While Kim Furlong admits that actions taken by regulators appear to have assuaged Silicon Valley Bank (SVB) liquidity concerns for now, she argues the need remains for the Government of Canada to hasten its tech spending given the downturn and fears of further investor pullback.
After prominent tech financier SVB was shut down last Friday, the Canadian Venture Capital and Private Equity Association (CVCA) CEO and a host of other industry leaders called on Canada’s political leaders to quell a possible “full-blown” liquidity crisis in the country’s tech sector.
The letter’s signatories specifically asked for the Government of Canada to inject $700 million CAD of capital into the ecosystem via existing programs, and called for EDC to guarantee secured loans from other Canadian banks bridging SVB deposits or loans.
A group of nearly 30 Canadian tech leaders from across the country signed the letter.
One Canadian tech sector stakeholder BetaKit spoke with called the letter asks sensible, arguing that investor confidence after SVB’s downfall is a concern. They added, however, that tech “escaped an extinction-level event for startups” when the Federal Deposit Insurance Corporation (FDIC) agreed to make all depositors whole.
Not everyone agrees with the letter’s “full-blown” crisis framing, though. One Canadian venture leader called the letter “ridiculous.”
“What problem are they exactly looking to solve,” they said. “There isn’t one … Data doesn’t back it up at all.”
In an interview with BetaKit, Furlong noted that many of the group’s concerns regarding liquidity and the status of SVB customer deposits were recently addressed when the FDIC agreed to honour them.
She acknowledged that steps taken by regulators have brought “more predictability to the market.”
At the same time, Furlong said she believes the measures that the group is asking for from the Government of Canada are still necessary. “I think there’s a need because of the retraction in capital that we’ve seen,” said Furlong, who pointed to the drop in total venture capital (VC) funding that Canada saw from 2021 to 2022, from $14.2 billion to $10 billion.
As market conditions have worsened, Furlong noted that it is taking longer for Canadian VC firms and tech startups alike to fundraise.
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Furlong also highlighted the risk of SVB’s issues leading to more United States (US) investors retreating from Canada amid the broader downturn. “As we were coming together as an ecosystem, we were thinking, ‘Okay, is there a potential of US dollars retracting from Canada?’” said Furlong. “Potentially. Are we seeing it already? Yes, we’re seeing the first signs.”
The concern over investors pulling back is one that has been shared widely over the last week since SVB was taken over by regulators. More than 1,000 venture firms in the US had their money with the bank. While the short-term concerns around companies accessing their money from SVB are largely addressed, it’s the potential long-term impact that has some people worried.
In its letter, the group noted approximately 60 percent of direct funding for Canadian tech companies comes from the US. Given Canada’s proximity to the US and reliance on American investors for financing, the group argues that “the current downturn in the US capital markets will directly affect Canadian companies disproportionately and will put Canadian companies at greater risk of failing.”
As Communitech CEO and letter signatory Chris Albinson told the Waterloo Record, he recently heard of one startup where a term sheet was pulled for a deal that was expected to close this week. He claimed the deal ultimately fell through and the startup had to make layoffs. Notably, this occurrence had affected some other Canadian startups prior to SVB’s fall, as venture firm’s struggled with capital calls from limited partners, as reported by BetaKit.
Other concerns that have arisen are how quickly Canadian companies will be able to access money from their US bank accounts with SVB. Speaking with the Waterloo Record, Albinson argued that Canadian companies are not being prioritized given that wires for local companies are not coming through or if they are it is not quick enough.
Other venture leaders that BetaKit spoke with pushed that idea away saying that companies they’ve spoken to are receiving their money. One example of that is Toronto Stock Exchange (TSX)-listed AcuityAds, which announced Thursday that it had received all its money from SVB. Previously, AcuityAds had $55 million USD held in SVB accounts.
The US government and banking regulators committed to backstopping all SVB depositors in full earlier this week. In Canada, SVB only provides venture debt as it does not have a banking license in Canada. As such, it pulls its Canadian lending capital from deposits made outside of the country. Canadian banking regulators took over control of SVB Canada earlier this week, on Wednesday moving to wind up SVB Canada’s operations and force it into liquidation.
Asked whether she believes that there is still potential for a liquidity crunch in Canadian tech given these moves, Furlong said, “What we’re saying is, ‘let’s put in place all of the programs and parameters required to ensure that there’s liquidity if we see a further reduction than what we’ve seen so far.’”
“We’re not asking the government to create anything that they’re not already doing,” said Furlong. “We’re asking them to be very mindful about the speed at which they go to it.”
Feature image courtesy Flickr. Photo by Focal Foto.
