Canadian tech leaders leapt into action over the weekend to assess the impact of the Silicon Valley Bank 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-fund 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 have a combined exposure of more than CDN$1 billion, said Communitech CEO and President Chris Albinson.
What’s needed, he added, is for government to provide a swift injection of liquidity into the Canadian tech ecosystem to help the most-affected companies 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 existing funded 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.”
Communitech joined with other tech hubs and industry associations across the country in penning a letter to Deputy Prime Minister and Finance Minister Chrystia Freeland. The letter includes a summary of key issues facing Canadian tech companies as a result of the SVB collapse, along with four recommendations to address them.
Although the U.S. government has said it will guarantee all the money that customers had on deposit with SVB, the tech hubs warned of “multiple spillover effects” beyond access to cash deposits.
These include: delays in accessing deposits held by the now-defunct SVB; inability to secure new lenders until the ownership of outstanding SVB loans is clarified; and a tightening of venture capital that may occur if market uncertainty causes U.S. VCs to retreat from investing internationally (U.S. firms invest more in Canadian tech than Canadians do).
“The tech and innovation ecosystem is fragile, and if there is a liquidity crisis, it will quickly turn into a full-blown crisis,” the letter to Freeland states. “The current downturn in the U.S. capital markets will directly affect Canadian companies disproportionately and will put Canadian companies at greater risk of failing.”
The letter urges the federal government to act quickly to address the potential fallout for the Canadian tech sector. It pointed to the response in the UK where the government moved swiftly to find a buyer for SVB’s UK operations to ensure a fast and orderly transition. (Canada’s federal banking regulator took control of SVB’s Canadian branch on Sunday, but the process to find a buyer or wind-up the branch is just beginning.)
The letter from the tech hubs also urges the Canadian government not to rely on the U.S. Federal Deposit Insurance Corporation (FDIC) to address trans-border fallout.
“Although the FDIC has made some moves to calm the market on deposits, the systemic risk in the system remains and we do not believe it wise for Canada to rely on the FDIC to ensure the liquidity of the Canadian innovation economy,” the letter states.
The tech hubs made four recommendations:
- Business Development Bank Canada (BDC) immediately extend a second CDN$300-million bridge financing program. This program matches venture-capital investments, which the tech hubs say will encourage investors to continue putting capital into Canadian tech companies.
- Accelerate the process for the federal Venture Capital Catalyst Initiative (VCCI) with a deployment of CDN$200 million into the market over the next 12 months.
- Accelerate deployment of the CDN$200 million already allocated by the Export Development Canada (EDC) for investments in Canadian venture funds and tech exporters.
- Have EDC guarantee secured loans on SVB deposits and loan refinancing.
“The situation can be stabilized quite quickly but it does require liquidity in the market over the next 12 months,” said Albinson.
Freeland has not responded directly to the recommendations, but she has spoken with tech and financial leaders, and she has met with Canada’s Superintendent of Financial Institutions (OFSI) and representatives of the Bank of Canada.
“The Canadian government has been closely monitoring the situation with Silicon Valley Bank and I have been receiving regular updates,” the finance minister said in a statement. “We are in close contact with OSFI, which took action earlier this evening (Sunday). Canada’s well-regulated banking system is sound and resilient.”
U.S. regulators shut down the Silicon Valley Bank last Friday following solvency concerns and a liquidity crisis in which customers rushed to withdraw billions of dollars.
Based in Santa Clara, California, the SVB was launched in 1983 to provide banking services to technology companies and venture capital firms. As the go-to bank for many in the tech world, SVB 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.
The sudden failure of the SVB sent shock waves through an already jittery economy. One other U.S. bank – Signature Bank of New York – collapsed two days later, and Moody’s Investor Services put six other U.S. banks on review for potential credit-rating downgrades.
Observers say SVB’s fall was related to rising interest rates and a substantial investment in long-term government bonds.
U.S. President Joe Biden announced late Sunday that his administration will guarantee all deposits at SVB and Signature Bank.
SVB clients were able to start accessing their accounts again on Monday, although some reports said that web access was slow.
Despite the current turmoil in the tech economy, industry leaders say there is room for optimism.
“If you've been through this before, you understand that this is the best time to be in the market,” said Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association. “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.”