Abra-Radava, You're Connected to the Financial Market

This is The Startup Breakdown, the newsletter where we breakDOWN startUPs (just had to make sure you appreciated the word play). By joining this growing community of hundreds of curious individuals, you're getting firsthand access to my observations and opinions on the current state of the startups and venture scene. If you'd like to receive these newsletters directly in your inbox once a week, go ahead and subscribe to never miss an email!

Happy Monday, folks.

No other way to put this. The startups world got absolutely rocked late last week.

Silicon Valley Bank, SVB, has been a stable in the Bay, catering to exactly who its name suggests: the Allbirds wearin’, LinkedIn motivation postin’ founders of the world. Just how engrained was it to this community? Half of the country’s VC-backed companies were customers.

In total, the bank had $209 billion in assets at the end of 2022. Notice I said “had.” This is in part because those assets have significantly declined in value, and partly ‘cause SVB is sorta dead.

Over the last couple of months, SVB had been forced into a fire sale to cover losses from investing ~$80 billion into MBS and other long-term “safe” assets during 2021 when anything with a ticker was a rocket ship.

During this period of clear eyes, full hearts, and near-zero interest rates, the securities were yielding 1.5%, nothing in the neighborhood of DeFi APY promises (spoiler: 200% APY is about as legit as one of those Nigerian prince emails), but in the world of banks, it was an attractive bet.

Since, however, it has become a once-per-quarter event to bet your friends on how much Jerome is raising rates this time around. The betting favorite for later this month is another 50 bp, bringing overall rates above 5%. With those long-term, low rates locked in, that means that all of these conservative assets have lost value.

There were problems which were shamefully overlooked from the get-go. First, these massive deposits were unsustainable as they were propped up by unwarranted valuations, and in case you’ve been off-Earth on a secret SpaceX rocket for the past year, things are no longer like that. Most companies can’t even afford their army of masseuses anymore, creating higher demand by companies to draw from their deposits.

Second big problem, the US government only insures $250K per account, and most of these companies had far more than this with SVB. As in, 97% of the money in the bank was not insured. Now everyone that took Econ 101, say it with me. What did that make the bank susceptible to?

Bank run!

Your prof would be so proud.

The company was forced to sell $21 billion of its long-term assets at a loss to cover demands for deposits, costing the bank ~$1.8 billion in losses. “No worries,” thought Mr. Bank President, though, “I’ll just ask our shareholders for some quick help!”

To do this, the bank made the decision to sell $1.75 billion of stock. Unfortunately, this had the same effect as giving your already overly energetic puppy a 4-pack of Bang energy drinks AND a scoop of preworkie.

VCs began to panic about the bank’s (not even that) precarious state and tell their portcos to get their money out pronto. As capital fled, the bank saw $80 billion of its market value wiped away in fewer than two days as its share price sank 60%. Deja vu of the olden days in ‘08 caused investors to fear broader financial contagion, and other banks fell close to double digits in solidarity.

Things got so bad that the stock was halted (throwback to $GME), and the government stepped in, the FDIC took over the bank, and its fate remains up in the air thanks to the big whoopsie.

In an idea world, the FDIC could attempt to sell the bank and its assets to another bank which could capitalize on the chance to quickly add a bunch of new customers. This would allow for minimal disruption.

More likely, the FDIC will reopen the bank on Monday under new management, and all insured money will be automatically available. For the 97%, companies will receive advanced dividends and IOUs which will be redeemable as the bank’s assets are sold off over the next few months, hopefully restoring most of the funds though with a long period of anticipation and money shortages until then.

Looking at the broader banking sector, there’s probably not too much need to panic. While it’s certainly true that the same systemic problem of sitting on cost-depreciated assets is plaguing most businesses in the space, most other banks are far more diversified and less exposed to trends in tech. Further, no bank comes close to 97% of deposits being uninsured and should be nowhere near the firecracker in a drought-ridden hayfield that was SVB.

The real concern is for the startups trying to simply do their daily startup-y things without access to their bank accounts. They can’t afford to buy supplies, keep the lights on, and most importantly, pay their employees if they weren’t one of the few lucky enough to get their cash out of the bank and under their mattress.

How many do you think still remember how to count physical cash? Most will probably resort to “yeah, a fist-full seems about right.”

Long-term, there will be a “bailout,” though the term is misused in this situation. The precedent which would be set by NOT getting depositors their money back is simply too detrimental to the future cash-stashing industry. Equity holders will take some losses, and yes it sucks for them, but unfortunately, them’s the rule of investing.

As for “bailout,” unlike in 2008, those being saved aren’t the Saint Moritz travelers of the world. Instead, it’s the thousands of crazy individuals choosing to work longer hours for a quarter of the pay because they trade compensation for the chance to change the world.

We’re not saving some VP who wants to buy a third home.

Seriously, though, thoughts out to everybody dealing with this situation first-hand. As if working in a startup wasn’t stressful enough... Here if you need to talk 🙏 

I’m a financial and economic history nerd. Devour the stuff like a maritime trade route-hungry European in the 16th century. One thing you pick up on pretty quickly is that humans tend to keep making the same mistakes time and time again.

I’ve come to appreciate how easy criticism becomes in hindsight. There were certainly signs that the pandemic-market was an anomaly, and SVB clearly could have done more to manage its risks.

The role of VCs is discouraging as well, and fear is human nature, but with recent events like FTX’s collapse and Silvergate just a week ago, can you really blame them.

Just a mess all around. This really sucks, guys. Unfortunatley, it doesn’t seem to matter how many times these things happen. We just keep repeating the same mistakes. Never fly too high. Never fall too low.

No more doom and gloom. We’re still building. And I’m excited to share more about one that appears bound to have some serious impact👇️ 

The growth that you guys have allowed me to achieve with this newsletter over the last few weeks has been crazy. I keep rubbing my eyes, expecting it to cause my vision to do a plug and unplug reset, but nope. The numbers are still there. You guys are gonna make a grown man cry. Want to force yourself to suck those tears back in, too?

Check out First Class Founders, a weekly newsletter bringing you all of the strategies you need to scale your business, social media following, or sick collection of plastic succulents.

For those who were unaware, last Wednesday was International Women’s Day, so if you forgot to recognize all of the powerful ladies in your life, 1) you done messed up, and 2) they’ll accept your apology in weighted blankets.

In honor of the occasion, web3 community investment group Thousand Faces hosted a demo day for women founders to flex their startup accomplishments, and the results were impressive. Companies representing a wide variety of interests, geographical locations, and backgrounds applied, each with an underlying focus on sustainability.

The ten startups that made it to the stage were all fighting for the chance to win one-on-one mentorship and 50K euros in prize money, though based on the traction and size of some of the problems that each of these promising companies are set to address, brand recognition from the event exposure seems to be the far more valuable outcome.

While each has the potential to be a winner, the one that made me audibly proclaim “woah” was Radava.

Many people’s investing experience is limited to the ol’ handy dandy Robinhood. While being able to sell $BBBY at a 70% loss is pretty cool, many of these diamond-handed investors might not even realize that there’s a trillion dollar market out there for trading commodities like agriculture. It’s like a whole new world for potential blown checking accounts!

While most of the world has long had access to these alternative financial tools, much of the developing world still does not. Extending this access could completely change the reality of our food supply chains.

Radava has brought the agricultural commodity exchange market to Sub-Sahara Africa. In addition, the company offers farmers new tools like alternative financing options and post-harvest tech to take ownership over the wheelin’ and dealin’ side of seedin’ and harvestin’.

This aids farmers with issues like price discovery and risk management through futures as market prices become uniform and transparent, and they’re able to lock in prices for their products ahead of time to hedge against the many risks of agriculture. A certain bank could have learned a thing or two… 🙃 

Anyone in the world with internet access (that’s a lot of people) will be able to tap into the other side of this market like through purchasing these derivatives (not the ones you learned about in pre-calculus).

Eventually, there will be even more options for farmers. Micro-loans are no new concept, but Radava is making them even more enticing for lenders as they can lend against agricultural collateral. They’ll also be able to access systems to manage their crops post-harvest, like transportation and warehouse management.

No word on whether they’ll also launch a competitor to Farmers Only.

It’s still very, very early for Radava. They’re barely generating any revenue, and their only investments are through incubator programs which the company has gone through like TechBridge and Jasiri. However, they’re making progress and laying the groundwork to address a massive problem.

Since being formed in 2021, the company has rolled out its commodity exchange model, meaning you can set up an account and trade right now with their electronic receipt system allowing for safe storage of ownership information.

This is preferable to having to physically transport the goods each time they’re exchanged. Did someone order 100 trucks of soybeans?

The company claims to be on track to serve 10,000 small farmers by the end of 2025. So far, it has seen 230 tons of agro-commodities traded on the platform. It doesn’t take the Corn Kid to tell you that’s a lot of corn.

There’s a reason that this market sees more than a trillion dollars of transactions on a daily basis globally. One, we all need food to survive, something that will never change even if what we consume has shifted to mostly protein shakes and Big Macs.

Second, the industry employs 1.3 billion people worldwide. In a few regions such as Sub-Saharan Africa, it actually employs more individuals than any other industry with 60% of the population classified as small-scale farmers. It’s a true life (and livelihood) or death sector.

23% of the region’s GDP is accounted for by this economic activity, and the last estimate of the market value pegged it at $311 billion in 2019. This number will only continue to increase as the region’s population does, and hint hint, it’s rapid.

We’re expected to host 11 billion humans on Earth (idk maybe some on Mars by then) by the end of the century. Between matches of online chess, they’re going to need to refuel those thumbs with something, and much of it will come from Africa.

There are a few existing options for borrowers and lenders, but they lack transparency and require middlemen which might boost early growth through increased awareness but will eventually take away from efficiency. This has been apparent in some early wins but no sustained traction.

Lending for African Farming Company connects lenders to local SMEs in the region to then distribute loans to farmers. While the goal remains the same as what Radava is doing, this chain of lending is efficient and ripe for corruption. LAFCo and other similar groups have reported cumulative loans upwards of $10 million, but few have released updated statements in the years since.

The East Africa Exchange has shown some promise in introducing support for grains market exchanges in East Africa. In fact, it has even expanded its commodity offerings to new agro-products like coffee and minerals. However, it’s still far too early to view any competitor as The Kansas City Chiefs, particularly if Radava can gain traction in other markets before expanding.

Pitching the company at the demo day was the company’s CTO, Josephine Adeti. Armed with a degree in telecomms and information enginering, she wears far more hats than your average engineer.

She is also in charge of marketing, PR, and sales. She has past experience in community management and partnerships. Oh yeah, and she has to handle everything tech-related as her title implies.

The COO and CFO are Ivan Otieno and Isaac Wachira, both of whom bring strong background experience in startups in the region to their roles to help the trio to achieve their goals of democratizing access to the global commodities exchange market, something which they firmly believe will bring development to the region, potentially helping the next region to say goodbye to poverty after so many years of effort.

Long $rice, and long Radava.

TLDR: Radava is bringing access to the global financial markets to the massive but unreached Sub-Saharan Africa region. This will allow farmers to access alternative financing and market strategies which will empower them to improve their businesses and catalyze regional development efforts. Led by a strong team with a special connection to the problem, the company shows early promise in making this future a reality.

Cheers to another day,

Trey