SVB Collapse: Are Africa’s Tech Firms At Risk?
SVB was renowned for taking risks on startups that other banks would not and held a privileged position in the tech community, with many startups and investment firms as clients. Therefore, the bank's collapse harms the tech companies with funds in SVB.
On March 10, the President & CEO of YCombinator, Garry Tan, tweeted that 30% of YC companies cannot make payroll in the next 30 days due to Silicon Valley Bank’s (SVB) failure. SVB’s failure is the most significant US bank failure since the financial crisis over a decade ago.
SVB was renowned for taking risks on startups that other banks would not and held a privileged position in the tech community, with many startups and investment firms as clients. Therefore, the bank’s collapse harms the tech companies with funds in SVB.
In 2021, SVB made seemingly good financial decisions as the tech sector grew, leading to a significant amount of money in its custody. However, SVB invested much of this money in long-dated bonds with low-interest rates. When interest rates rose, SVB suffered losses in the value of its bonds.
Although this loss alone was not enough to cause the bank’s collapse, the tech startup community had been experiencing low funding, causing some of SVB’s clients to withdraw funds. SVB had to sell some of its investments at a loss and seek funds to meet its clients’ demand for cash.
According to CNN, Silicon Valley Bank’s C.E.O., Becker, and his leadership team last Wednesday expressed their hope (with no firm commitment) to raise $2.25 billion in capital and $21 billion in asset sales, which resulted in a $1.8 billion loss. This news caused concern among the bank’s money-sensitive clients, resulting in a bank run that led to the downfall of the 16th-largest US bank last Friday.
A bank run is a self-fulfilling prophecy that occurs when many clients withdraw all their money simultaneously from their deposit accounts with a bank out of panic that the bank might become insolvent. It then becomes so because of the massive panic withdrawal.
YCombinator has invested in 86 companies in Africa, including prominent names such as Flutterwave, Paystack, and Chowdeck. Although the President of YC did not reveal which companies will be affected by the crisis, he suggested that some of their funds may be caught up in it.
One of Africa’s most valuable startups, Chipper Cash, received a $100 million investment led by SVB, sparking rumours that the collapse will likely affect Chipper Cash.
Chipper Cash CEO Ham Serunjogi has since put out a statement claiming that the recent failings of both Silicon Valley Bank and Silvergate Bank, while chaotic, had an “insignificant” effect on the payments company.
“We had a minimal amount of money (only about $1 million) held in our SVB account when the California regulator took over the bank,” according to Chipper CEO Ham Serunjogi. “SVB made their investment in Chipper in 2021, and we received those funds as soon as that round closed…, and SVB owns a very small part of Chipper; [about] 2%,”
With some best-known African tech firms as SVB’s clients, should these African tech firms be worried? The answer would have been yes if the US Federal Deposit Insurance Corporation were strict with implementing its policy of insuring only the maximum amount of $250,000 deposited by any client.
The US government is taking steps to protect these tech startups with more than $250,000 in deposits by prompting the FDIC to create a bridge bank that will facilitate a quick and organized transfer of insured and uninsured deposits, ensuring that all depositors of the institution receive their money. According to the FDIC’s press release on March 13, all depositors should now have full access to their funds.
With the creation of a bridge bank to facilitate the transfer of funds, the worst-case scenario of customers having to wait weeks or months to access their money has been avoided. As a result, the predicted extinction of startups and setbacks in innovation that massive layoffs would have marked has also been averted.