A significant financial collapse occurred in the United States banking system on March 10, 2023. Silicon Valley Bank (SVB), considered a mid-sized U.S. Bank, failed, shaking investors and the markets. In addition, the bank’s international operations, including Silicon Valley Bank Canada, were affected. As a result, Silicon Valley Bank, as we knew it, is dead.
While banks in the United States sometimes fail, the ones that do usually aren’t the size of SVB. SVB was the 16th biggest bank in the U.S., with $209 billion in assets. There hasn’t been a failure of a comparably large bank since 2008 when Washington Mutual collapsed.
America’s economy is the largest in the world, and a significant disruption in their banking system could have far-reaching effects. Additionally, SVB was a worldwide operation, so their clients in other countries will be affected. To understand how the failure of SVB can affect you, it’s important to look at its history, what it did as a bank, what triggered the collapse, and where you can find alternatives in Canada.
The history of Silicon Valley Bank
Silicon Valley Bank opened for business on October 17, 1983. The company's vision was to fill a gap in the market for entrepreneurs and startups, particularly in the technology space. At the time, few banks were willing to lend the money startups needed because they considered the risk of lending to start-ups too high. In addition, most traditional lenders at the time didn’t have a solid understanding of the tech niche, making it difficult for entrepreneurs to secure financing.
There wasn’t a lot of competition in this market, and in order to make its vision work, SVB developed a business model that would support its mission. The company was a venture lender. A venture lender loans money to start-ups, but the loans typically come with higher interest rates and shorter repayment terms than traditional loans. Borrowers might have to pledge collateral to secure the loan. At SVB borrowers sometimes pledged up to 50% of their shares as collateral.
As innovation in the technology sector grew, so did the demand for the services of SVB. Eventually, Silicon Valley Bank opened offices around the world, including in India, Israel, China, Europe, the United Kingdom, Ireland, and Canada. As a result, Silicon Valley Bank Canada began its operations north of the border in 2019.
The bank expanded its lending portfolio as well. In addition to tech startups, SVB funded healthcare and biotech companies, software, hardware, and premium wineries. Some well-known businesses that were customers of SVB include Roku, Airbnb, Pinterest, and Fitbit.
Concerns about SVB spread through the marketplace, partly fuelled by social media, leading customers to withdraw all their money immediately. Unfortunately, much of SVB’s money was not in liquid investments, so they were overrun with demand for withdrawals without the available means to fulfil the requests. While several factors contributed to SVBs difficulties, a bank run was ultimately a major cause of the failure.
Once this happened, state regulators got involved, taking control of SVB. The Federal Deposit Insurance Corporation (FDIC) was appointed as SVB’s receiver. The bank was reopened on Monday, March 13, 2023, and renamed the Deposit Insurance National Bank of Santa Clara.
Will depositors get their money back?
In the United States, deposits are insured by the FDIC for up to $250k. However, in SVB's case, the government lifted the $250k ceiling on deposits and stated that all depositors will get all their money back. The government's intention in removing the ceiling on the insurable amount was to restore confidence in the banking system.
In the United Kingdom, HSBC bought SVB. HSBC is one of Europe's largest banks and the transfer of SVB's $8.1 billion in deposits means that depositors won't lose their money.
Silicon Valley Bank Canada
Looking for opportunities to expand internationally, SVB began operating in Canada in 2019. The bank then received a license from the Superintendent of Financial Institutions (OSFI) and opened its Canadian office in Toronto.
Opening a Toronto office was considered a good move because of its opportunity. In 2018, Toronto was named North America’s fastest-growing tech market for the second consecutive year.
The goals of the new office were consistent with their mission, which was to “ provide in-market commercial financing solutions to private and public technology and life science companies and their investors across Canada.”
The Canadian division suffered a similar same fate as SVB in the United States. The Office of the Superintendent of Financial Institutions (OSFI), the regulator of Canadian banks, took control of Silicon Valley Bank Canada on March 15, 2023. Additionally, a winding-up order was granted by the Ontario Superior Court of Justice. At this time, Silicon Valley Bank Canada had $864 million in assets and a loan portfolio of $435 million.
Silicon Valley Bank Canada’s main focus was working lending money to Canadian venture-backed start-ups. As a result, it did not take any individual or commercial deposits, although some of its Canadian clients also had deposits held at Silicon Valley Bank in the United-States. Since all deposits at Silicon Valley Bank in the US are now covered, all Canadians clients of SVB will get their deposits back.
What are the Silicon Valley Bank Canada Alternatives?
Silicon Valley Bank filled a gap in the market as a loan provider to start-ups and entrepreneurs. Traditional lenders would often decline to finance these types of business ventures. The lack of appetite for risk of Canadian banks helped Silicon Valley Bank Canada succeed.
So, if you are an entrepreneur in the tech space in Canada and need funding, where can you go now? The good news is that some of Canada’s big banks have been exploring this sector for the last few years and have developed their own venture lending programs to partner with tech startups. Other lenders also play a role in this market.
RBCx is a division of the Royal Bank of Canada (RBC). RBCx is a merger of its tech and banking platform with RBC Ventures. It offers capital solutions for venture capital and growth equity firms. Services RBCx offers include:
- Private banking
- Advisory services
- Foreign exchange
- Cash management
- General partner facilities
- Management company financing
- Capital Call and subscription lines
- Global business solutions
- Strategic Advisory Services
- Exclusive incentives
RBCx offers innovative products and services to tech companies of all sizes and in all stages of growth and has over 4,000 tech clients.
CIBC Innovation Banking
CIBC Innovation Banking is a division of the Canadian Imperial Bank of Commerce (CIBC) that originates from CIBC acquisition of Wellington Financial, a venture lender, in 2020. It focuses on the clean tech, life sciences, and tech industries. They offer banking services and customized financial solutions for businesses. Across North America, CIBC’s innovation platform manages $11 billion in funds.
Founded in 2009, Espresso Capital provides venture debt solutions for companies in Canada, the United Kingdom, and the United States. It primarily works with health care, technology, and other high-growth vertical companies. Espresso Capital has worked with over 300 companies, providing their clients with capital and flexible credit structures. The company has offices in Toronto, Chicago, San Francisco, and London.
The company opened for business in Canada in 2015 but has been operating since 2007. While Ondeck Canada is technically not a venture lender, it provides financing for small businesses in the United States, Canada, and Australia and has funded more than $13 billion in loans since its inception. OnDeck Canada sets itself apart by offering a quick turnaround for loan applications (as little as 10 minutes), multiple lending options, and the opportunity to connect with a lending advisor to help you with your business needs.
Business Development Bank of Canada
Also known as BDC, the Business Development Bank of Canada is one of the largest and most entrepreneur friendly venture lender in Canada. As a crown corporation, the BDC don't solely focus on profitability and, as a result, it is a great place to start if you need funding, because it is known to take on more risk than their competitors, while offering competitive rates. The bank has over 30 years of experience working with tech companies. Services include venture debts, equity investments, and advisory services.
Are there potential pitfalls to Canadian alternatives?
Now that Silicon Valley Bank Canada is no longer among us, there are possible roadblocks entrepreneurs might encounter when approaching Canadian venture lenders. Without competition from Silicon Valley Bank Canada, big banks may raise their rates, demand more personal guarantees, or be very selective with who they choose as clients. This approach could lead to only the least risky clients receiving the funding and services they need.
The good news about Canadian alternatives
Despite the concerns, the failure of Silicon Valley Bank Canada shouldn’t cause too much disruption if you’re an entrepreneur. Part of this is that the bank hadn’t been in Canada very long. In addition, Canadian competitors such as RBC and CIBC have been gearing up to compete in this space for about five years and have become more familiar with it as a result of the process. Alternatives to the banks are available, too, and could be a great fit for your business.
Working with a Canadian bank owned venture lender can have advantages. First, the Canadian banking system is considered to be very sound. Most of the big banks have a long history of success in Canada. Secondly, they offer an extensive range of products and services domestically and internationally. The products and services provided can be very beneficial if your business operates in more than one country. Third, you can do all your business banking with an established Canadian bank, including business credit cards, bank accounts, investments, and lines of credit. Finally, they offer services to help you grow your business which can be invaluable.
Specialized lenders play an important role as well. They work with a specific market and their knowledge can give them an in-depth understanding of your needs as an entrepreneur.
Going forward without Silicon Valley Bank Canada
The collapse of Silicon Valley Bank Canada will be problematic for some because it might make borrowing for start-ups more difficult. Although it hadn’t been in the Canadian market long, SVB challenged our local venture lenders, which are primarily the big banks. With less competition, there's a good chance it'll be harder for venture-backed companies to raise debt.
If you’re a tech, life sciences, or clean tech entrepreneur, you may be able to find the funding and advice you need from the BDC, Canada’s traditional banks, or from a specialized lender. These institutions are evolving to meet the needs of entrepreneurs and start-ups, but they still might be unwilling to take on enough risk. By researching your options, you might find a better financial partner than Silicon Valley Bank Canada.