U.S. bank failure treated as 'extinction event' in Waterloo Region ...

The failure of Silicon Valley Bank (SVB) in the U.S. led to a weekend of crisis management in Waterloo Region as roughly 10 per cent of tech start-ups in Canada faced a cash crunch following the bank’s collapse.

On Friday, U.S. regulators took control of the California-based institution, mainly serving the tech industry, after billions of dollars were withdrawn by fearful depositors.

“I think one phrase was ‘extinction event,’” said Chris Albinson, the president and CEO of Communitech. “There was really a fear that a whole generation of founders and companies that we’ve been working so hard to build over the last five to seven years could collapse.”

According to Albinson, the fallout in Waterloo Region impacted about 120 of the 1,200 start-ups directly.

“Companies and founders through the weekend were talking to their investors trying to figure out how they were going to make payroll this week,” said Albinson.

The rough weekend came as the sector was already facing economic challenges.

Albinson notes the sector has seen 750 layoffs year-to-date, and the SVB crisis could have a negative knock-on effect.

He points to an unnamed company, which he says was forced to layoff half its staff, about 20 employees, because a U.S. investor withdrew its funding to take stock of the SVB fallout.

“This liquidity crisis couldn’t have come at a worse time,” said Albinson.

Ottawa took action on Sunday, moving to take temporary control of the assets of the Canadian branch of SVB while also issuing a notice of intention to seek permanent control of its assets.

“By taking temporary control of the Canadian branch of Silicon Valley Bank, we are acting to protect the rights and interests of the branch’s creditors,” said Peter Routledge, superintendent of financial institutions, in a statement. “I want to be clear: the Silicon Valley Bank branch in Canada does not take deposits from Canadians, and this situation is the result of circumstances particular to Silicon Valley Bank in the United States.”

Berry Vrbanovic, the mayor of Kitchener, sees the government intervention as crucial in stabilizing the situation and securing the region’s tech sector.

“Government’s did what they needed to do to avert a crisis,” said Vrbanovic. “I think now we want to make sure that this sector, which is so important not only to our economy here in Waterloo Region, but from coast, to coast, to coast, can continue to thrive.”

Canada’s Information and Communications Technologies sector has more than 45,000 companies, with a large majority — over 40,000 — falling within software and computer services.

According to the latest Statistics Canada figures, the Canadian tech sector was worth about $242 billion in 2021, representing growth of 4.7 per cent.

Albinson points to about $1 billion in Canadian exposure to the SVB collapse. He notes not only are companies challenged in retrieving money tied up in the U.S. by the Federal Deposit Insurance Corporation (FDIC), the ensuing uncertainty and crisis of confidence could have a knock-on effect for the sector.

Waterloo Region companies raised $17.2 billion dollars in investment last year, but Albinson believes that funding, the key to fuelling growth, could begin to dry up if investors remain spooked by the financial fallout.

“If 60 per cent of the money that’s financing our companies here locally is coming from the U.S. and we’re already seeing examples where the U.S. investors are pulling back, that’s something that could be really systemically problematic,” said Albinson.

Ablinson calls the SVB collapse “akin to [the] 2008 [financial crisis] — a worrying sign for the weeks and months ahead.

“Even though our banks are really solid, it’s sort of the broader environment like, ‘what can you have confidence in?’” asked Albinson. “We’re quite concerned that, if not addressed quickly, that that will continue throughout the year, and it’s going to be, hopefully, not as bad as 2008 or 2001, but we could be in for a really tough year.”

Albinson hopes to see Canadian officials take similar steps made in the U.K., where HSBC rescued the British arm of SVB by buying the branch for £1. The bank not only seized assets, but transferred the funds to domestic accounts to better allow companies to access funds and refinance debt to continue paying workers and supporting growth.