The run on Silicon Valley Bank (SVB) has ended almost as quickly as it started, with news breaking Friday that the bank has been closed by regulators, which have taken control of its deposits.
This dramatic and quick downfall for one of tech’s most prominent financial institutions is likely to have cascading effects across not only Silicon Valley but Canadian tech.
The extent of those effects is not yet clear.
“I’m not sure we fully appreciate the complexity of our ecosystem and the knock on effects of SVB going down.”
– John Stokes,
With FDIC taking over control, the regulator now holds the insured deposits from SVB. The FDIC’s standard insurance to protect bank customers’ deposits covers up to $250,000 per depositor, per bank. At the time it was, unclear how larger accounts or credit lines for companies would be impacted by SVB’s closure. Since then, the US Treasury, Federal Reserve, and FDIC noted that all depositors will be fully protected.
One Canadian venture capitalist (VC) BetaKit spoke with noted that numerous Canadian startups used SVB for their US bank accounts. “They were much more reasonable on rates and faster to help them than Canadian banks in the USA,” the VC said.
The VC added that to their knowledge few, if any, Canadian VC firms banked with SVB as that practice had also not been launched in Canada.
The FDIC said insured depositors will have access to their deposits no later than Monday morning, and that it will pay uninsured depositors an advanced dividend within the next week.
With SVB the main bank for startups in the United States (US), and its 16th-largest bank, the impacts on the country’s tech ecosystem may be sizeable.
In Canada, SVB plays a different role, as it does not have a banking license and only provides venture debt locally. As such, unlike their American counterparts, Canadian-domiciled companies likely won’t have their funds with the bank.
Every group chat, Slack, and email chain I'm in is going crazy.
Founders have no idea if they'll make payroll. Investors have no idea which companies are impacted or if LP funds are safe. Employees don't have the slightest clue what's going on.
— Alex Cohen (@anothercohen) March 10, 2023
However, Canadian startups that have their US banking with SVB, or ostensibly Canadian companies that are legally domiciled in the US for tax purposes and use SVB, will be impacted by the bank closure.
One innovation bank leader BetaKit spoke with on background noted that SVB’s downfall could also create a “credit crunch” here. Since SVB Canada does not have a national banking license it pulls its venture debt lending capital from deposits made outside of the country. The shutdown potentially eliminates one pool of capital Canadian startups have relied on during the downturn.
How the shutdown of SVB will impact SVB Canada’s overall operations is also unclear at this time. BetaKit has reached out to SVB Canada for comment.
Sentiment amongst Canadian tech, which is still reacting to the news in real-time, seems mixed.
Mark McQueen, until recently the head of CIBC Innovation Banking, published a blog post Friday morning prior to SVB’s shutdown investigating the bank’s business model and track record. For McQueen, “decades of brilliance” by the bank have been undone.
“For the sector, the repercussions aren’t entirely knowable at this stage,” McQueen wrote. “Entrepreneurs will have a harder time raising debt, at least temporarily. LPs will frown, for sure, which could make it harder for VCs to raise their next fund. The risk managers at competing banks will conclude what they’ll conclude, but SVB will no longer be easily held out as a proof-point of the appeal of lending to the innovation economy, even if this crisis had nothing to do with the credit quality of SVB’s loan book.”
For Mark McQueen, until recently the head of CIBC Innovation Banking, “decades of brilliance” by SVB have been undone “in a matter of hours.”
Maverix Private Equity founder John Ruffolo agreed with McQueen’s sentiment that SVB’s issues had nothing to do with the market. “It’s a treasury risk management issue,” he told BetaKit.
Ruffolo’s comments refer to an investment decision that SVB management made amid the tech boom that killed its liquidity and resulted in an unrealized $15 billion USD loss, as reported by The Financial Times.
“SVB prudently concluded that with rising interest rates, many of their tech borrowers will struggle to repay debts. So, they put the brakes on lending. BUT, they took the excess liquidity and invested in long term bonds,” Ruffolo wrote on LinkedIn.
“This is the part I struggle with and if anyone can explain it to me, please do,” Ruffolo added. “If you bet on higher interest rates, won’t the long term bonds price drop precipitously as well? Well that’s exactly what happened.”
Others, like Real Ventures managing partner John Stokes, are focused on the actions that fuelled the run. In a post on LinkedIn, Stokes specifically referenced the “get your money out” message from Union Square Ventures and Y Combinator CEO Gary Tan, wondering if such a “self-serving” approach was the only one available.
“As VCs we realize that we have a duty to ALL of our portfolio companies but I’m not sure we fully appreciate the complexity of our ecosystem and the knock on effects of SVB going down … so this message of “grab your cash”, while totally understandable on a case by case basis, seems to be shooting our ecosystem in the foot?”
BetaKit has reached out to multiple innovation banks for commentary on SVB’s dramatic downfall. Background conversations with employees at such firms, however, point to the general mood:
It’s these innovation banks that will help temper the adverse effects of SVB’s departure short-term, argued Ruffolo. Noting that if this happened ten years ago, it would have unleashed “devastation” on the market, he added that groups like CIBC Innovation Banking, RBCx, and BMO have now become big competitors to SVB locally, and should be able to fill any short-term gaps.
Long-term, the investor expressed concerns that the lack of an international competitor in the Canadian market would allow the big Canadian banks to have as great a monopoly on venture lending as they currently have in other areas of the economy. Particularly, Ruffolo expressed concerns about the “long-term competitiveness of low rates and aggressive terms.”