A man puts a sign on the door of the Silicon Valley Bank as an onlooker watches at the bank’s headquarters in Santa Clara, California, U.S. March 10, 2023.NATHAN FRANDINO/Reuters
Canada’s technology sector was already poised to emerge largely unscathed from the failure of Silicon Valley Bank before U.S. regulators promised Sunday to ensure all of its depositors would be made whole.
But as markets digested the news Monday, denizens of the Canadian tech scene said they were still worried about the long-term impact of the bank’s demise.
The concern is twofold. One major worry is that the sector, which entered a sharp downturn in late 2021, will continue scaring off investors. Valuations crashed last year, and tech companies – including Canadian employers Shopify and Lightspeed – have laid off more than 300,000 people globally.
“With Silicon Valley Bank gone, I think there are real concerns around trust and willingness to invest in the tech sector broadly,” said Benjamin Bergen, president of the Council of Canadian Innovators, which represents domestic technology companies. “We had already heard from CEOs that capital markets are brutal. This will only make it worse.”
The other worry is that the disappearance of SVB, a core financier of tech companies for decades, will further tighten available capital for startups that have already had to slash spending in the face of dwindling investor interest. Collectively, those companies have driven job growth and wealth creation for years.
“Any tightening of the supply of risk capital funding to the early stage firms will be a net-negative for the health care and technology ecosystems,” Scotia Capital’s technology research analyst team said in a note Monday.
Maria Pacella, managing partner with Vancouver-based Pender Ventures, said in an interview that there are also longer-term concerns about what the tech landscape will look like with fewer funders.
“Who’s going to take up that spot and make sure this doesn’t just get concentrated in our top banks? That isn’t good for anyone,” she said. “We might see a clamping down on credit from financial institutions, which we were starting to see anyway with rising interest rates. The last thing we needed was for the banks to have another excuse not to provide capital.”
The weekend following SVB’s failure on Friday was tense and busy, as technology companies made emergency plans and bombarded banks with requests to move money to safety. Industry associations surveyed members and contacted political leaders to prepare them for what could happen next.
But a consensus quickly emerged that there would be limited immediate fallout in Canada, even in a worst-case scenario – if there had been no rescue plan announced Sunday, for example. The Canadian Venture Capital and Private Equity Association determined that only 10 per cent of venture-capital-backed Canadian companies had deposits with SVB, while the Council of Canadian Innovators concluded that 9.3 per cent of 64 companies it surveyed were “severely impacted,” meaning they wouldn’t be able to cover payroll or operating costs without access to SVB accounts.
As a result, the two organizations’ recommendations to government were relatively mild. CCI vice-chairman John Ruffolo told Finance Minister Chrystia Freeland in an e-mail Sunday that companies whose debt facilities were impacted had “a multitude of choices” in Canada from other banks, their own investors, as well as two Crown agencies, Business Development Bank of Canada and Export Development Corp.
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Mr. Ruffolo suggested the Finance Minister make a statement saying that the government was on top of the situation, and that the vast majority of Canadian tech companies had little to no SVB exposure.
The CVCA’s main suggestion was that the federal government instruct BDC to provide bridge financing to companies. That advice “became almost moot” with the U.S. announcement Sunday, said Kim Furlong, the association’s chief executive.
The association’s other suggestion was that the government allow for quicker disbursements to venture capitalists through an existing federal initiative, which the financiers could then invest in startups.
Ms. Freeland issued a statement late Sunday saying she had spoken to industry representatives, and that Canada’s “well-regulated banking system is sound and resilient.”
SVB’s Canadian operation was limited to offering venture loans to companies, because it wasn’t licensed to hold deposits here. It faced stiff competition from the big banks, notably Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Montreal, which had moved aggressively into tech banking.
SVB’s business in Canada had just US$692-million in assets and US$349-million in loans as of December, according to filings with the Office of the Superintendent of Financial Institutions. OSFI took control of SVB Canada on Sunday, just before the U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. announced plans to ensure SVB’s depositors got all their money.
Many Canadian companies that had raised money from U.S. venture capital firms did have SVB accounts south of the border, though for many those accounts represented small amounts of their cash.
Some were able to move funds to safety before SVB went into receivership. Others weren’t so lucky, including Toronto’s AcuityAds Holdings Inc., which revealed Friday it had US$55-million – about 90 per cent of its bank deposit cash – held with SVB. But that level of exposure was rare for a Canadian company; AcuityAds said it had taken steps to rely on other banking relationships, and by Monday its situation was resolved.
Mr. Ruffolo said in an interview Monday that he believes any risk of contagion from SVB’s failure has been contained, and that “there really is no short-term impact of consequence” in Canada. But he added Canada has lost “a very good, high-quality competitor that kept the banks honest.” He said he worries SVB’s demise will lead to higher pricing and stricter loan terms and conditions for tech companies, dampening risk capital availability.
Ms. Furlong said she worries that U.S. venture capital firms, which worked extensively with SVB, could retreat even further from the market. “If the U.S. market is hit strongly, we’re definitely going to feel it” in Canada, she said.
“We want to ensure this ecosystem continues to grow and doesn’t falter because of external factors, such as the disappearance of SVB.”
With a report from David Milstead