SVB collapse offers lessons to banks on start-up funding, Target Global says

Lenders can diversify their portfolios by targeting the sector, says co-founder of technology investment firm that is setting up in the UAE at Abu Dhabi Global Market

Silicon Valley Bank is the biggest bank failure in US history after Washington Mutual's collapse in 2008. AP

Global banks can learn lessons from the collapse of Silicon Valley Bank and tailor their offerings to the start-up sector to ensure they leverage the opportunities it provides, said the co-founder of technology investment firm Target Global.

Lenders should consider extending more of their services to the start-up industry as it provides an opportunity to diversify portfolios, Shmuel Chafets told The National.

“It's an opportunity globally for banks to get a peek at start-up financing and to get into the start-up level,” he said.

“In the long term, it would provide more funding for the industry.

“It would be very helpful for the start-up ecosystem. There would be more competition, diversity and risk and cash management.”

California-based SVB was the go-to bank for technology entrepreneurs and start-ups. At its peak, it was the 16th-largest bank in the US and the biggest in Silicon Valley, a global centre for technology and innovation.

US regulators seized SVB and placed it on receivership after it collapsed this month. On Monday, the US Federal Deposit Insurance Corporation confirmed that North Carolina-based First Citizens Bank & Trust would acquire SVB's assets.

It became the biggest bank failure in US history after Washington Mutual's collapse in 2008, which triggered the global financial crisis.

The saga highlighted the disadvantages of a bank concentrating the majority of its portfolio on certain industries, which, in this case, were start-ups and technology companies.

It also exposed the need to boost local funding for start-ups instead of them relying on overseas lenders.

“Moving forward, 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,” Philip Bahoshy, founder of data platform Magnitt, said.

Target Global, one of the biggest VC funds in Europe and Israel, which has around €3 billion ($3.25 billion) of assets under management, is expanding its presence in the UAE market with the establishment of an office in Abu Dhabi Global Market.

Mr Chafets acknowledged the strength of the UAE's start-up ecosystem and the financial sector, both of which help the company's business development portfolio.

“Local commercial banks [in the country] have a good book when it comes to start-ups,” he said.

Target Global's expansion in the Emirates has a goal of putting the UAE on its investment map and bringing the country to the attention of investors looking for high-growth opportunities, he said.

“Yes, it's about investing, but it's also about bringing and helping our companies leverage what the UAE has offer,” he said.

“We have brought a big group of [start-up] founders to Abu Dhabi and Dubai to meet … people in the FinTech world, regulators, the government and other businesses.”

He did not give a timeline for when the office would open, although he said Target Global has been “consistently expanding” its operations in the UAE over the past eight years. It invested in local start-ups including beauty company Fresha, open banking platform Tarabut Gateway and FinTech start-up Rapyd.

“The establishment of VCs in ADGM builds confidence for more asset management firms to follow suit and choose Abu Dhabi as their regional home to expand their business operations, especially with its ideal geographical location and amiable tax and legal environment,” Arvind Ramamurthy, chief market development officer of ADGM, told The National.

Aside from ADGM, the investment firm will also work closely with Hub71, Abu Dhabi's global technology and start-up ecosystem, to build on scaling its network through strategic partners.

Target Global will focus on key verticals including consumer technology, mobility, logistics, health care and FinTech, as well as robotics, Mr Chafets said.

The size of its investments in start-ups range from €1 million to €5 million for those in the seed and series A rounds, €10 million to €30 million for series B and C, and up to €150 million to €200 million for those in the late stage, he said.

He acknowledged that start-ups continue to face challenges when it comes to funding, especially when compared to bigger, more established organisations.

“Good companies get funded in any environment. That's the truth. Sometimes they'll get funded in the terms that they want, but good companies get funding almost no matter what the environment is,” Mr Chafets said.

“It's more challenging for younger entrepreneurs and companies that have more to prove.”