Six months after SVB collapse, startups are adjusting to a new reality

The worst fears didn’t come to pass and stability has returned, but the funding landscape has been changed.

When Silicon Valley Bank imploded last March, it seemed like confirmation the tech boom had run its course. There are few clearer signs the party’s over than the failure of the bank that provided the drinks (literally in many cases, as the sponsor of numerous tech conferences).

Half a year later, however, the situation has stabilized. Regulators carved up the remains of SVB and sold them off — to National Bank in Canada, First Citizens Bank in the U.S. and HSBC in Britain. And entrepreneurs and investors are learning the contours of this new financial landscape.

“The sky hasn’t fallen. But there is a big gap in the Canadian market now, and it’ll be the same in the States and in Europe,” says Jane Kearns, who invests in clean technologies as a partner at Evok Innovations. “SVB was founded by entrepreneurs. They had a different appetite for risk and managed their portfolio differently than other banks. If a company was offside with its loan covenants, SVB might cut them some slack. But a Canadian bank would call in that loan without thinking twice.”

Here, six industry experts weigh in on how SVB’s failure affected Canada’s tech sector and where it goes from here.

It caused a chill, not a crisis

Emil Savov, Managing Director, MaRS Investment Accelerator Fund

The SVB failure temporarily took about $70 to $80 billion out of circulation globally — that’s a lot of capital. So, of all the scenarios that could have happened, the acquisition by National Bank was a good one.

But, combined with interest rates going up, it has definitely caused a slowdown. There is less of a rush to close deals. Some of our co-investors now want to see more people with deep pockets around the table before they invest, because they have to be sure a company has enough runway to last the next two years in this more difficult economic environment.

But from our perspective, we’re prepared to go as fast as before or even faster — we’re actually expanding our team. We invest in early-stage companies, and downturns can be a good time for that because when the market recovers a year or two later, they’ll have finished their product and will be ready for growth when the economy starts picking up again.

It’s left a hole in the startup funding market that will take time to fill

Jane Kearns, Partner, Evok Innovations

We invest in pre-revenue companies, so SVB going bust wasn’t a huge deal for us because they weren’t in most of our companies. They tended to wait until we put our money into a company and they’d come to the table later. But we aren’t seeing banks stepping in to fill that void. That makes it harder to think about how you fund a company — especially for me working with cleantech companies building infrastructure.

Some banks are trying to be more entrepreneurial, but it is fundamentally not in their DNA. A commercial bank just doesn’t know how to assess and accept early-stage company risk. So I think we’ll continue to have this gap.

Valuations are coming down, and from an investor perspective, that’s great. There are still really cool companies doing really cool things and good deals are still getting done. I actually see all of this as a good thing in the long run.

We’re in a new funding environment now

Chris Albinson, CEO, Communitech

Initially there was a fear that we’d have a 2008-like scenario that would jam up the markets. I give the federal and provincial governments a lot of credit — they were very attentive in navigating SVB out of this frozen state to a place where the market could function. But, I think the British navigated it a bit better than we did. They moved the SVB assets over to HSBC very quickly while we had an air pocket [before the National Bank purchase] that turned out to be problematic. It caused ripple effects in the ecosystem  and some companies didn’t survive.

We’ve settled into a more pragmatic — and  tougher — financing environment. But this is different from other down cycles. Usually, when the U.S. catches a cold, Canada gets the flu. But recent data show that funding is up strongly from a year ago. A lot of that is driven by the density and quality of our AI companies and our ability to attract the best talent in the world. I think we’ll look back at the SVB failure and say it was a small speed bump in what is otherwise a pretty exciting trajectory for Canada.

We’re not in the danger zone

Abdullah Snobar, Executive Director, DMZ

There’s still a lot of uncertainty, but the market is rebounding from six months ago. Although seed-stage companies are riskier, there’s a bigger appetite for them among investors right now — one of the reasons is that valuations for later-stage companies have become a bit outrageous. We’re seeing new funds, like Staircase Ventures, coming to life to support these earlier stage companies. And Panache and Round 13 Capital are very interested in seed companies. It’s sending a signal to the market that it’s time for a new batch of companies that are not over-valued.

Buying SVB’s loan book makes sense for National Bank

Camille Hebert, Assistant Professor, Rotman School of Management

National Bank wanted to diversify their portfolio and get more exposure to the tech sector. They are also quite Quebec-centric, so this gives them more geographic diversification with more exposure to Ontario, British Columbia and Alberta. One of the big value drivers of this kind of acquisition is often the human capital, but it seems some people got poached from SVB. Several seem to have gone to CIBC, which among the big five banks already had the biggest interest in small and young firms.

In terms of financing for startups, not much has changed. Interest rates are high, so it’s still very hard for startups to raise money from venture capitalists. Six months ago, companies that were already low on cash were the most impacted. But now that inflation is continuing, companies that were OK may start to run out of money, and so even solid startups may start to be impacted. It’s going to be tough.

 
Interviews have been condensed and edited for clarity.

 
Image source: iStock