Following SVB Collapse, Nigeria Makes Genius Move to Protect African Start-Ups | The African Exponent.

KEY POINTS

• On March 10, 2023, there was confirmation that Silicon Valley Bank (SVB) had collapsed
• Before its collapse, SVB was one of the world’s biggest tech-lender, with an investment of over $212bn
• SVB, coupled with Silvergate Bank and Signature Bank, were big lenders to African Start-ups before the SVB collapse – which also affected the other two banks
• Analysts believed that the Bank had been struggling with some internal challenges linked to stiff regulations imposed during the Trump administration and predicted the beginning of hardship for African Start-ups
•  Nigeria has reacted quickest in Africa to bail out its Start-ups by launching a $672 million fund

On March 10, 2023, the world woke up to the news that Silicon Valley Bank (SVB) had collapsed. Experts described the bank’s failure as the second-largest bank failure in United States history and the largest since the infamous 2008 financial crisis.

Three United State banks – Silicon Valley Bank, Signature Bank, and Silvergate Bank, all collapsed last week, and financial experts are at loggerheads as to whether the failures were a result of Trump-era regulations, poor risk mismanagement, sharp interest rate rises – or a combination of all three?

Whatever the issue may be, the abrupt failure of SVB, a $212bn tech lender, continues to reverberate and send heat waves globally – especially among African Start-up owners and investors.

How are African Start-ups Affected by the Failure of Silicon Valley Bank?

It is not yet clear how many African Start-ups and Venture Capitalists were affected by SVB’s collapse, but a widely circulated report released by Castle Hall, an international due diligence company, has revealed that several funding vehicles for African start-ups, like 4DX Ventures, banked with SVB.

Also, some big African start-ups like fintech unicorn Chipper Cash were also among several start-ups that could not access their funds with SVB after the collapse. Also, none less than 50 Start-ups from Egypt and North Africa whose wealth managers used SVB’s investment banking and corporate services could not access a portion of their funds.

A significant amount of the venture capital that African start-ups raise comes from United States-based investors. One of the criteria for accessing these funds is that the Start-ups are mandated to domicile the funds in U.S. bank accounts. These investors and venture capitalists usually recommend SVB because of its history with African Start-ups and tech businesses. Another reason behind the recommendation is the incentives and benefits that SVB provides to start-ups that are hard to find in other financial institutions.

According to reports by TechCrunch, before its collapse, SVB provided African Start-ups with cash management features alongside better interests on deposits and cheaper wire transfer fees than its counterparts — services that would be costlier for an African start-up to access in bigger institutions.

SVB also provided loans, which many start-ups are unable to get in conventional banking institutions owing to their high-risk profile. So, it is understandable, while a majority of African Start-ups had their funds in multiple SVB accounts, why the failure of the Banks is causing a shock wave across the continent.

Nigeria Aims to Rescue Start-ups in the Country

Nigeria’s commercial capital, Lagos, is Africa’s leading start-up investment destination. So, it was only natural for the West African country to react quickest to the news of the failure of Silicon Valley Bank, Signature Bank, and Silvergate Bank.

To cushion the direct effect that the failure of the American Banks would have on African Start-ups operating out of the country, Nigeria has launched a $672 million fund to support its tech start-ups as a way of supporting them from collapsing.

The fund was launched in Nigeria on March 14, 2023, under a charter by the government through its Digital and Creative Enterprises Programme (DCEP). Its $672 million fund would be generated through key Stakeholders – $170 million would be contributed by the African Development Bank (AfDB), $116 million will come from the Agence Francaise de Developpement, the Islamic Development Bank has pledged $70 million, and $271 million will be raised from the country’s private sector. The Nigerian government will provide the remaining $45 million.

According to a report by Venture capital firm Y-Combinator, the fall of the U.S. banks will directly affect more than 10,000 start-ups. Its president Garry Tan tweeted, saying “30% of YC companies exposed through SVB can’t make payroll in the next 30 days.” Following the announcement of the bank failures, the accelerator itself, which currently funds 80 African start-ups, has cut nearly 20% of its own workforce.

The $672 million fund can be accessed by founders of African Start-ups operating in Nigeria who are between the ages of 15 and 35. Therefore, it is safe to say that only tech Start-ups are being targeted.

For the second year running in 2022, Nigeria was Africa’s most funded country, with 180 start-ups receiving up to $976 million, almost 30% of the $3 billion the continent received.