- There appears to be a mixed impact on Africa's tech ecosystem due to the collapse.
- If ripple effects are not yet fully apparent, observers believe that the long-term implications could be more significant.
- Calls to protect African businesses through reduced reliance on foreign capital have since emerged.
The collapse of Silicon Valley Bank (SVB) last week has sent shockwaves through the tech industry as the largest lender to venture capital funds suddenly seized up.
Ever since its establishment in the early 1980s, SVB – the 16th largest bank in America – has played a fundamental role in the development of the influential Silicon Valley ecosystem by providing crucial financial support to start-ups and investors alike.
What really led to the SVB’s downfall?
During the Covid-19 pandemic, SVB found itself inundated with deposits, which it invested in US bonds and mortgage-backed securities with a fixed return. However, the recent rise in interest rates led to a decline in the value of its assets.
As economic conditions worsened, Silicon Valley firms began to withdraw their deposits from the bank, leading SVB to sell off its bonds at a significant loss and dilute its stock. That ultimately led to a run on the bank as clients withdrew their funds in fear of 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.
What effects does the collapse have on Africa’s start-up ecosystem?
There appears to be a mixed impact on Africa's tech ecosystem due to the collapse. As Nigerian tech journalist Frank Eleanya noted in a recent article for BusinessDay, "Nigerian start-up founders say the impact on the local ecosystem will be minimal," mainly due to the fact that only a small number banked with SVB.
However, there are some firms that have had dealings with the stricken bank. Chipper Cash, one of Africa’s start-up unicorns (start-ups valued at more than $1bn), is one that might be directly impacted, having received a $100m SVB-led investment in May 2021. No official statement has been released by Chipper Cash regarding how much of that funding is banked in SVB.
Other businesses appear immune. Future Africa, one of the largest Africa-focused venture capital funds, recently assured that its funds have minimal exposure to Silicon Valley Bank. The fund noted, nonetheless, that its team is "working very quickly to build new account relationships with established global banking institutions as soon as funds are available”.
In an interview with BBC Focus on Africa, Tanzanian start-up founder Benjamin Fernandes, founder of cross-border payments firm NALA, said that he managed to withdraw the firm's money prior to the collapse after hearing of the bank's struggles. Nevertheless, he bemoaned that some industry contacts in the US had not managed to move their funds in time.
However, he believed that the impact on Africa's tech sector may be limited given the small number who bank with SVB. Indeed, the difficulty that African start-ups face in opening US bank accounts may have protected the continent from the worst of the fallout, he said.
But if ripple effects are not yet fully apparent, observers believe that the long-term implications could be more significant. Venture capital funds, in particular, may be less willing to take risks in the wake of SVB's collapse, potentially slowing down start-up funding across the continent after a record-breaking year of $4.8bn raised by the end of 2022.
In a blogpost, Ngozie Dozie the founder of digital finance platform Carbon cautioned of a possible slowdown in investments on the continent, more pulled term-sheets and delays in getting that critical follow-on funding.
A key opportunity to boost local funding for start-ups.
In the wake of the bank’s collapse, founders in Africa have been forced to review their banking options to cushion their start-ups from such eventualities.
As with every financial external shock, calls to protect African businesses through reduced reliance on foreign capital have since emerged.
Expert Investment analyst view SVB's collapse as an opportunity to strengthen Africa's start-up ecosystem and encourage greater investment from local sources.
"When we rely on foreign investors, then we expose ourselves to imported problems," said Dozie, highlighting the need for more local investment in Africa's burgeoning start-up scene.
Max Cuvellier, founder of the start-up deals database Africa The Big Deal, has reported that 1,400 investors were involved in at least one start-up deal in Africa in 2021-2022. Among them, 36% were from North America, 27% from Africa and 21% from Europe.
As the tech industry grapples with the aftermath of SVB's collapse, it is clear that the lessons learned from this event will have far-reachingconsequences for start-ups and investors across the continent.