May 27, 2024


Think Differently

Calgary tech scene sees opportunity in wake of SVB’s collapse

“I think disproportionately Calgary-based … who’ve come up in this lower-investment environment will ultimately be better placed”

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The collapse of Silicon Valley Bank has sent shock waves all the way to Calgary.

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The California bank was the pre-eminent financial institution for financing the startup and tech sector in North America. Some companies had debt financing through the bank, some ran their accounts through the bank, while others had venture capital investment tied up through it.

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Benjamin Kemp, CEO of Ambyint, a Calgary-based oil well optimization software company, spent the weekend figuring out how the company was going to make payroll for its almost 40 employees. Moves by the U.S. and Canadian governments to shore up the banks and ensure access to accounts helped solve that issue for the time being.

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He said the bank’s collapse is a blow to local developers.

“I think confidence has been knocked, for sure,” said Kemp. “When you’re in this startup software world, your eye on cash is 100 per cent . . . that’s for the risky, thick-skinned people that want to take on that kind of work. You have to have a good set of nerves for that.”

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Ten per cent of Canadian venture capital-backed companies had deposits with SVB

Ambyint was not alone. Kemp said most founders and CEOs he talked to had exposure to SVB.

Kemp pointed to a series of bad bond investments made by the bank, which was then was crushed by rising interest rates, leading to the failure.

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Last week, Silvergate Capital, a cryptocurrency-focused bank, collapsed. At the same time, SVB alerted investors it needed to raise $2 billion in capital and sold a bond portfolio at a $1.8-billion loss to cover it. This set off a domino effect and sparked a run on deposits, leading to its failure.

It is the biggest banking crash since 2008.

The tech sector will bear the brunt of the impact.

The Canadian Venture Capital Private Equity Association (CVCA) wrote to International Trade, Export Promotion, Small Business and Economic Development Minister Mary Ng this week, noting 10 per cent of Canadian venture capital-backed companies had deposits with SVB, adding many more had accounts at the bank frozen.

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CVCA warned about the long-term effects of the collapse and called for the Business Development Bank of Canada to set up a $300-million bridge financing program, similar to the one used during COVID-19, and to accelerate the flow of venture dollars to the Canadian market by lowering the Fund of Funds threshold.

Venture capital becoming more selective, increasingly demanding evidence over projects

A silver lining in the collapse is that it appears to have spurred the need for startup and tech investment in Canadian banking institutions, something that previously had been minimal.

Terry Rock, president and CEO of Platform Calgary, noted 60 per cent of direct funding for Canadian tech companies comes from the U.S.

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RBCx currently is leading the charge in Canada on this note while other institutions like BMO and CIBC are also working on expanding into this space.

The Calgary tech sector has spent the past five years riding record venture capital investment, outpacing other major jurisdictions in its growth. Rock said this crisis could potentially have a chilling effect in the short term, due to fewer options to fund expansion through the use of debt instruments.

“This is a risk, a national level issue,” said Rock. “(Canada) really needs to start making sure that we’re taking steps to shore up some of the stuff that’s been quite a risk. That will instil confidence and it will also just practically roll out activity.”

The challenge with startups is in securing funding before hitting the venture capital investment stage, especially if they are operating without assets that can be leveraged. This often requires debt financing, something that has become even more difficult to secure due to changing global economic pressures.

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Even venture capital investors are becoming more selective than they were 12 to 18 months ago, demanding more evidence over projection to make their choices.

‘(C)ompanies that have learned to do more with less are going to come out of this on top’

Canada has always had stronger banking regulations than its American counterparts, which has helped the country’s six big banks avoid this type of collapse. There are thousands of banks in the U.S. that have pushed innovation in the face of competition, but have also engaged in more risk taking.

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“Canada lags a little bit in terms of innovation behind the United States,” said Alfred Lehar, an associate professor at the Haskayne School of Business at the University of Calgary. “This new tech and innovation is really important for the long-term economic growth in Canada and also to create jobs going forward.”

Brett Colvin, CEO and co-founder of Calgary-based Goodlawyer, sees potential for the Calgary tech scene in the midst of the financial chaos.

He said this is due in part to the lack of access to funds that startups in Calgary have had in comparison to those in the U.S., which has led to a culture of more responsible spending and decision-making by local companies.

Colvin posted to LinkedIn earlier this week, urging tech companies north of the border to be prepared to take advantage of the opening that will be created when the dust settles on this banking crisis.

“I think companies that have learned to do more with less are going to come out of this on top,” he said. “I think disproportionately Calgary-based or Canadian companies who’ve come up in this lower-investment environment will ultimately be better placed.”

[email protected]

Twitter: @JoshAldrich03


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