A few weeks ago, news broke that Silicon Valley Bank (SVB), the widely endorsed bank for most startups and venture capitalists, was shut down by the Federal Deposit Insurance Corporation (FDIC). What triggered the closure was a bank run that began after the bank announced that it lost $1.8 billion in the sale of treasuries and securities. Without clear communication, many customers took those losses as a sign to take their money out of the bank.
Since then, the global tech community has been anything but quiet. Many tech founders, including Africans, are worried about how this situation affects them. Several African startups had funds in SVB as the bank, which served as their lender, required them to keep deposits as collateral in the bank.
SVB is not the only bank that has shut down in the last few days. Silvergate and Signature banks, two of the most important banks in the startup ecosystem, were also involved. But in the middle of this saga, there might be a silver lining for African tech startups. Before we get to that, let’s understand the problem.
Why do African startups use these foreign accounts?
A large portion of African startups raise money from international investors. But after that comes a new challenge: getting that money into their bank accounts. “If you’re a startup from the U.K., you can easily open a U.S. bank account because it’s not a high-risk country. But in Africa, that’s not the case. South Africa is the only country that’s not regarded as high-risk,” Ibrahim Ibitade, co-founder and CEO at Leatherback, told Ventures Africa over a call. “So if an African business goes to the US to raise funds and gets, say, a million dollars from a VC, where would they put that money? The VCs would not move that money into a Nigerian bank account or any other high-risk account.”
As a result, these startups need to open local bank accounts in the US. So, the African company needs to incorporate its business in the US. That explains why many African startups today also identify as US companies..........READ MORE.
