The failure of Silicon Valley Bank (SVB) is serving as a wake-up call to improve access to funding for start-ups at a local level, the founder of data platform Magnitt has said.
For local banks, this is an opportunity to provide much more efficient and friendlier services to these small companies and venture capitalists alike, instead of seeking funding from international lenders, Philip Bahoshy said.
“Moving forwards, a collaboration between the banking industry and the venture capital community is vital to provide facilities and support start-ups and consequently, minimise the reliance on having to use international banks,” he said.
California-based SVB, which started in 1983, rode the wave of America’s local high-technology economy during that decade and rose further during the dot-com era of the 1990s, when tech start-ups started growing.
Its status as the go-to bank for technology entrepreneurs and start-ups continued until its final years. At its peak, it was the 16th-largest bank in the US and was the biggest in Silicon Valley, a global centre for technology and innovation.
US regulators seized SVB and placed it on receivership on March 10 in an effort to protect its investors after a bank run. It became the biggest bank failure in US history after Washington Mutual’s collapse in 2008, which in turn triggered the global financial crisis.
The fallout from SVB’s demise was swift: it rattled global stock markets, which lost around $465 billion in value, and became the trigger for the growing worries of another financial crisis. The debacle also left its start-up clients scrambling on figuring out how to continue paying their employees.
The FDIC had created a bridge bank that now holds the deposits and assets of SVB’s former clients, a majority of which have deposits that are up to millions of dollars above the $250,000 threshold the FDIC insures.
When word began to spread that the bank could be insolvent — as government bonds it purchased in the past few years were now drastically declining in value following recent interest rate rises — many of those firms moved to pull their money out of SVB.
“The collapse of SVB caused panic among those who had banked with them,” Mr Bahoshy said.
Any exposure to SVB among start-ups in the Middle East would not have a profound effect, given that many of these companies are operating at a local level, and therefore have cash accounts locally that they can use to fund their operations and payroll, he said.
“For our region, the immediate impact hasn’t been as acute as it was in the US,” he said.
“The real challenge is that the collapse of SVB is likely going to affect the confidence in the sector, creating risk aversion and a lack of risk appetite as people take a step back to view the wider macroeconomic level and how that’s going to impact the venture capital space.”
In an ecosystem where venture capital funding is receding, alternative asset classes as opposed to venture capital are still a very nascent concept
Philip Bahoshy, founder of Magnitt
The situation has highlighted the opportunity local banks have in front of them to provide the needed — and reliable — support they can provide to start-ups, especially as there has been a decline in venture capital invested since the first quarter of 2021, Mr Bahoshy said.
In 2022, there was only about $250 million across 18 deals that were afforded to start-ups as an alternative for venture capital, according to Magnitt data.
The likes of JP Morgan, HSBC and others, Mr Bahoshy said, are attempting to provide facilities for banking as a service, and that would help them to expand their portfolio.
“So, for local banks, this is an opportunity to provide much more efficient and start-up-friendly or venture capital-friendly account opening processes,” he said.
Still, there may be a long way to go before banks recognise start-ups as a segment of the market, owing to the risks associated to these companies, which include unclear goals, lack of market fit and growing too fast or too slow.
“One thing that SVB did quite effectively in the US was to provide loans and other alternate banking products that were beneficial for start-ups,” Mr Bahoshy said.
“In an ecosystem where venture capital funding is receding, alternative asset classes as opposed to venture capital are still a very nascent concept.”
Updated: March 19, 2023, 3:30 AM