Silicon Valley Bank (SVB) has been significant in the startup ecosystem in recent years. Known as a startup bank in many circles, SVB was one of the largest banks in the US, with billions in assets. It provided funding and support to many promising young companies in the technology industry.
However, on March 10, 2023, SVB announced its collapse, leaving many of its clients in Africa and other parts of the world scrambling to find alternative funding sources.
The collapse impacted Africa’s technology ecosystem, where many startups relied on SVB’s financing and expertise.
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SVB’s growth and collapse
SVB was founded in 1983 to help startups. It started at a time when the finance industry overlooked and ignored startup markets. The bank began by collecting deposits from businesses financed by venture funding. SVB eventually expanded to funding Venture capitalists.
The bank experienced tremendous growth during the Corvid 19 pandemic. SVB assets grew from $48 Billion in 2018 to $189 Billion by the end of 2021.
SVB invested heavily in long-term US Government bonds. Considered risk-free investments, they have risks to them;
- Invested funds are locked in 10-year bonds and cannot be accessed in emergencies. When rumours of the SVB bank collapse started, investors panicked and started withdrawing their deposits. The bank needed a lot of cash fast to curb this situation, but most of it was tied up in long-term bonds.
- When interest rates rise, these bonds lose value. And this is what happened to SVB bonds. When the federal bank started raising US interest rates to combat the high inflation in the country, SVB bonds became worthless.
So, when SVB bank announced on March 8th of the bank’s demise, its customers rushed to withdraw their funds, causing what is known in bank terms as a “bank run”., causing the bank to collapse. Social media played a pivotal role in causing this stampede as investors sounded the alarm.
The Federal Deposit Insurance Corporation (FDIC) took over the bank and created a successor bank, Silicon Valley Bridge Bank (SVBB), to stabilise and market the institution. All insured and uninsured deposits, including all bank assets, were transferred to SVBB.
In efforts to ensure the bank’s survival, SVBB’s new CEO has encouraged its customers, venture capital and startup clients to keep their funds with the bank and those who withdrew their money to return it.
How does all this affect the African Tech scene?
Many African startups had their funds in SVB. Chipper Cash, a thriving financial services company, is among the many startups impacted by the SVB collapse. Others include Future Africa, Quona Capital, Volition Capital, and EchoVC. The bank required startups to have deposits in the bank as collateral. In addition, the bank offered loans against shares for founders and cashflow loans.
With the recent bust of the crypto-linked Signature Bank and Silvergate Bank and now the collapse of SVB, the mood in the tech scene is one of fear and apprehension.
To understand the potential impact of SVB’s collapse on the African continent, it is essential to consider its role in Africa’s startup scene.
SVB has established a presence on the continent in recent years, recognizing African startups’ potential for growth and innovation. As a result, it provided financing to many of these companies, along with mentorship and access to its extensive network of industry connections.
The loss of SVB’s mentorship and expertise is significant to African startups. Many of these companies benefited greatly from SVB’s guidance and support, as it helped them navigate the complexities of building a successful tech business. With this support, many startups can scale their operations and compete globally.
SVB’s collapse will undoubtedly create a funding gap for many startups in Africa, as they will need to find alternative sources of financing. It may be particularly challenging for companies in the early stages of development, as they often need help to secure funding from traditional sources like banks and venture capital firms. Without access to funding, many startups will be forced to close their doors, stalling innovation and growth in the technology sector.
All is not gloom
However, it is not all doom and gloom for African startups. Several potential opportunities could arise from SVB’s collapse.
- For one, it may lead to the emergence of new funding sources and alternative financing models. Startups will evolve to become more creative and resourceful in their pursuit of funding, leading to the development of new approaches and partnerships.
- Additionally, SVB’s collapse may allow African banks to step up and support the technology sector’s growth. African banks have traditionally hesitated to lend to startups and other high-risk ventures. Still, the collapse of SVB may spur them to re-evaluate their lending practices and become more supportive of innovation and growth.
- Furthermore, SVB’s collapse may also lead to a shift in how African startups approach fundraising. Startups may focus more on building sustainable, revenue-generating businesses rather than relying solely on fundraising rounds.
- The shift towards revenue generation could ultimately lead to more stable and resilient companies, better able to weather the ups and downs of the business world.
In conclusion, the collapse of Silicon Valley Bank is a significant disruption of financial services globally. The impact on the technology industry and the broader geopolitical and economic implications were felt worldwide.
It is undoubtedly a blow to the African startup ecosystem. Many startups will need help finding alternative sources of funding and support. However, it is essential to remember that this is not the end of the road. Several potential opportunities could arise from SVB’s collapse, including the emergence of new funding sources, increased support from African banks, and a shift towards revenue generation.
With resilience, creativity, and hard work, African startups can continue to thrive and innovate in the years to come.
Frequently Asked Questions
A combination of factors led to the collapse of SVB Bank;
– The gradual increase of interest rates by the US Federal Reserve to curb rising inflation. As interest rates rise, long-term Government bonds lose value. SVB invested heavily in US Government bonds, and when interest rates spiked, the bonds lost value.
– News of the bank’s financial situation caused its clients to withdraw their funds quickly.
– To mitigate the situation, SVB sold its bonds for significant losses. Within 48 hours, depositors had withdrawn enough money to cause the bank to collapse.
The number of African startups affected by SVB’s collapse is unknown. However, SVB had established a significant presence on the continent. It provided funding and support to many companies in the technology industry.
Several alternative funding sources are available for African startups, including venture capital firms, angel investors, crowdfunding platforms, and government grants. However, securing funding from these sources can be challenging, particularly for startups in the early stages of development.
While the impact of SVB’s collapse on the global technology industry is not yet clear, it will likely have some ripple effects. SVB was a significant player in the startup ecosystem. Its collapse may lead to changes in how startups approach fundraising and growth.
African startups can adapt to the loss of SVB’s support by becoming more resourceful and creative in pursuing funding and growth. This may involve seeking out alternative sources of financing, partnering with other startups or established companies, and focusing on revenue generation to build sustainable businesses.