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Sunday, 12 March 2023

Silicon Valley Bank collapse leaves dozens of local startups in the lurch

Silicon Valley Bank collapse could squeeze dozens of high-profile local startups: The implosion of Silicon Valley Bank (SVB) last week has likely left scores of Egyptian startups without access to deposits they parked at the bank, according to industry players we spoke with yesterday. The collapse of the bank — the second-largest in US history (see sidebar, below) — has left companies across the world, most of them tech startups, scrambling to find the means of meeting payroll and other operational expenses while US regulators try sort out the mess.

SVB was one of the world’s most popular banks for startups and served businesses and venture capital firms across the world, including in Egypt and the MENA region. With some USD 209 bn in total assets and USD 175.4 bn in total deposits, it was the sixteenth-largest bank in the US until last week when a frantic two-day bank run triggered by concerns about its solvency caused it to collapse.

Almost 50 local companies are said to be affected: A list is circulating among local players that includes the names of 46 startups and two VC firms (one of them global) that were banked with SVB, one industry source told us yesterday, on condition they not be named. C-suite officers at four startups declined to comment or did not respond to requests for interviews when we approached them over the weekend.

“I don't have a way to speculate on the number of local startups affected, but I would say it's definitely in the tens. I know of a handful,” Nclude General Partner Basil Moftah tells us, adding that one of eight Egyptian firms in the fintech fund’s portfolio is affected. Acasia Ventures Managing Partner Aly El Shalakany estimates that two or three of the 10 companies in Acasia’s portfolio — which spans startups across the MEA region — banked with SVB, noting that the fund is still in conversations with its startups to assess their exposure to the bank.

Aren’t deposits at SVB insured? Not really. Under US law, the first USD 250k of a client’s deposit with any given bank is insured by the Federal Deposit Ins. Corporation (FDIC), which said it will pay out by Monday morning at the latest. This, though, will come as little consolation for companies that had mns of USD in deposits at the bank who are now unable to access their money and don’t know whether they will get it back. That means north of 85% of the deposits held by SVB are effectively uninsured, according to estimates circulating over the weekend.


If the Fed finds a suitor for SVB fast, this could all go away: The VC players with whom we spoke over the weekend think SVB is most likely to be bailed out through an acquisition by another US bank. “If somebody bails out the bank this weekend, then everything’s back to normal by Monday,” Nclude’s Moftah tells us. “In the history of US bailouts, deposits have always been returned to depositors,” he adds.

The alternative is a lengthier liquidation process — meaning startups could wait months to see their funds. “If they sell the assets, it takes six to 12 months to go through that process,” Moftah tells us. “We will be supporting the one firm in our portfolio that is affected with a bridge round in the event that it is not able to access its deposits,” he adds.

Some are optimistic they’ll get their money back (eventually): “SVB’s assets can potentially cover a big chunk of the depositors’ money in case of liquidation,” Moneyfellows Founder and CEO Ahmed Wadi told us yesterday.

The silver lining: Egyptian firms don’t have credit exposure to SVB. Egypt was never a target market for the bank as far as loans, Moftah said. That means Egyptian firms won’t find lines of credit suddenly put on ice as is the case with startups elsewhere.


Right now, startups need to find short-term liquidity — and somewhere else to bank. “The most pressing questions now are for how long startups will have to wait in order to receive their deposits in full — and whether they will be able to pay their employees and keep the lights on until then,” Sylndr co-founder and CEO Omar El Defrawy told Enterprise. Shalakany agrees: Our expectation is that this will be resolved, but startups need to have a short-term plan to cover expenses, which really means employees first and foremost and making sure that they have either liquidity elsewhere or a line of credit to cover that,” he told us.

For some startups, SVB is likely to have been their sole bank: “The assumption that most startups work with multiple banks and multiple contingencies is completely unrealistic,” Shalakany says, noting that SVB may have been the only bank that would accept some startups as clients because of the risk level and regulatory requirements.

The next weeks will be crucial: “Most of the startups who bank with SVB probably have their operational money and their March payroll or maybe even more to hand,” Moftah says, predicting that liquidity problems could start to become a bigger issue for startups as we enter 2Q.

Layoffs aren’t an immediate threat: “I don’t see layoffs as a big threat at this stage, particularly in Egypt,” Shalakany says. “For those startups who are well capitalized, they may have already made that transfer to meet payroll this month.”

Investors are on hand to help startups find new banks: Acasia is working with its portfolio companies to help them “quickly open alternative banking relationships and get access to short term credit lines to get them through the next few weeks and the end of the month,” Shalakany said.

Egyptian firms may face more challenges than those in other emerging markets to quickly open another bank account or line of credit, Shalakany tells us. “The problem is you’ve got perhaps tens of thousands of customers in exactly the same situation, coming from exactly the same industry, that are all scrambling to do that at the same time. For a lot of non-US-based startups, they don't really have a lot of banking alternatives. From an Egyptian perspective, people offshore because the local banking system does not provide enough support and quality products for SMEs and startups.”

“In the short-to-medium term, there's a lot of uncertainty and fear, but it’s not a doomsday scenario,” Shalakany says. “Our main concern is to work with our portfolio companies as we have always done in times of crisis and to say: Look, it's going to be okay.” Moftah agrees: “It’s a temporary blow — one more thing in a year that’s been pretty challenging overall.”


SVBs collapse could make MENA firms think twice about banking in the US: “The SVB situation is enough to move the needle a hundred percent for people to say we're not doing US banking anymore,” Shalakany tells us. “I hope it leads to more guidance for startups on how they bank and more sophistication in their banking strategies,” Moftah says..

That presents a chance for the Gulf: “People may want to consider jurisdictions where the regulator or the government has deeper pockets to insure the banking industry,” Moftah adds, noting that 100% of bank deposits are insured in the UAE. “People are definitely thinking twice about being banked in the US now, and that's one of the things that we're thinking about when we're talking to our portfolio,” Shalakany says. “This is a really good opportunity for banks in other markets, including Saudi and the UAE, to get a lot of that business.”

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