Aidi — SVB

A recap; on March 10th 2023, The Silicon Valley Bank (SVB) which served a large chunk of the tech community folded up due to a number of reasons such as having a large proportion of uninsured deposits, bad risk management among other factors, and was taken over by the FDIC. 

Here are 3 lessons we believe founders can glean from the event; 

• Community is important:

When news about the incident got out and most US founders needed clarification about the outcomes, their startup community rallied around them to ensure they got all the support they needed. Email threads, email chains and efforts were all made to help spread the word about startups in dire need of funds. This may not have looked like a solution amid all the uncertainty, but it helped lots of people make sense of the situation and the implications for the future. This points to the fact that building a startup isn’t something a founder should do alone. Challenges and hard times will definitely spring up, but one way to find help and solutions is to lean on and depend on a community. 

Your community can be a group of other founders and investors you maintain relationships with. It can also be, becoming a part of a larger community made up of founders either in your industry, city, country, etc. In uncertain times, these communities can prove to be a source of help and relief to you. Reading through the experiences of founders during this period, it is clear that most were able to get past the initial panic and fear by relying on their community for support, counsel, information and possible solutions. Intentionally build a community/ become a part of a thriving one. 

• Prepare for the worst:

One thing founders have been trained to do is to prepare for the worst. So, take this counsel as a reminder to always plan ahead and to be prepared for whatever may come up. As with the SVB case, founders are advised to mitigate risks and the possibility of more events like this happening in the future by diversifying. Diversifying in this scenario implies having 2 or more business accounts created for distinct purposes.

Speaking to Fortune, Hemant Taneja managing director of VC firm General Catalyst and a Silicon Valley Bank client counsels that startups should at a minimum have 2 banks and consider having 3, the bigger they get. Still on diversification, for local startups incorporated in the US, it is advisable to at least have one account with any of the big 4 US banks (Bank of America, Citi bank, JPMorgan and Wells Fargo). For a substitute account, it can be with a bank that understands how startups work and operate seeing that they differ from traditional businesses. We are aware that for African startups, opening corporate accounts with the US big 4 will not be a walk in the park. The good news is - Aidi Africa can help you set up accounts in the US. All you need to do is signup or login to your dashboard and book a meeting with us. More so, subsequent newsletters will address how African startups can get around the stipulated regulations for holding accounts with these banks. 

• Make informed research:

Startups looking to keep a bulk of their funds in a particular bank should make out time to do some research to understand the risks associated with the bank. 

For example, SVB was the go-to bank for most US tech companies and for some African tech companies and was known to be ‘startup-friendly’. This made it susceptible to changes in the ecosystem like more expensive capital and increasing interest rates. In light of this, it is important to recall that one of the causes of the bank’s failure stemmed from startups withdrawing their deposits all at once, leaving SVB short on capital. Reading through this article on Techcrunch, this founder says that his decision to bank with SVB was almost automatic. He went along with it because so many other entrepreneurs held accounts with the bank and he did not conduct further research because it was recommended by many. He goes forward to advise that sometimes, herd mentality can cause issues for a founder and his business. Following the event, there are so many suggestions for other possible banking alternatives.

We advise that beyond the recommendations, take out time to understand the regulations of the bank, risks that may occur in the future and how they will affect your business and also, what will happen if the likelihood of failure or a shutdown happens especially for non-US startups, etc. This doesn’t imply that recommendations should be ignored. Rather, listen to recommendations but ensure to make personal research to aid you in fully understanding what you’re getting into so you can be equipped with all the information you need, with the facts clear and straightened out, and so you can have possible solutions ahead of time, just in case situations like this occur in the future.