2023 Banking Crisis: Did its impact reflect on MENA's VC ecosystem yet?

While the global banking crisis, which impacted the global VC ecosystem, continues to head the news with the release of the financial results of Q1, is its impact on MENA's space tangible or not yet?

Early in March, Silicon Valley Bank (SVB), a major lender to technology companies, collapsed after a run on deposits. The bank had investments in long-term bonds, which saw their value decrease as interest rates rose. When depositors began to withdraw their money, confidence in SVB wavered. The collapse of SVB was the hardest hit to the US banking sector since the financial crisis of 2008. It sent shockwaves through the financial markets and raised cautiousness toward the stability of the global banking system. However, the Federal Deposit Insurance Corporation (FDIC), the government agency that insures bank deposits, stepped in to protect depositors. The FDIC transferred all of SVB's insured deposits to a newly created bridge bank, and it is working to wind down the bank's remaining assets. Similar to any major event that hits the banking sector, the collapse of SVB had several consequences. First, it has raised concerns about the stability of the global banking system. Second, it has led to calls for reform of the financial system. Third, it has harmed the economy, as businesses and consumers had their confidence doubted in the banking system.

The financial results published by the US banks in April and earlier this month revealed that the banking crisis is not over yet. The US banking sector has been in turmoil since early March. Following the path of SVB and Signature Bank, First Republic was one of the regional banks in the United States that was hit by a loss of confidence in the banking sector in March 2023. The San Francisco-based bank that caters to high-net-worth individuals and businesses was not immune to the panic that gripped the banking sector in March 2023. The bank lost more than $100 billion in deposits in the first quarter of 2023, and it was forced to seek help from the Federal Reserve. As this followed the collapse of two other mid-sized U.S. banks in March 2023, the state of the US banking sector continues to be alarming.

The banking crisis in 2023 had a significant impact on the global venture capital space. Data already revealed double-digit declines in venture capital funding in the first quarter of the year. The crisis pulled down investor sentiment further down as the overall global macroeconomic circumstances originally were not helping. The ongoing banking failures hurt the global venture capital space. It made it more difficult for VCs to raise money to invest in startups, at a time when high interest rates representing an elevated cost of capital were also playing a tough role. Although data can take a short while to reflect the impact of these events in specific, the overall overarching sentiment in the market has been unappealing over the past 15 months.

In the MENA region, the situation was a bit different. The overall investment sentiment was impacted by the US banking crisis and it did create a level of cautiousness and alertness in the ecosystem as some VCs and startups headquartered in the MENA region could have had part of their deposits in the failing banks. However, noting the delayed response the ecosystem in the region sees due to its 6-9 months period required in closing a funding deal, data did not yet encompass the impact of this crisis. While April data reveals a sharp monthly drop, this merely goes back to the slow data announcement the region sees during Ramadan months and less of the global or regional factors impacting the ecosystem.

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