The tech sector fears a “chilling” effect from the bankruptcy of Silicon Valley Bank

Chris Albinson once watched a Canadian company with no connection to SVB lose an investor who was scared by the bank’s failure and decided not to invest in new ventures. (Canadian press)

Toronto. Tech Canadians fear that the collapse of Silicon Valley Bank (SVB) will dampen investment in their already struggling industry.

They say some Canadian startups are already worried about cash flow and many are wondering how they will raise their next funding round now that US regulators shut down the California bank on Friday as its customers stormed in at the same time. withdraw billions of dollars, worrying about his solvency.

US regulators, including the US Federal Deposit Insurance Corporation (FDIC), have since announced plans to protect the financial system and pay all bank deposits. The Office of the Financial Institutions Supervisor of Canada (OSFI) announced on Sunday that it had seized the bank’s Canadian assets.

But there are still concerns about Canada’s tech sector.

“I hear from the founders that our fate is in the hands of the FDIC in the United States and that they are in no hurry to transfer money to Canada so we can pay our companies,” Communitech CEO Chris Albinson said.

Elbinson estimates that 120 of the 1,200 founders of his innovation center in Waterloo, Ontario, were affected by the bank collapse, and many are worried about how they will cover short-term salaries. Prior to OSFI’s announcement on Sunday, many didn’t think they would be able to access the money they needed to pay their workers a week, he said.

“There’s no doubt” that even Canadian companies that didn’t do business with SVB would feel the effects of its collapse, especially when it comes to fundraising, he added.

Several layoffs

“We had a business with a list of conditions that was ready for financing. She had no connection with the SVB. The venture capital company also had nothing to do with SVB,” Albinson explained.

“But because the California VC was worried about what else might happen, they said, ‘We’re not going to make any new investments. We’ll just focus on our existing business.” They removed the list of conditions and, unfortunately, the company had to cut half the staff.

The times couldn’t be worse.

Technology investment has been under pressure for nearly a year now as consumers revert to pre-pandemic habits, forcing companies to rethink their growth forecasts. In addition, interest rates have been raised several times, which has increased the cost of borrowing. Under these conditions, it is more difficult for new and experienced entrepreneurs to find money, and some of them have had to resort to cuts.

The layoffs aggregator has counted 128,202 jobs lost globally at 483 companies since the beginning of the year.

Canadian tech companies have received $668.3 million in funding across 38 deals this year, according to Waterloo, Ontario-based Briefed.In.

Startups raised $14 billion in 701 deals in 2021 when the market was still booming because companies expected their huge pandemic growth to continue. Investment activity fell to $9.7 billion across 417 deals in 2022.

In a post on LinkedIn, the CEO of the Canadian Innovators Council expressed concern about the restrictive environment for venture capital funding, which could get “worse and worse” due to the SVB closure.

“It definitely limits the pool of capital that you can potentially access,” he said in an interview on Tuesday.

Mr Albinson agrees. He predicts that a San Francisco venture capitalist with a portfolio of 20 companies – 18 in the US and two in Canada – will pay more attention to US companies in his offices, talking to them about their difficulties.

“Our business just won’t be as high a priority.”

This change will undo years of recent progress made by SVB in the Canadian technology sector, which has long been in the shadow of the American one.

Best investment in Canada?

The bank’s final market report, released in February, found that Canadian companies earning up to $10 million a year outperformed their US counterparts for five consecutive quarters.

Between the first quarter of 2020 and the fourth quarter of 2022, U.S. companies have a cash burn rate — the rate at which a company uses its cash reserves — that is 38% faster than Canadian companies.

SVB expects the net burnout rate of Canadian startups to drop further in 2023 and pointed out that investments in these companies tend to generate higher returns.

“I think our businesses are generally better managed than their American counterparts, but it will be a challenging environment for them,” Albinson said.

“We used to have a saying that when the United States has a cold, Canada gets the flu, but it looks like the United States has the flu now and we’re going to have a very bad cold.”

Abdullah Snobar, managing director of Toronto’s DMZ technology center, said he’s heard of several founders looking to raise funds right now and he expects them to run into difficulties.

Investors told these companies that they would not venture to invest until the market stabilized.

Mr. Snobar foresees the consequences that will eventually follow for founders who aren’t even looking for funding.

“I think there will be a lot of consequences that we just don’t know about right now.”

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