Takeaways for African founders from Silvergate, Signature & Silicon Valley Bank
Don’t worry, this is not going to be another rehash of what went wrong with Sillcon Valley Bank and its siblings. For background and requisite context my elders Marc Rubenstein and All-in Podcast have done a much better job than I can hope to do. Its may seem that the crisis is over to all intents and purposes
After the debacles of Luna & FTX, most people would have predicted that the next financial crisis would come from the part of the finance ecosystem that has funny words such as metaverse, defi - you get what I mean. Nobody would have predicted it would come from three regulated institutions in the heart of the world’s startup center, and in three days.
Initially the view was that most African startups would be relatively unscathed by the SVB blowup but this may not be because founders were sharp in their diversification or quick in their transferring money out.
But the action by the regulators on Sunday now mean that all depsoitors will have access to a 100% of their funds.
Whilst it seems all is uhuru now, we should not underestimate the repercussions on the continent on what has happened in far away California. A few musings/takeaways for my African brothers & sisters founders.
Fundamentals still matter.
Whilst Silvergate, Signature & Silicon Valley Bank were intimately linked to the crypto currency sectors, it was not any crazy speculation on shit coins that brought them down. Rather it was a classic mistake in allocating assets. The banks took cheap short term deposits and invested the funds in securities that would give them a tasty profit. The assets were safe if you held them to maturity but the rising interest rates meant that in the short term, there was a significant reduction in value. The ensuring loss lead to a reduction in the banks’ equity and as a result their stability.
This is fundamentally what caused the run on the banks. Not crypto magic, but poor risk management on the part of bank executives.
So whether you are a neobank or logistics operator just know you can’t fight gravity. You can delay implementing critical infrastructure on the altar of growth but all those boring functions like accounting, compliance, documentation, treasury management that you are ignoring - these are likely to kill you. Not that competitor of yours out innovating you or even churn;
More likely to be corporate suicide than anything. Hear word.
Expect the unexpected
The one thing that we can predict is that we have no idea of what is coming next. It seems the problem has been contained but there may be 2nd or third order effects that are yet to be seen. If there was every a time to focus on core operations and manage your costs - this is it.
Most investments into startups are financed by Silicon Valley Bank and its peers. The banks make loans to VCs to fund their investments; When VCs call capital from their investors then the bank is paid out. But the main point is that SVB and others are a vital cog in the Silicon Valley machine. As a lender, financier, payroll facilitator, investor and venture debt financier. Overnight all these are no more and not all of these services can be replaced overnight.
The psyche of investors of investors & operators alike has changed overnight. When there is uncertainty, people naturally go back into their shells, or their countries.
That sense of adventure to look at other markets; disappeared.
The patience to keep investing in a region that has seen little or no exits; severely challenged.
Expect a slow down in investments on the continent, more pulled term-sheets and delays in getting that critical follow-on funding. We have no idea of the scale of the current problem and how it will affect companies in the West or here. But we know that the operating and fundraising environment has not improved. And as such, founders need to react accordingly. But its important to be realistic about how we got here.
You raised money from VC; brilliant. But you know your startup is not that great right? ☹️☹️☹️
Not many will like to hear this but its the truth. Over the last 7 or so years, the cost of capital has been practically 0%. Which means that in the States, investors could raise money at next to nothing and as long as they made a few % points it was a good deal. When you have cheap capital, it means exotic investment locations like Africa are not as daunting. If investors are having to manage you t-bill returns of 6% and these cute African startups can give, even 6% - well no harm no foul.
So yes, there were record raises in 2021 and 2022 but sorry to break it to you; I am sure some of it was because of the “Africa Rising” or “Lions in the Savannah” narrative but the truth is that the main reason was probably because these investors had a shit load of money with not much of an idea of what to do. Really sorry to break this to you. But you aren’t that great.
How are you feeling? I know that was a bit rough but it gets worse. Because there is something important that you need to know:
Sue or Barry are not your best friend.
Yes, they gave you a shit load of capital. When they signed that term sheet you felt finally like an African Lion and when you received that alert from your bank, (yes it was probably Silicon Valley Bank) your dreams were finally realized; you could finally stop eating Indomie noodles, and attack that $XX billion addressable market. Sue and Barry may be the reason you spend 70% of your time in Dubai/New York & London which is why you and your spouse are debating whether you can name your next child after them despite the opposition of your parents.
What I am saying is that as much as they mean well for you, your relationship is primarily financial. You are a potential 25% IRR on a chart. Or alternatively a logo that will be in the discarded basket if your startup is not performing.
Because let’s be clear; Silicon Valley VCs turned on, Silicon Valley Bank; one of their own. A bank loved by startups and VCs alike; financed their deals, funded their nice houses and even as of yesterday was being hailed by all as having been critical to the ecosystem. But in 24hours Silicon Valley ate their own without batting an eyelid when profits were at stake.
So who are you to them when things get rough? Afua, Kofi, Tawanda, Zainab - I am talking to you.
So stop shafting your angel investors.
Yes, those investors that you are now ashamed of when Mr or Mrs VC come to you and tell you that they want a clean cap table. You know how you talk arrogantly about them, with your term-sheet in hand.
”What’s wrong with them? I am going to 3x their money so why don’t they just sod off and allow me to be come a unicorn? What’s this nonsense about wanting to keep supporting me? I don’t need their help any more - I have got a termsheet baby!”
The truth is that we need more local investors. When we rely on foreign investors then we expose ourselves to imported problems. You got money offshore and had to domicile in the USA. Now we know you you weren't forced to do this but imagine the conversation if you insisted on transferring the $10mm raise to your Wema or Kenya Commercial Bank domiciliary account 🤣🤣🤣.
The reality of investing in Africa right now is that funds are raised offshore, companies have to be domiciled offshore, and the funds raised are kept in offshore banks.
That’s like telling your partner you want to marry them that you are fine with marriage but they need to change their name, their religion and move to Nigeria. Oh shit that’s a common occurrence already - bad example guys.
Anyway my key point is that this is not a pretty situation; we have all accepted it because we need the cash. But if this continues as is, it will not end well.
In conclusion, what are the lessons for participants in the ecosystem?
Operators
It really is time to build but with a focus on fundamentals. We are not going to get as much money as we want so its heads down. Cut costs immediately. And don’t ignore the macro - this is a common mistake by entrepreneurs and it can bite you where it hurts
Investors
We need local investors who can help us on the ground. It may mean more education for both parties but definitely more humility on the part of founders. The fact that you can get that $20mm pre-seed valuation doesn’t mean you should. We also need investors who don’t send termsheets demanding >50% ownership pre Series A.
Regulators
Bad policy will always lead to pain and in the USA, the policy of allowing banks to carry unrealized losses when interest rates rose. The lessons from America have shown how government policy can hurt enterprises inadvertently. In an earlier post, Is Brazil the epicenter of fintech?, I talk about how the Brazilian central bank has been a leader in creating an enabling environment. Regulators acting decisively can quell issues and install confidence in the market.
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Why don't we have local investors, how do we solve this?
Love it. We must encourage local investors. The current situation of offshoring imports problems. love it.