"Banking options reconsidered by African startups following SVB's downfall"
Nala, a U.K.-based mobile money transfer startup that is focused on Africa and managed to pull its funds out of SVB before it collapsed, is exploring partnerships with new large corporate banks.
It is becoming clear that millions of dollars held by African startups and venture capital funds at the bank were at risk before the U.S. Federal Reserve took action to save the day after the collapse of Silicon Valley Bank (SVB) last week.
To protect their startups from such occurrences, African founders have been forced to examine their banking options following the bank's collapse. The Pan-African fund Future Africa, which suffered "minimal exposure," also hinted that it was keen on opening an account with a global banking institution. Nala, a U.K.-based mobile money transfer startup that is focused on Africa and managed to pull its funds out of SVB before it collapsed, is exploring partnerships with new large corporate banks.
Benjamin Fernandes, chief executive officer of Nala, stated, "We’ve gotten inbound outreach from several banks...but you know banks always like to know a lot of information about companies, their revenue, the amount of cash the company would hold with them, and so on to bring them on board."
Because of the collapse's far-reaching effects, even organizations that were not directly impacted are looking into additional security measures. Co-founder Kagure Wamunyu that Jumba, a Kenyan construction technology startup, is opening an additional account with a "bigger bank" in the United States. This comes as more and more startups prefer to hold their funds in multiple bank accounts at large financial institutions, which are generally regarded as being safer.
SVB's demise has had an impact on African startups, but the number of startups and VCs affected is still unknown. A generally coursed report from the reasonable level of investment organization Palace Corridor showed that few financing vehicles for new African businesses, including 4DX Endeavors, saved money with SVB before it lost everything; It is unclear whether they were impacted.
Meanwhile, several startups were unable to access a portion of their funds, including the African fintech unicorn Chipper Cash. A Dutch wealth manager that provided investment banking and corporate services to mostly Egyptian startups, including opening SVB accounts, was also affected. The majority were probably among the nearly 50 North African startups affected by SVB's closure.
African startups receive a significant amount of venture capital from investors based in the United States, who require that the funds be deposited in U.S. bank accounts. They have previously recommended SVB due to the bank's history of working with technology companies and the unique incentives and benefits it offers to startups.
According to Fernandes, the bank offered features for managing cash, as well as better interest rates on deposits and lower fees for wire transfers—services that would cost more for an African startup to access at larger institutions.
Additionally, the lender offered loans, which many startups are unable to obtain from conventional banks due to their high-risk profile.
SVB collaborated with the International Finance Corporation (IFC) and the U.S.-based fund manager Partners for Growth (PFG) just last year to provide debt capital to early- to mid-stage companies in emerging markets. SVB was a strategic partner of the IFC.
According to Deepak Dave, an analyst at Riverside Advisory in Toronto, these incentives for high-risk businesses are one of the reasons why startups based in other parts of the world held accounts at SVB.
“In Africa, we do not have a financial system that is even remotely mature enough to deal with financing for startups. SVB can make loans in the United States because the range of assets that have value in those countries is very different from ours. For example, assets like IP that have only been partially created can have a value attached to them. That simply cannot be done in this location. First and foremost, the startup will almost certainly not be licensed the intellectual property; Dave stated, "It will have been licensed to an offshore vehicle managed by the VC investors."
Dave stated that African regulators are not evolving sufficiently quickly to meet the requirements of emerging businesses despite the financial system's infancy.
Additionally, we lack a regulator who is familiar with this kind of lending. Startups won't have as deep a relationship with banks here, but they can have a transactional one, he said.
But founders who spoke with TechCrunch, including those who were accepted into accelerators like Techstars and Y Combinator, said that setting up their startups' SVB bank accounts wasn't easy. They cited a variety of factors, including citizenship status and the absence of SVB operations in Africa, as well as specific criteria like proof of address in the United States and an SSN. As a result, they used platforms like Brex and Mercury to conduct banking transactions. Mercury recently increased its FDIC insurance to $3 million.
Stephen Deng, co-founder and general partner of Africa-focused early-stage VC firm DFS Lab, stated, "Those are your options if you want U.S.-based banking, which does instil credibility (still) with investors." The requirement for founders to be aware of how they manage counterparty risk changes, in my opinion. Top of mind is sweep networks and treasury management.
Banking on such platforms can be risky for an African startup due to their potential for unpredictability. Last year, Mercury limited accounts connected to new African tech companies, including those supported by Y Combinator. This kind of thing happens in regulatory grey areas where banking-as-a-service platforms must comply with partner banks' KYC/KYB requirements and where transactions from emerging markets are considered "high-risk."
Founders assert that this event, which occurred frequently last year, and the SVB disaster have emphasized the necessity of developing in-house solutions (Float is an example). Deng stated, however, that it has its challenges. It becomes harder to differentiate between risks associated with "Africa" the further away you are from the service provider. The deposit base generated by African technology is likely insufficient for these bank providers to modify their KYC/KYB controls.