Though seemingly distant, a series of bank failures in the US could be bad news for startups in Africa. While actions by government authorities and institutions seem to have prevented contagion, the successive collapse of Silvergate Capital and Signature Bank, and the near-shuttering of Silicon Valley Bank (SVB) signals further instability ahead.
As news of SVB’s seemingly imminent collapse circulated on 9 March, African startups appeared shielded from events. African founders and investors took to social media, describing the barriers faced when trying to open bank accounts with SVB, Silvergate, or Signature, labelling their rejection a possible blessing in disguise.
Despite the perceived limited exposure of African startups to these bank failures, recent events will change the startup funding landscape for the foreseeable future, increasing barriers for the continent’s tech startups which already faced an uphill battle.
Susceptibility to global shocks
The assumption that the African startup ecosystem has limited exposure to recent developments ignores the nature of startup funding on the continent, the majority of which comes from VC firms. Many VC firms active on the continent – including those that entirely focus on Africa, such as San Francisco-based Future Africa – are registered outside of the continent, leaving African startups vulnerable to global shocks.
SVB, for example, was previously considered the go-to bank for VCs due to its tailor-made solutions, serving the global tech startup ecosystem with branches in the UK, Germany, and Hong Kong. With over 2,500 VC firms as depositors in the US alone, SVB’s stumble prompted panic in the ecosystem as startups feared not only for their own assets but also the future of funding as VCs faced the possibility of downsizing or shuttering their operations.
The market is experiencing a fright that is likely to shift behaviours across the globe. More eyes than ever are turned toward rising interest rates, an underlying issue that catalysed SVB’s downfall and spells more trouble for firms of all sizes, in all sectors, and in all markets. Following a period of cheap credit, rising interest rates across the world signal the end of the period of liberal investor spending, and will usher in a new era of frugality.
This will hit the continent hard, as African startups already struggle to convince international VC firms on the merit of their solutions due to a number of barriers including perceived credibility. VC reliance on data-driven modelling can also prove a barrier to founders whose markets lack the sources of data required to unlock investment.
Tough(er) times ahead
While 2021 and 2022 saw record funding for African startups, African central banks in the meantime struggled to temper widespread fiscal instability triggered by the COVID-19 pandemic. Despite the IMF’s relatively rosy forecast for 2023, economic growth in most countries is expected to slow considerably, and the possibility of skirting a recession seems less likely.
The last year has already been difficult for many tech startups, characterised by pivots, mergers, layoffs, and a number of firms shutting down. ChipperCash, one of the few African startups to publicly share its exposure to SVB, has already faced rounds of layoffs, and now rumours of a sale, despite declaring that recent developments left the company unscathed.
On top of investor coffers drying up, African startups in nascent sectors should also expect that developments will amplify scrutiny from authorities and accelerate progress toward regulation, especially in the world of digital assets.
What of Web3?
FTX’s meltdown last year and now the failure of crypto-focused banks Silvergate and Signature have only worsened public perceptions of the Web3 space. 2022 saw efforts to implement regulations accelerate around the world, with initiatives only picking up speed since 2023 began. The IMF has shared its suggestions for effective crypto policy, the US SEC has quickly moved to consider stablecoins securities, and the EU’s Markets in Crypto-Assets Regulation is expected to enter into force before H2 2023.
African authorities are also seeking to regulate crypto beyond outright bans, with Kenya seemingly next in line following the steps of South Africa and Botswana. 2022 saw an amendment to the Capital Markets Bill tabled in the National Assembly, which seeks to define digital currencies as securities and establish capital gains and income tax on crypto assets.
The antithesis to the decentralised ethos of the space, crypto regulation has many players anxious. Even larger ones – well-poised to establish regulatory compliance and absorb the market share of those unable to do so – have expressed concern over the perceived rushed approach of regulators. As African players in the Web3 space begin to explore use cases beyond trading, rash regulation could see innovative solutions to everyday issues stifled.
The tech startup ecosystem’s golden days seem to have come to a close, as previously endless pockets run dry, and authorities clamp down to avoid market instability. In Africa, there will be uncertainty, as announcements like the shuttering of South Africa’s largest investment fund Foundry force founders to reconsider their strategies.
2023 is thus likely to see more pivots, mergers, and layoffs, and see startups place a heavier emphasis on other funding avenues, including angel investors and impact funds. Shifts could also see crowdfunding rise in prominence, with Nigeria and Kenya having implemented investment-based crowdfunding regulation, and Tanzania set to follow suit.
African governments are also looking to take a more important role in enabling startups through policies that introduce incentives for young people to start a venture, investors to fund projects, and other stakeholders to lend support where needed. Ghana and Nigeria are working to operationalise their startup regulations, while final readings for Kenya’s Startup Bill are approaching, and South Africa is considering a similar path.
About the author
Jasmine Okorougo is an Associate Consultant at Africa Practice with a special focus on political economy and digital financial service developments across sub-Saharan Africa. She can be reached at [email protected].