Silicon Valley Bank (SVB) shut down on Friday, leaving over 40,000 clients unable to access their funds. The bank’s sudden closure has shocked the financial industry, with concerns about the impact on startups, VC and private equity firms, and other banks.
SVB was created in 1983 in Santa Clara, California, in the heart of Silicon Valley. The bank was founded with the purpose of providing banking services to the technology industry, which at the time was rapidly growing in the area.
The founders saw an opportunity to provide financial services to startups and emerging technology companies that were not being served by traditional banks. Since then, SVB has become a leading provider of financial services to the innovation economy, including venture capital and private equity firms, technology companies, and life science companies.
What went wrong?
SVB had over $170 billion in assets and was the 16th largest bank in the US. The bank did not engage in risky lending practices, unlike what happened in 2008 when the entire global financial system crumbled overnight. However, the bank did get greedy.
Zero-interest rates over the last decade meant that cash flooded into tech. COVID-19 made it even crazier. Banks lend your money out to offer you a return for parking your cash. Before, banks offered 0.3% APY, but today they compete at +3.00% APY. As customer deposits exploded, SVB couldn’t grow their loan book out fast enough.
SVB turned to Mortgage Backed Securities (MBS), which it bought for $80 billion. MBSs were supposed to be safe, long-term bonds at 1.56%, but when the Fed raised rates over the last 6 months, these became poor investments. Once interest rates went up, tech valuations fell, IPOs halted, and startups continued to burn cash. Deposits into the bank fell from $200 billion in March 2022 to $170 billion at the end of December and were forecast to keep falling.
The downfall
On Wednesday, SVB sold a large chunk of assets at a $2 billion loss and tried to raise $2 billion by issuing equity, diluting shareholders. Investors freaked out, and the largest VC firms in Silicon Valley pulled their funds. Then they instructed their portfolio companies to follow. Overnight, SVB’s stock dropped 60%. By Friday, regulators shut the bank down, freezing customer deposits.
For the average person, the FDIC insures up to $250k in customer deposits, which is plenty. However, for cash-burning startups, SVB’s primary customer, that’s only a single month’s expenses. Thousands of startups and their employees do not have access to their funds.
What lies ahead for African startups?
The SVB shutdown is a wake-up call for African startups and investors who have relied on the bank for its services. It is also a reminder of the importance of diversification and risk management.
Many startups have been caught off-guard by the sudden closure and the impact on their operations. To avoid a similar fate, startups must look beyond SVB and consider diversifying their banking relationships.
Investors must also pay attention to the risks associated with their investments. The sudden shutdown of SVB is a stark reminder of how quickly things can change in the financial industry. Investors must be aware of the risks associated with their investments and consider diversifying their portfolios.
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Reactions from some founders
Benjamin Fernandes, founder of the Tanzania-based NALA stated, “We had most of our money in SVB. Moved it all to another bank. Literally an hour later, couldn’t log back in to SVB.”
One of Africa’s unicorns, Chipper Cash – founded by Ugandan Ham Serunjogi and Ghanaian Maijid Moujaled, had about US$1 million at SVB when it closed. The former had this to say.
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