Canadian tech leaders leapt into action over the weekend to assess the impact of the Silicon Valley Bank (SVB) collapse on Canadian companies and to offer assistance to founders affected by the demise of the California-based bank.
Communitech reached out to tech entrepreneurs and began working with numerous others across the country, including bankers, venture capitalists, pension-plan executives, politicians and support organizations such as the Canadian Venture Capital and Private Equity Association (CVCA) and the Canadian Technology Network (CTN).
Canadian tech companies appear to have a combined exposure of approximately CDN$1 billion, said Communitech CEO and President Chris Albinson.
What’s needed, he said, is for government to provide a quick injection of liquidity into the Canadian tech ecosystem to help the most-affected companies – an estimated 10 per cent of those Canadian venture-backed startups that dealt with SVB – to continue to meet short-term obligations such as payroll.
“About $700 million worth of liquidity needs to be injected into the market quickly, largely from funded existing programs,” said Albinson. “That injection of capital will stabilize the market and… provide immediate relief and investor confidence in the Canadian venture landscape without any net new investments.”
A group of Canadian tech and finance leaders have drafted a list of recommendations that they plan to present to Deputy Prime Minister and Finance Minister Chrystia Freeland by this Wednesday.
“The situation can be stabilized quite quickly but it does require liquidity in the market over the next 12 months,” said Albinson.
U.S. regulators shut down the 40-year-old SVB last Friday following solvency concerns and a liquidity crisis in which customers rushed to withdraw billions of dollars.
In Canada, the country’s federal banking regulator took control of SVB’s Canadian branch on Sunday to contain the impact on Canadian VCs and tech companies.
“By taking temporary control of the Canadian branch of Silicon Valley Bank, we are acting to protect the rights and interests of the branch’s creditors,” Peter Routledge, Canada’s Superintendent of Financial Institutions, said in a statement. “I want to be clear: the Silicon Valley Bank branch in Canada does not take deposits from Canadians, and this situation is the result of circumstances particular to Silicon Valley Bank in the United States.”
Based in Santa Clara, California, the SVB was launched in 1983 to provide banking services to technology companies and venture capital firms. It grew over the past 40 years to become the largest bank by deposits in Silicon Valley, and was the 16th largest bank in the U.S. at the time of its collapse.
Observers say SVB’s fall was related to rising interest rates and a substantial investment in long-term government bonds.
For bank customers, the U.S. Federal Deposit Insurance Corporation only guarantees the first $250,000, which was devastating news for SVB clients – mostly startups and VC firms – that had more than that in their accounts.
However, following the collapse of a second bank – Signature Bank of New York – U.S. President Joe Biden announced late Sunday that his administration will ensure that all deposits will be guaranteed.
SVB clients were able to start accessing their accounts again today, although some reports said that web access was slow.
Biden’s announcement takes some of the immediate pressure off Canadian companies that dealt with SVB, said Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association (CVCA).
However, both she and Albinson said a number of investment-related concerns remain for the Canada’s technology sector.
One is the fact that a majority of the venture capital invested in Canadian companies – 60 per cent in 2022 – still comes from the U.S., which makes Canada vulnerable to events and trends south of the border.
For example, the current market uncertainty may cause American investors to focus more on American companies.
“The big concern is this will disproportionally impact Canadian startups in a negative way,” said Albinson.
Added Furlong: “That's where my mind is at now: How do we ensure that Canadian companies and entrepreneurs continue to have access to capital?”
Another uncertainty is how lenders and investors – especially those who haven’t been through a down cycle before – react to the latest market turbulence.
“It’s impossible to predict how people are going to feel about this space,” said Furlong.
However, downturns can provide opportunities.
“If you've been through this before, you understand that this is the best time to be in the market,” she said. “It's where values realign, it’s where companies have the opportunity to anchor themselves and grow. Every downturn pushes out wonderfully innovative and solid companies. It’s important to remind people of the potential that Canada holds, that the companies that are being founded and are growing in our pipeline have the potential to transform Canada's economy and to be global leaders.”