The failure of Silicon Valley Bank on Friday had Canadian tech companies working to quickly withdraw their assets from the crumbling institution.
The California-based bank’s collapse marked the second-largest bank failure in U.S. history, with collateral effects rippling across the tech and banking sectors through the weekend and into this week as U.S. and Canadian regulators scrambled to minimize the damage.
“You’re sitting there hitting refresh throughout the afternoon to see if the money has hit your other bank accounts. And then when it finally does, that’s a big weight off your shoulders,” said Kris Hartvigsen, the CEO of Vancouver-based tech startup Dooly, which held its U.S. accounts with SVB.
The financial institution held over $200 billion US in assets. It was the preferred banking partner of many Canadian tech startups, due to its nimbleness and because its ubiquitous use across the sector made transfers between companies and their clients easier to process, according to Hartvigsen.
While Dooly’s cash was successfully transferred to the Royal Bank of Canada — “I feel relief for my business, I feel relief for my investors, I feel relief for my customers,” Hartvigsen said — SVB’s collapse has shaken Canada’s startup ecosystem.
As the Canadian government and its big banks give reassurances that the impact of SVB’s crash will be minimal, some in the startup community are concerned that the incident will chill tech investment, with lenders playing it safe after this latest setback.
Lending with caution
Chris Albinson, the CEO and president of incubator Communitech in Waterloo, Ont., said that 16 of the companies his firm works with couldn’t pay their employees immediately after SVB’s collapse, with the majority of their financing coming from south of the border.
“Our company’s ability to make payroll, to keep the lights on, are really highly intertwined with both the financings and the banking system in the U.S.,” the exec told CBC News.
WATCH | Canadian tech sector shaken after bank failures:
U.S. bank failures leave Canada’s tech sector shaken
The bank failures in the U.S. have sent shockwaves north, rattling the Canadian tech sector. Depositors have rushed to get their money out, but there’s a broader fear it will chill investment.
North American banking regulators have stepped in to mitigate the effects of the crisis. Canada’s top banking regulator seized control of SVB’s Canadian branch on Wednesday after temporarily taking possession of its assets on Sunday.
On Monday, the U.S. Federal Deposit Insurance Corporation, or FDIC, transferred all of the bank’s deposits — including those that weren’t insured — to a “bridge bank” that will take over SBV’s operations until a suitable buyer comes along. A startlingly high 94 per cent of SBV’s assets were uninsured at the time of the collapse because they exceeded the FDIC’s insurance cap of $250,000 US.
“Let’s say the bank that you’re using every day went bankrupt. You know, the first thing would be, can I get access to my cash to be able to go buy groceries? Looks like that problem is kind of solved,” Albinson said.
But what if you couldn’t use or pay your credit card, and who do you talk to about refinancing your mortgage if there’s nobody on the other line? That’s the situation that many Canadian companies now find themselves in, according to Albinson, without SVB as a lender.
“What I’m thinking about is the longer term, what does the disappearance of [nearly $900 million] of available credit for entrepreneurs mean to Canada?” said Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association.
The Canadian branch of SVB had about $864 million worth of business loans on its books.
That branch played an important role in the financial growth of the Canadian tech sector — the world’s second-largest technology hub — having competed against other major banks and lenders in sustaining the country’s startups.
Gov reassures, but not all are convinced
Finance minister Chrystia Freeland said that Canada’s banking system is sound and resilient, while innovation minister Francois-Philippe Champagne echoed the sentiment. “The message is that our banks are very resilient, and Canadians should feel confident,” Champagne said.
“I don’t know what impact this will have on the Canadian economy,” said Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto.
“All I know is what’s going on right now is banks are going to be more cautious probably about lending. And this could cause some short-term tightening of bank lending standards that could spill over into Canada that could slow the economy down,” he said.
The rate of financing and investing in startups had already slowed considerably before SVB’s collapse, said Albinson.
“There was already a liquidity crunch in the ecosystem. So that’s directly correlated to the layoffs that have happened, and I just think this will accelerate that, unfortunately,” he added.
The global tech sector took a bruising in 2022, with Canadian companies caught in the crossfire of mass layoffs and investors now pushing for downsizing and efficiency over growth. In the current atmosphere, lenders may be increasingly cautious about financing young startups, compared with non-traditional banks like SVB.
Some will naturally wonder which other banks are at risk, “after that one that you thought was really safe went bankrupt,” added Albinson.
“We’re really still seeing that dynamic in the market right now. And that’s effectively stopped investment,” he said. “And so we’re very concerned that the whole ecosystem is at some meaningful risk and less liquidity is put into the market quickly.”
