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The tech world worries about the bankruptcy of the Silicon Valley Bank



(Toronto) Members of Canada’s tech sector say they fear the collapse of Silicon Valley Bank (SVB) will have a chilling effect on investment in their already struggling industry.

They say some Canadian start-ups are already worried about cash flow and many are wondering how they will raise their next round of funding, now that U.S. regulators shut down the California bank on Friday when its customers rushed in at the same time. time to withdraw billions of dollars, worried about its solvency.

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

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

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

Albinson estimates that 120 of the 1,200 founders of his Waterloo, Ont., innovator center have been affected by the bank’s downfall, and many are worried about how they will cover short-term salaries. Before OSFI’s announcement on Sunday, many did not think they could access the money they need to pay their workers for the week, he said.

“There is no doubt” that even Canadian companies that have not done business with SVB will feel the effects of its collapse, especially when raising funds, he added.

Already several layoffs

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

“But because the California-based venture capital firm was worried about what else was going to happen, they said, ‘We’re not going to make any new investments. We’re just going to focus on our existing businesses. They removed the list of conditions and, unfortunately, the company had to lay off half of its workforce. »

The timing couldn’t be worse.

Technology investments have already been under pressure for nearly a year as consumers revert to pre-pandemic habits, forcing companies to rethink their growth projections. In addition, interest rates have been raised several times, increasing borrowing costs. Under these conditions, it is more difficult for new and experienced entrepreneurs to find money and several of them have had to resort to downsizing.

Layoff aggregator has counted 128,202 positions lost globally, across 483 companies, since the start of the year.

Canadian tech companies have received $668.3 million in investment so far this year, through 38 deals, according to data firm Briefed. In, of Waterloo, Ontario.

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 in 417 transactions in 2022.

In a post on LinkedIn, the CEO of the Canadian Council of Innovators expressed concern about a chilling environment for venture capital funding, which could go “from bad to worse” due to the shutdown of the SVB.

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

Mr. Albinson agrees. He predicts that a venture capitalist in San Francisco with a portfolio of 20 companies — 18 in the United States and 2 in Canada — will pay more attention to American companies in their offices, talking to them about their difficulties.

“Our businesses are just not going to be as prioritized. »

This change would erode years of recent progress SVB has made in the Canadian tech sector, which has long been in the shadow of that of the United States.

Better investments in Canada?

The bank’s final report on the state of the market, released in February, concluded that the revenue rate of Canadian companies earning up to $10 million a year had outpaced their US counterparts for five straight quarters.

Between the first quarter of 2020 and the fourth quarter of 2022, U.S. companies had a cash burn rate – the rate at which a company uses up its cash reserves – 38% higher than that of Canadian companies.

The SVB expected the net burnout rate of Canadian start-ups to drop even further in 2023 and pointed out that investments in these companies tend to yield higher returns.

“I think our businesses, on the whole, are better run than their American counterparts, but it will remain a challenging environment for them,” Albinson said.

“We had this adage that when the United States has a cold, Canada gets the flu, but it looks like the United States has the flu right now, and we’re going to have a really bad cold. »

Abdullah Snobar, managing director of the DMZ technology hub in Toronto, said he’s heard of a few founders looking to raise funds right now, and he expects them to have more difficulty.

Investors told these companies they would be reluctant to deploy capital until the market stabilizes.

Mr. Snobar foresees ramifications that will eventually follow for founders who don’t even seek funding.

“I think there’s going to be a lot of consequences that we’re just not aware of right now. »

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