The failure of Silicon Valley Bank (SVB) is serving as a wake-up call to improve access to funding for start-ups at a local level, the founder of data platform Magnitt has said.
For local banks, this is an opportunity to provide much more efficient and friendlier services to these small companies and venture capitalists alike, instead of seeking funding from international lenders, Philip Bahoshy said.
“Moving forwards, a collaboration between the banking industry and the venture capital community is vital to provide facilities and support start-ups and consequently, minimise the reliance on having to use international banks,” he said.
California-based SVB, which started in 1983, rode the wave of America's local high-technology economy during that decade and rose further during the dot-com era of the 1990s, when tech start-ups started growing.
Its status as the go-to bank for technology entrepreneurs and start-ups continued until its final years. At its peak, it was the 16th-largest bank in the US and was the biggest in Silicon Valley, a global centre for technology and innovation.
US regulators seized SVB and placed it on receivership on March 10 in an effort to protect its investors after a bank run. It became the biggest bank failure in US history after Washington Mutual's collapse in 2008, which in turn triggered the global financial crisis.
The fallout from SVB's demise was swift: it rattled global stock markets, which lost around $465 billion in value, and became the trigger for the growing worries of another financial crisis. The debacle also left its start-up clients scrambling on figuring out how to continue paying their employees.
The FDIC had created a bridge bank that now holds the deposits and assets of SVB's former clients, a majority of which have deposits that are up to millions of dollars above the $250,000 threshold the FDIC insures.
When word began to spread that the bank could be insolvent — as government bonds it purchased in the past few years were now drastically declining in value following recent interest rate rises — many of those firms moved to pull their money out of SVB.
“The collapse of SVB caused panic among those who had banked with them,” Mr Bahoshy said.
Any exposure to SVB among start-ups in the Middle East would not have a profound effect, given that many of these companies are operating at a local level, and therefore have cash accounts locally that they can use to fund their operations and payroll, he said.
“For our region, the immediate impact hasn’t been as acute as it was in the US,” he said.
“The real challenge is that the collapse of SVB is likely going to affect the confidence in the sector, creating risk aversion and a lack of risk appetite as people take a step back to view the wider macroeconomic level and how that's going to impact the venture capital space.”
In an ecosystem where venture capital funding is receding, alternative asset classes as opposed to venture capital are still a very nascent concept
Philip Bahoshy,
founder of Magnitt
The situation has highlighted the opportunity local banks have in front of them to provide the needed — and reliable — support they can provide to start-ups, especially as there has been a decline in venture capital invested since the first quarter of 2021, Mr Bahoshy said.
In 2022, there was only about $250 million across 18 deals that were afforded to start-ups as an alternative for venture capital, according to Magnitt data.
The likes of JP Morgan, HSBC and others, Mr Bahoshy said, are attempting to provide facilities for banking as a service, and that would help them to expand their portfolio.
“So, for local banks, this is an opportunity to provide much more efficient and start-up-friendly or venture capital-friendly account opening processes,” he said.
Still, there may be a long way to go before banks recognise start-ups as a segment of the market, owing to the risks associated to these companies, which include unclear goals, lack of market fit and growing too fast or too slow.
“One thing that SVB did quite effectively in the US was to provide loans and other alternate banking products that were beneficial for start-ups,” Mr Bahoshy said.
“In an ecosystem where venture capital funding is receding, alternative asset classes as opposed to venture capital are still a very nascent concept.”
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Favourite Meal: Chicken Caesar salad
Hobbies: Travelling, going to the gym
Inspiration: Father, who was a captain in the UAE army
Favourite read: Rich Dad Poor Dad by Robert Kiyosaki and Sharon Lechter
Favourite film: The Founder, about the establishment of McDonald's
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The drill
Recharge as needed, says Mat Dryden: “We try to make it a rule that every two to three months, even if it’s for four days, we get away, get some time together, recharge, refresh.” The couple take an hour a day to check into their businesses and that’s it.
Stick to the schedule, says Mike Addo: “We have an entire wall known as ‘The Lab,’ covered with colour-coded Post-it notes dedicated to our joint weekly planner, content board, marketing strategy, trends, ideas and upcoming meetings.”
Be a team, suggests Addo: “When training together, you have to trust in each other’s abilities. Otherwise working out together very quickly becomes one person training the other.”
Pull your weight, says Thuymi Do: “To do what we do, there definitely can be no lazy member of the team.”
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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Dubai works towards better air quality by 2021
Dubai is on a mission to record good air quality for 90 per cent of the year – up from 86 per cent annually today – by 2021.
The municipality plans to have seven mobile air-monitoring stations by 2020 to capture more accurate data in hourly and daily trends of pollution.
These will be on the Palm Jumeirah, Al Qusais, Muhaisnah, Rashidiyah, Al Wasl, Al Quoz and Dubai Investment Park.
“It will allow real-time responding for emergency cases,” said Khaldoon Al Daraji, first environment safety officer at the municipality.
“We’re in a good position except for the cases that are out of our hands, such as sandstorms.
“Sandstorms are our main concern because the UAE is just a receiver.
“The hotspots are Iran, Saudi Arabia and southern Iraq, but we’re working hard with the region to reduce the cycle of sandstorm generation.”
Mr Al Daraji said monitoring as it stood covered 47 per cent of Dubai.
There are 12 fixed stations in the emirate, but Dubai also receives information from monitors belonging to other entities.
“There are 25 stations in total,” Mr Al Daraji said.
“We added new technology and equipment used for the first time for the detection of heavy metals.
“A hundred parameters can be detected but we want to expand it to make sure that the data captured can allow a baseline study in some areas to ensure they are well positioned.”
UAE currency: the story behind the money in your pockets
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Date started: 2015
Founder: John Tsioris and Ioanna Angelidaki
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Sector: Online grocery delivery
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• 50 per cent of Abu Dhabi’s waste is from construction and demolition
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