The closure of the United States-based Silicon Valley Bank, the bank of choice for many venture capitalists and startups, may affect Nigerian startups according to industry players.
On Wednesday, March 8, SVB surprised investors with news that it was seeking to raise $2.25bn to maintain liquidity. Within the next couple of hours, a bank run occurred after VCs advised their startups to withdraw their funds from SVB.
By Thursday, customers had withdrawn $42bn of deposits, according to a California regulatory filing. The filing revealed that as of the close of business on March 9, the bank had a negative cash balance of approximately $958m.
On Friday, the US Federal Deposit Insurance Corporation closed the bank and seized its deposits, becoming the largest US banking failure since the 2008 financial crisis in the process.
The UK branch of SVB has also been closed down by the Bank of England after it sought £1.8bn of liquidity from it. The collapse of SVB has caused a collapse in the tech ecosystem because of the important role the US plays in the global tech ecosystem.
Many reports have estimated that the closure of the UK arm of SVB could affect as much as 30 per cent of UK tech startups and jeopardise about 10 per cent.
Prior to now, SVB had about $175.4bn in total deposits as of December 2022.
According to Y-Combinator’s president, Garry Tan, 30 per cent of YC companies are exposed as a result of the collapse and might not make payroll this month.
He tweeted, “30 per cent of YC companies exposed through SVB can’t make payroll in the next 30 days.”
There are over 80 African startups in Y-Combinator. One of the founders recently tweeted, “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.”
Chipper Cash, on Sunday, disclosed in a statement that about $1m of its funds is trapped in SVB. The fintech, which is one of Africa’s most valuable startups, said SVB was one of its investors and led its Series C fund raise.
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 13th 2023. Furthermore, there was absolutely no impact on our customer operations around the world.”
According to the founder/CEO of Future Africa, Iyinoluwa Aboyeji, a number of Nigerian startups could be impacted by the collapse of SVB. He stated that most startups might start to move their funds to other banks.
In a conversation with The PUNCH, he said, “SVB was well known for treating our startups with respect unlike a lot of the big banks which tended to be less receptive to banking relationships with African startups
“I am 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 startups 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.”
Commenting on the situation, the Chief Executive Officer, TruQ, Williams Fatayo, said only few African startups might be impacted by the collapse of SVB.
He noted that the indirect impact of the collapse is more likely to affect startups, with investors ability to raise cash likely to be impeded.
He said, “Very few startups in Africa have their funds there. We tried to onboard last year, but the conversation was around how we had not hit certain ARR milestones and raised a certain amount of funds.
“You need to have a certain ARR before you can open an account with them. There is this restriction and most African startups might not be able to open accounts with SVB.”
He said the annual recurring revenue that was expected at the time was $10m.
Fatayo added, “Asides from 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 startup a cheque might have money trapped there. Investors that you want to pitch in a couple of months’ time might have their money trapped.”
According to industry experts, SVB’s collapse will significantly impact the industry. Y Combinator recently stated that one-third of the startups in its community used SVB as their sole bank account.
It said this will affect more than 10,000 small businesses and startups and may result in the loss of 100,000 jobs in the US.
Many in the industry are calling on the US to bail out the bank, but US Treasury Secretary, Janet Yellen, on Sunday disclosed she was working closely with banking regulators to respond to the collapse of SVB and protect depositors, although a major bailout might not be in the works according to Reuters.