Canada's tech start ups face financing hurdles with SVB collapse

© Reuters. Customers wait in line outside a branch of the Silicon Valley Bank in Wellesley, Massachusetts, U.S., March 13, 2023. REUTERS/Brian Snyder

By Maiya Keidan and Divya Rajagopal

TORONTO (Reuters) -Last week's sudden collapse of Silicon Valley Bank (SVB) could choke funding for Canada's technology start-ups and place them in the hands of domestic lenders who may be more selective in financing new ventures, financiers told Reuters.

That would be bad news for a sector that took a beating in 2022, which has made investors more risky averse in early stage investments.

"I would say this is probably the worst possible time (for this to happen) in the last decade because of the tech pullback we've had," said Neil Selfe, CEO at advisory INFOR Financial.

SVB's Canadian division, which received a license to operate in 2019, competed against other banks and private lenders to help finance the growth of the Canadian technology sector, before it collapsed on Friday. It had doubled its secured loans to C$435 million ($314 million) in 2022 from previous year.

Canada had come to be known as the world's second-biggest global tech hub in the world after Silicon Valley, Kim Furlong, CEO of Canadian Venture Capital and Private Equity Association told CBC News on Monday.

Companies including Shopify (NYSE:SHOP) Inc were examples of Canada's tech success story, which helped pull more investments into the sector.

U.S. regulators stepped in on Sunday after the collapse of SVB, which had a run after a big bond portfolio hit.

CIBC, Royal Bank of Canada and Bank of Montreal were the most likely to pick up both SVB's current book, and future clients in Canada, John Ruffolo, Managing Partner Maverix Private Equity, a Toronto-based PE firm said.

All three banks have dedicated technology lending groups.

A spokesperson for RBC declined to comment while CIBC and BMO did not respond to requests for comment.

Selfe at INFOR Financial said while SVB Canada was a smaller player "it was an important competitor in that market."

"I think Canadian banks will continue to lend to earlier stage technology companies but without Silicon Valley Bank as a lender, I think they can afford to be much more selective in who they lend to and potentially increase the price at which they lend."

Canada's top six banks already control more than 80% of the banking assets and the industry has come has attack from consumers advocates and politicians for its dominance.

Benjamin Bergen, president at Council of Canadian Innovators, a lobby group for Canadian technology companies, agreed.

"Before SVB went down, accessing capital was increasingly becoming tighter and tighter for Canadians for startups for scale ups," he said.

"And with this, really what we're hearing from the ecosystem is, you know, it is going to make it even more difficult, so that's really what we're monitoring."

Canadian companies saw overall venture capital investment of C$1.3 billion ($947.38 million) so far this year, compared to C$4.5 billion over the first three months of 2022 and C$3.5 billion over the same period in 2021, according to Refinitiv data.

Funding environment for start-ups was already getting difficult due to rising interest rates. Investors were also turning selective due to the threat of a recession. Aside from the banks, the federal government also has a Venture Capital Catalyst Initiative program that invests in promising Canadian technology companies.

($1 = 1.3722 Canadian dollars)