As we approach one week from the day Silicon Valley Bank (SVB) and its assets were taken over by the US Federal Deposit Insurance Corporation following a bank run in the 48 hours prior, we acknowledge that we have been granted this moment to learn, improve, and implement more robust banking relationships and structures in our organizations. 

For those VCs, founders, and ecosystem builders focused on the African continent, we know that this is easier said than done. To support, we recently provided our portfolio companies with some guidance on navigating this situation, and we thought it would be equally as important to share this information more broadly for anyone it may benefit, fully recognizing that each team should seek the appropriate guidance and legal counsel before making any structural changes to their organization in light of what has happened with SVB.

Overview of the fallout:

Although the Treasury, the Federal Reserve Bank and the FDIC have now fully guaranteed to make immediately available to depositors all funds held at SVB, founders may want to consider their broad exposure to the US banking system.

The issues underlying Silicon Valley Bank's failure is $17b of unrecognized losses arising primarily from the US Federal government having guaranteed long term mortgage backed securities, which wiped out the banks equity as losses arising from the Federal Bank interest rate hikes accrued. This issue was further compounded by the use of a legal accounting loophole that allowed the banks to avoid recognizing this loss on their books if they reclassified these bonds in a way that prevented them from securing hedges on these bond instruments.

We are aware that many American banks are in a similar position like SVB and the combined losses across them may be as much as $620 billion. For context, the US 2008 Financial crisis required a $550 billion dollar bail out. 

While the US government has stepped in to ease the possibility of contagion while maintaining confidence in its banking system - it is clear that systemic risks remain, creating a moment to rethink our US and global banking relationships, particularly if you are set up as US Delaware Corporation or those with parent companies incorporated in other jurisdictions. 

Guidance for building banking resilience: Neo banking solutions have filled a gap in the market that warrants their services, but it is worth evaluating whether your risk profile is suitable for the banking structure you are trying to achieve. For example, the proposed sweep programs which spread your balances below the FDIC limit of $250,000 across multiple banks, may be a high risk approach. In this scenario, to claim your funds from the FDIC in the event of a bank failure, would require one of the company executives or control persons with a Social Security Number or Tax ID. In the event one or several banks fail and you need to claim your funds, making these claims across multiple institutions may prove to be very inconvenient in a time of possible crisis, particularly as an African founder.

The latest leading recommendation is that founders have most of their funds in at least one top 10 global banking institution. These banks are heavily regulated and well capitalized in the event of some exposure to unrealized losses or a bank run at the scale of Silicon Valley’s bank run last week. Perhaps of equal or greater importance is perception and optics, which is part of what led to the bank run altogether. At a time when perception matters more than ever before, these banks have earned the trust of investors, customers and stakeholders from around the world and that trust will benefit your business during volatile times.

As desirable as these banking relationships may be, we recognize the significant challenges as an Africa focused startup in securing these accounts, given the onerous underwriting process. This is why we are sharing with you a few tips that could help you prepare to build a banking relationship with a top tier global bank. 

First, identify a control person to establish the banking relationship. A control person has significant managerial control or influence over a legal entity customer and generally have roles such as your CEO, CFO, General Partner, Managing Member, etc. Unlike SVB and other Neo banks that can be more accommodating, global banks are unlikely to establish a new account remotely and may require you to be in person. The process will be easier as an American resident or citizen with a valid visa, green card or passport as well as a valid residential address to establish proof of residency. 

• For your Finance staff, consider hiring personnel who could meet the control person requirements
• If you cannot afford to hire a full time person in the US, consider appointing a board member who meets the definition, while adding them as a control person on your bank accounts
• Check to confirm whether you are eligible to apply for the O1 visa where platforms like Vesti can help

Global financial institutions also consider “fit and proper” assessments, so if you as an officer do not personally qualify, but you are considering one of the above scenarios, it is important to properly vet anyone who may fit the control person profile, to ensure they do not ultimately compound your risk. 

Second, for many of you who are incorporated in Delaware, we recommend that you leverage on service providers that offer a virtual office space within the US for your place of business service. This helps to establish your business with US operations. There are several top rated registered agents to choose from.

Third, review your internal financial architecture and consider simplifying or restructuring to match the requirements of a global financial institution. Many of these institutions will not be as flexible as banks like SVB when it comes to making transactions as their risk management systems are quite easily triggered, which can result in an account shutdown without warning. For example, we may reconsider transactions that require wiring frequently to Nigeria or to accounts outside of the US and Europe. 

• Evaluate your banking needs and seek guidance on the appropriate account structure. For example, if you do a lot of payroll into Africa consider using a US based Professional Employer Organization who covers Africa instead of wiring directly. Though there is a cost, it is better for your business to have this option
• For the neo banks or smaller regional banks, we have learned that it is ideal to maintain account balances under the deposit insurance guarantee amount and accelerate spending from those accounts to minimize risk for losses
• With the advice of your finance team and depending on your particular financial circumstance, consider moving excess cash that is not immediately needed, into three month US treasury bills which are backed US government

Fourth, think similarly about your banking relationships outside of the US back in your home markets and move to subsidiaries with low risk global financial institutions if you are eligible. We believe the compliance burden for opening a business account in our countries is lower than those in the U.S. Although we are not sure the contagion will spread globally, we worry about the knock on effects on less resilient financial institutions especially since the hike in interest rates is a global issue and not only in the US, while government issued treasury defaults are on the rise. Where possible, seek the safety of resilient global financial institutions and keep deposits elsewhere under the insurance deposit guarantee in your country and use these accounts as pure transactional accounts where needed. 

For anyone reading this, thank you for your contribution to the startup ecosystem, particularly those who are building for Africa where some hurdles may be higher. For those of us with big visions and dreams for the ways in which we can leverage entrepreneurship to make change, let us take this moment as a lesson and an opportunity to improve the way we do business. If you have other resources to share or comments, please connect with us on social media on twitter @anafricanfuture or on LinkedIn 

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