Latin American tech startups are struggling to find banking alternatives after the abrupt failure of Silicon Valley Bank (SVB).
One of the few banks that provided desperately needed dollar accounts and catered to the particular needs of the sector, Latin American tech startups are struggling to find banking alternatives after the abrupt failure of Silicon Valley Bank (SVB).
Latitud co-founder Brian Requarth, who is based in Mexico City, said that this affected “almost all” venture-backed businesses in the region. After SVB’s demise, local startups now have few options for a banking partner, according to Requarth. U.S. regulators disclosed an emergency plan over the weekend that enables depositors of Santa Clara, California-based SVB to access their money.
The Association for Private Capital Investment in Latin America estimates that more than 1,300 startups in the region raised $28.17 billion in funding in 2022.
Co-founder Vicente Garrido of Mexican rental property startup Roddo told Reuters that he was still unsure about whether the business would pay employees this week. We had all of our capital in the United States, according to Garrido. We only kept a fifth of what we spent in a month in Mexico.
As one of the few banks in the area to provide them with U.S. dollar accounts—a requirement from venture capital firms providing capital in dollars—startups in the area frequently relied on SVB.
Startups would open SVB accounts using what Requarth referred to as a “Cayman sandwich,” using holding companies in the Cayman Islands and limited liability companies (LLCs) in the U.S. state of Delaware to avoid paying taxes twice if the company was ever sold.
That is the norm for Latin American venture-backed businesses, according to Requarth. Although businesses have largely been able to withdraw their funds from SVB, he added that they are currently without a long-term strategy.
According to Garrido, Roddo was able to transfer its funds from SVB on Monday to a number of cash accounts the startup had set up with American financial tech companies. He added that it might not arrive in time for employees’ mid-month paychecks.
The startup is still trying to open an account through its Cayman holding company, so Garrido acknowledged that the cash accounts are just a band-aid solution. In general, we don’t open accounts for less than $5 million, a bank told me, Garrido. However, I will make an exception for you and permit you to open an account with $2 million or $2.5 million.
Due to demand and regulatory red tape, Garrido says he is unsure of how long it will take to open an account. He also says he has spoken with other organisations like Santander, Bank of America, and Citigroup Inc. Entrepreneurs in China, a country with a booming startup scene, told Reuters they were turning to bigger U.S. banks or local Chinese lenders.
Latin American startups , however, complain that the local banks do not provide them with the necessary assistance.
According to Garrido, banks in Mexico were just starting to introduce products that catered to startups, and they had yet to establish that they possessed the expertise, resources, and institutional strength to support them. “I doubt that my American and European investors would have felt as at ease making investments (in a Mexican account).” said Garrido.