Silicon Valley Bank (SVB) is the biggest in the US to fail since the financial crisis of 2008, and its failure is already affecting the Middle East region. According to market data, several Middle Eastern stock indexes fell slightly on Monday on the back of the news. And some compared the situation to the financial crisis in Lebanon, where depositors cannot access their funds.
The Royal Group investment firm, owned by Emirati national security adviser Sheikh Tahnoon bin Zayed Al Nahyan, considered purchasing the British arm of SVB, Bloomberg reported on Sunday. However, according to the BBC, HSBC ultimately bought the bank’s British arm on Monday.
Over three decades, SVB has been one of the most preferred banking choices for startups and the tech industry in Silicon Valley and worldwide, mainly because of its understanding of the industry and flexibility in many aspects suiting the startup ecosystem.
The collapse of SVB, the largest vendor in the startup ecosystem, has left many tech firms in a deep financial freeze in the Bay Area – Roku, a streaming giant, had nearly $500 million tied up in SVB.
Across the technology sector, as lay-offs and bankruptcies loom, it is likely to impact the MENA startup scenario.
According to experts, many startups without an employee or an office in the US opened accounts in the SVB as it let them do so without many regulatory questions and with a customer-friendly approach.
This has injected a lot of uncertainty in the sector overnight. Questions are being raised about whether it will dent the fundraising ability of startups in the region, as the US-based bank was a key source of funding for tech startups, directly or indirectly.
According to Roberto Croci, Director, Value Creation & Transformation at Public Investment Fund, SVB has been actively prospecting in the MENA region in recent years. “It will have existing relationships with investors, specifically General Partners (GPs) and even Limited Partners (LPs) in regional funds. There is some risk of GP impact regarding funds and management company bank accounts held at SVB, where some percentage of their cash may sit.”
As a result, VCs in the region are either likely to hold on to making new investments or be short on their ability to fund new or pending transactions. “There could be issues on funding their cash flows and severe constraints around emergency of the financing requirements in challenged investments,” Croci adds.
But experts say although there’s a panic in the tech sector, the damage will be minimal.
“While we are users of Silicon Valley Bank, none of our portfolio companies in the MENA region are, ” says Heather Henyon, founding partner of Mindshift Capital, focused on post-seed early-stage companies in the US, Europe, and the Middle East.
“The banking and regulatory ecosystem for ventures is beginning to develop in the region; however, the challenge has been that many of the fund managers from the region rely on the Silicon Valley ecosystem,” adds Henyon.
COMPANY-LEVEL RISK FOR FUNDS
There is emerging portfolio company-level risk for funds in the region and the US, given startups who may bank with SVB.
According to Croci, some investee companies, even here in the GCC, will have a varying percentage of their cash with SVB, while their operating cash flows move through local/regional banks, deposits, and investor funding rounds may have been maintained at SVB. This is possible given SVB having prospected heavily in markets like the GCC and wider MENA,” says Croci.
Interestingly, Israeli banks Bank Leumi and Bank Hapoalim attempted to help companies transfer funds out of the bank before the collapse. The former reportedly assisted Israeli clients in bringing $1 billion to Israel, according to The Times of Israel.
Experts say we can expect new investment from some regional VCs to be affected in the coming months, especially if there is a need to fund existing companies on an emergency basis or to manage their obligations or their LPs’ funds held by them at SVB pending deployment.
“Corporate VCs and family groups will likely have an indirect impact as opposed to direct impact, for reasons of tech investments they have made regionally and globally, including in the US, where many regional groups will have balance sheet portfolio investments, including in Silicon Valley companies,” says Croci.
Corporate ventures, family offices, and sovereigns in the region might have strong exposure to global and US tech, direct and through funds, as part of asset allocation strategies.
“However, as startups scale, their treasury functions also scale, and reducing dependency on a single institution will be part of the treasury risk mitigation strategy in a scaled tech business, as is the case with corporates,” adds Croci.
With HSBC buying the UK arm of SBV for a symbolic one pound on Monday, rescuing a key lender for technology startups in Britain, and the US state regulators seizing the bank and making the Federal Deposit Insurance Corporation (FDIC) its receiver, Karim Konsowa, VC Investor at Dubai Future District Fund, and co-founder of VC MENA, says the impact is now going to be “minimal if any at all for any of startups or the region’s ecosystem.
“This event was a big stress test on the banking system. But the regulators operated quickly and efficiently to resolve this unfortunate series of events. SVB was a great partner to the startups in our ecosystem,” says Konsowa.
A POSITIVE OUTCOME?
However, experts say the aftermath of SVB’s collapse is still unfolding. It is still early to know how policymakers will treat SVB account holders and the role of the FDIC insurance policy in the US, which only has a $250,000 deposit guarantee threshold.
However, SVB’s collapse might result in a positive outcome for all affected. Henyon says the last few days have been “enormously stressful.” “But hopefully, it will result in new global banking systems and models for ventures so that the risk is not so concentrated.”
At this point, the lesson is for investors and founders to consider risk mitigation in their treasury strategies early in a startup’s lifecycle.
“The key is how we don’t get again into this if the lessons are not learned without clear accountability,” says Croci.
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