Saturday, 3rd June 2023

Diaspora remittances, impact of SVB’s failure on African startups in focus as ADIS begins today

By Tope Templer Olaiya, Silicon Valley
22 March 2023   |   6:16 am
As innovators, investors and world leaders converge in Silicon Valley, California, United States, on Wednesday to discuss the future of Africa at the African Diaspora Investment Symposium (ADIS), attention would be divided over the ripple effect of the collapse of Silicon Valley Bank (SVB), the bank of choice for most startups and venture capitalists, and the influence it had on the startup world, especially fintechs in Africa.

As innovators, investors and world leaders converge in Silicon Valley, California, United States, on Wednesday to discuss the future of Africa at the African Diaspora Investment Symposium (ADIS), attention would be divided over the ripple effect of the collapse of Silicon Valley Bank (SVB), the bank of choice for most startups and venture capitalists, and the influence it had on the startup world, especially fintechs in Africa.

This is as a new study has said 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds on the heels of SVB’s collapse earlier this month. According to the study by economists in a paper published on the Social Science Research Network, a run on the banks could pose a potential risk to even insured depositors – those with $250,000 or less in their accounts.

SVB was closed after the bank announced it had lost $1.8 billion in the sale of treasuries and securities. Millions of dollars banked by startups and venture capital funds were at stake until the U.S. Federal Reserve acted to save the day.

The closure of SVB triggered panic on the African continent, and that fear is not without reason, according to the head of American technology startup accelerator Y-Combinator (YC), which has 80 African startups in its portfolio.

“About 30 per cent of our companies exposed through SVB can’t make payroll in the next 30 days,” said YC president, Garry Tan. “All the startup founders groups I’m in are in full-on panic mode. Everyone is moving money around. Nobody knows which banks are safe.”

SVB was the bank that lent to startups and asked that startups have deposits in the bank as collateral. The bank offered loans against shares for founders and cashflow loans. Since 2019, SVB has been the preferred bank for startups.

In the wake of the bank’s collapse, founders in Africa are reviewing their banking options to cushion their startups from such eventualities.
African fintech unicorn, Chipper Cash, was among several startups that could not access a portion of their funds after SVB failed, but CEO Ham Serunjogi downplayed the company’s exposure. “Most of our funds are in various other banks in the U.S. and around the world. SVB was a great supporter and partner of Chipper. Sad to see them go down,” he tweeted.

It was gathered that there were 100 most funded startups in Africa at the end of 2022 by SVB — among them Nigeria with 27 and Kenya with 23. The other two members of the big four, South Africa and Egypt, are represented by 34 startups, which means the big four represents 84 per cent of the 100 startups.

In light of the increasing difficulty to obtain funds, the Federal Government last week announced a $672 million tech fund to support young entrepreneurs in creative and tech sectors who struggle to raise capital in Africa’s largest economy.

The African Development Bank will contribute $170 million to the fund, while the other $116 million would come from Agence Francaise de Development and $70 million from the Islamic Development Bank.

Adedeji Olowe, founder and CEO of Lendsqr, a fintech company, offered some assurance saying that while some startups may have funds trapped in the failed bank, the funds have not disappeared.

Beyond the impact of SVB’s failure on African startups, the symposium hosted by the African Diaspora Network (ADN) at the Computer History Museum, Mountain View, will see techies and members of the diaspora community discuss how the continent can move away from sole reliance on grants and remittances from abroad.

Recorded remittances from the Africa Diaspora reached over $95 billion in 2021. This is in addition to aid from foreign investors and partners.

According to Almaz Negash, Founder and Executive Director of ADN, ADIS is looking forward to bringing this critical dialogue on beyond remittances back to Silicon Valley.

“With a median age of 20 years and 60 per cent of the population under 25, Africa is the youngest continent in the world and holds the future. Projections show that a quarter of the world’s people will be African by 2050. Africa has an opportunity to drive major transformations that adapt to this drastic demographic shift and build resilience in an era of disruption.

“The unforeseeable economic shocks created by the pandemic, international conflicts such as the war in Ukraine, and challenges in the global economy have sparked innovations in industry, investment, and entrepreneurship across the continent. Now, 10 years into Agenda 2063, Africa must plan for a sustainable recovery and reimagine its path forward. What does a future-ready Africa look like?

“This year, the 8th ADIS seeks to explore trending innovations, blueprints for the future, and the interconnectedness of sectors including climate change, healthcare, finance, education, and agriculture. How do we strengthen infrastructure, reinvigorate markets, and create a healthy atmosphere for communities? What seeds must be planted to enable a thriving future for the continent?

“I believe that the prosperity and success of Africa can be measured by our move away from reliance on remittances. There are new approaches and investment opportunities trending across the continent, including the African Diaspora Finance Corporation (ADFC). Africans in the diaspora are truly a force for good, giving abundantly to the communities they live in and back home to friends and family. They are the largest direct investors in Africa, not just from abroad, but within the continent, with 70 per cent of migration occurring within Africa,” she said.

In 2019, Africa received $82.7 billion in personal remittances, nearly double foreign direct investment (FDI) flows of $46 billion. Remittances to Nigeria alone were $23.8 billion compared to $3 billion in FDI. Egypt saw remittances worth $26 billion. Those are just the formal, countable remittances.

These payments provide a financial crutch to millions of households. This is why smaller, poorer and more fragile economies are so dependent on them.

Africa’s top remittance recipients as a proportion of their economies are South Sudan, Lesotho and The Gambia with 35 per cent, 21 per cent and 15 per cent of GDP respectively coming from remittances, according to World Bank statistics. Between 2004 and 2017, remittances as a share of GDP grew from one per cent to 7.5 per cent in Ghana.

“Remittances from the diaspora constitute one of the major sources of revenue in many African countries. Unlike foreign direct investment flows, remittances directly reach the most vulnerable and are less likely to end up in the pockets of corrupt officials,” said Aleix Montana, Africa analyst at Verisk Maplecroft, a risk intelligence company.

Participants at the symposium will for three days discuss what can be done to tap into and engage the diaspora community and leverage their strengths for Africa’s benefit.

An estimated 17 million of them today form Nigeria’s vast diaspora, according to the Nigerians in Diaspora Commission (NiDCOM), established under the Federal Ministry of Foreign Affairs. They are working, setting up businesses and studying in the U.S., Canada, the United Kingdom, the Gulf and elsewhere.

Alongside Kenyans, Ethiopians, Ghanaians and others of African origin they have been dubbed the continent’s “secret weapon”. So large and important is Africa’s diaspora that the African Union (AU) officially declared it the continent’s “sixth region” after East, West, North, Central and South.

In Nigeria “japa” regularly trends on social media. “It’s on the political leaders just not creating the environment for innovation and talent to grow,” said Iyore James, a Nigerian-American doctor, who heads the US-based Nigerian Physician Advocacy Group. Born in the U.S., she was raised in Nigeria and returned to America at 16 to attend university. Now 42, James says many in the diaspora have mixed feelings.

“Some people have just given up hope of any development happening and more and more want to get their family members to migrate,” she said, adding that “there are others who still believe in some sort of change in leadership. These people actually go back, invest their time to create businesses and create jobs.”

In this article