No one will replace Silicon Valley Bank and that’s a big problem for tech

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Mark McQueen is the former chief executive officer of venture debt lender Wellington Financial LP, and was most recently president of CIBC Innovation Banking.

Silicon Valley might be a long way from Saskatoon or Saint-Laurent, Que., but every Canadian innovation entrepreneur will agree that the collapse of Silicon Valley Bank will negatively affect our startup scene for years to come.

While the U.S. government’s response to the brewing bank crisis has mitigated the initial fallout, there’s no quick fix to the gaping US$70-billion funding hole that has been created in the global capital market because of SVB’s demise.

From a public policy standpoint, the innovation economy is part of many daily conversations within our legislatures and elsewhere. Whether it be reducing the cost of health care through artificial intelligence, new drug discovery, advanced carbon-capture innovations, faster rural internet or overall job creation, capital providers such as SVB play a key role in our daily lives.

Silicon Valley Bank collapse: What’s next for banks and investors?

First-time founders tackle multiple challenges as they try to turn their idea into the next Apple, Google, Lightspeed or Moderna. It takes a certain kind of person to recruit a team and find that first customer, all while keeping the lights on. Without access to capital, most great ideas that rely on intellectual property development will eventually die, no matter how determined the team.

Once entrepreneurs have raised an equity round from friends, family, an “angel investor” or a venture capital fund, specialized lenders such as SVB or CIBC Innovation Banking – a competitor I used to lead – become key players in their financing lifecycle.

Although there are almost 5,000 banks in North America, only a handful focus on startups, despite the importance of software, biotech and clean technology to the future of our economy, health and environment. While traditional commercial banks will only lend against “hard assets” or your personal guarantee, people such as me or SVB’s team have spent decades building the expertise to provide debt capital based on the value of your “enterprise,” taking into account your company’s IP, revenue or both.

When these startups approach a lender, they’re rarely profitable. That lack of profitability often scares both bankers and regulators. And yet, as SVB and other lending teams have proven across multiple economic cycles, loan losses in this sector are no higher than those in the broader economy – provided you have the right expertise.

Canada’s tech sector largely untouched by Silicon Valley Bank demise, but worries remain

SVB recognized this market gap and became the 16th-largest U.S. bank. As memories of the last dot-com bubble waned, SVB’s success spawned a few smaller competing banks. If you were an entrepreneur, you welcomed the new competition and the lower cost of capital that resulted. In Canada, venture debt lenders such as Wellington Financial – the company I co-founded that later became CIBC Innovation Banking – successfully filled the local gaps.

But that didn’t stop SVB and Dallas-based Comerica Bank from cherry-picking business with some of the best Canadian tech companies over the past 20-plus years.

When CIBC acquired Wellington Financial in 2018, the vision was to create a domestic champion for the innovation economy. Over the past five years, my former colleagues and I built a profitable, self-funding business within CIBC. We even advanced enough loans to become the number two lender (behind SVB) to Series A-C companies south of the border. Several Canadian banks are now trying to copy CIBC’s model. I welcome this development, as few entrepreneurs will ever tell you that there’s “too much capital out there.”

But no competitor can do in five years what took SVB decades to accomplish with its 6,000-person team. Over a 40-year period, SVB built a US$30-billion loan portfolio, and about half of that capital is already at work in the economy. SVB has also deployed another US$40-billion in support of venture capital, infrastructure and private equity funds for their day-to-day business needs. That capital and know-how helps create thousands of new, high-paying North American jobs each month. All of which came to a screeching halt last Friday.

With the loss of such a large debt partner, many VC funds will need to reserve more of their own capital to fund each and every new startup. Which means these same VCs will have no choice but to back fewer new firms. And fewer new startups means there’s a irrefutable risk that the “next Moderna” won’t get that first round of essential funding. The consequences of this single bank failure are difficult to overstate.