The co-founder of Carbon, a digital lending company, Ngozi Dozie, has said that the recent collapse of the tech-focused Silicon Valley Bank (SVB) may result in less funding for African startups this year.
Dozie in a blog post highlighting the takeaways from the bank’s collapse said this is the time for African startup founders to focus on core operations and manage their costs because Venture Capitals (VCs) now have fewer funds to throw around.
According to him, most investments into startups are financed by Silicon Valley Bank and its peers and with the recent developments, VCs now face uncertainties that will make them withdraw and become less adventurous in investing.
SVB and VCs: Explaining the relationship between the collapsed bank, other similar banks, and the major VCs investing in African startups, Dozie said:
- “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. SVB operated 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 and 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 exit is severely challenged.”
A slowdown in investments expected: Dozie said African startups should expect a slowdown in investments on the continent. He said there would also be 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 it’s important to be realistic about how we got here.
- “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 weren’t forced to do this but imagine the conversation if you insisted on transferring the $10 million raise to your Wema or Kenya Commercial Bank domiciliary account,” he said.
While emphasizing the need for more local investors in Africa, Dozie said 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.
