recent years, providing a way for startups to raise funds directly from their customers and supporters. Grants from organizations such as the African Development Bank and the World Bank, on the other hand, can be a valuable source of non-dilutive funding for startups. Finally, impact investors who prioritize social and environmental impact over financial returns can be a good source of funding for startups with a strong social or environmental mission.
Build Your SVB
African startups can also lessen their reliance on foreign banks by investigating local banking options. Many African countries are seeing an increase in the number of local banks and fintech startups offering a variety of financial services ranging from basic savings accounts to digital payment solutions. African startups can reduce their exposure to the risks associated with foreign banks by partnering with local banks and fintech startups. They can also benefit from services tailored to their specific needs.
In addition to funding and banking, African startups can explore local alternatives to reduce their reliance on foreign payroll solutions. Many African countries are seeing an increase in the number of payroll and human resource startups that provide affordable and customized solutions to small and medium-sized businesses. African startups can benefit from services that are specifically designed for their needs by partnering with these startups, which can help them streamline their operations and reduce costs.
Conclusively, SVB’s collapse will have a significant impact on African tech startups, particularly in terms of funding, banking, and payroll solutions. This crisis, however, provides an opportunity for African startups to look inward and explore local solutions in order to reduce their reliance on foreign investors. Hence, there is an urgent need for Africans to invest more in the African startup ecosystem, as it has been proven times without number that the current arrangement is not really in the best interest of the continent. African startups can become more self-sufficient and less vulnerable to the whims of the global financial system by doing so, and they can build stronger, more resilient businesses that can weather any storm and bring more prosperity to the continent.