A leading U.S. bank catering to technology companies and venture capitalists is putting down roots in Canada, hoping to be a lender of choice for the next wave of Canadian innovators.
Silicon Valley Bank, based in Santa Clara, Calif., filed an application Thursday with Canada's banking regulator for a license to open a lending branch in Toronto.
Its push into Canada comes just as the federal government has unveiled an innovation-friendly budget pouring hundreds of millions of dollars into venture capital investments, clean technology firms and the flourishing artificial intelligence (AI) sector. In early 2016, Prime Minister Justin Trudeau pitched Canada as a hub for technological innovation to billionaires and global leaders at the World Economic Forum in Davos.
The bank, known as SVB to many of its clients, has $45-billion (U.S.) in assets as of Mar. 31, and has carved out a major niche with offices across the U.S. while growing quickly into outposts in London, China and Israel. (The firm pulled back from its presence in India due to concerns over the regulatory environment.) But now, the lender that has built its business by cozying up to entrepreneurs, private equity players and venture capitalists south of the border is looking to build bridges to expanding innovation hubs in Canada.
If successful, the bank won't take deposits in Canada, preferring to focus on commercial lending. The next step would be to hire a general manager for Canada, likely a Canadian. John Ruffolo, the chief executive officer of OMERS Ventures, said it's an open secret that the hunt is already on. And then SVB must find a location to place its branch.
Canada is "just a natural place for us to look at a next step," said Greg Becker, the president and CEO of SVB, in an interview at its California headquarters. The bank is also eyeing Germany as part of its expansion plan, he added.
The bank, a subsidiary of SVB Financial Group, is treading lightly around regulators and competitors as it enters Canada, but it also needs to stand out if it is to win a bigger slice of the Canadian market. John China, SVB's head of technology banking, believes the Office of the Superintendent of Financial Institutions (OSFI) "values a bank that brings something differentiated to the market, versus doing the same old thing."
Mr. Becker describes SVB's niche as "the innovation economy," meaning companies in high-tech, clean tech and life sciences, but also private equity players and even wine producers. The bank counts nearly 30,000 companies as clients. But it also banks more than half of all venture-backed companies in the U.S., and about 60 per cent of all American venture capital firms.
Far from the skyscrapers that dominate most global financial districts, SVB's headquarters in a suburban Santa Clara plaza is made up of connecting two-storey, slate grey buildings wrapped around a pavilion furnished with bocce ball courts, table tennis and an outdoor coffee bar. It's a place a young entrepreneur from the Valley might feel at home.
Though SVB has a reputation for banking startups, truly early-stage companies – those with little to no revenue – only account for about 6 per cent of its loan book. And the portion of the portfolio servicing more mature companies is growing faster, which lends stability to the business.
The ingredients in the "secret sauce," according to Mr. Becker, are a mixture of products tailored to high-growth companies, deep industry knowledge, and an "entrepreneurial spirit" that thinks about speed and can stomach risk and volatility.
Banks typically look for business models they understand well – "What's their cash flow? What's their EBITDA (earnings before interest, tax, depreciation and amortization) coverage?" Mr. Becker said.
But the kinds of firms his bank targets are often growing fast, losing money, and have complex, volatile business models. "The volatility is great because they're doing something new," he said. "We get that, and there's a trust that we're going to be in there and stay in there and support them."
Where clients are concerned, companies come and go, but SVB has long and deep relationships with the entrepreneurs who create them and the investors who back them – some of whom might be banking their fifth or seventh company with SVB, Mr. Becker said.
Jack Abraham is one such customer. The entrepreneur, who founded online shopping startup Milo in his 20s and sold it to eBay for a reported $75-million (U.S.), now runs Atomic Labs, a San Francisco-based venture fund that forms and builds startups, starting with its own capital. The company opened an office in Waterloo, Ont. about a year ago to tap the region's well of engineering talent, and now has about 70 Canadian staff, with a plan to double that number soon.
"We've banked with [SVB] for every company we've started within Atomic, all eight, and we plan to for all the future ones," Mr. Abraham said in an interview at the company's San Francisco offices.
He's found most banks he's dealt with "like a black box. The people are inaccessible. They're not willing to be creative and problem-solve with you," he said. By contrast, SVB's slick, simple website and mobile app and e-mail-friendly bankers appeal to the "entrepreneur on the go" in him. And the bank is "a great partner for venture debt, with terms that make a lot of sense."
Mr. Abraham thinks it could be "helpful" when the bank sets up shop in Canada. "I think for [the Waterloo] region, SVB can also serve as a bridge and a decoding mechanism for the people and financiers that can help them grow their companies here in Silicon Valley," he said.
Silicon Valley Bank already lends money to Canadian companies with U.S. operations, through so-called suitcase banking. When companies set up subsidiaries, sales offices or development shops in the U.S., SVB sometimes gets "pulled in" through relationships with venture capitalists, lawyers, or company executives. The bank won't disclose how much business it does in Canada now, but Mr. China said: "It's pretty small compared to our existing business. I would say we're pretty significant in Canada though."
Igloo Software, a digital workplace solutions provider with about 130 staff based in Kitchener, Ont.-based, started out banking with a major Canadian bank. But when it came time for the business to begin borrowing, vice-president of finance Mark Stevenson appealed to a range of Canadian lenders, but hit a roadblock. "Our chartered banks' risk profile didn't fit lending with small, growing companies in new markets," he said.
In 2013, he discovered SVB by word of mouth, and the Californian lender is now Igloo's primary bank, holding the Canadian firm's U.S. accounts and line of credit. (SVB has a relationship with Bank of Montreal, through which it services Igloo's Canadian accounts.)
"SVB has been a fantastic banking partner. They gave us credit when the Canadian companies wouldn't, and they have continued to grow and work with the company," Mr. Stevenson said.
As an unlicensed bank in Canada, until now, SVB has been prohibited from soliciting business north of the border, and has had to settle for hosting dinners to meet entrepreneurs without asking for their business outright.
With a Canadian lending license and branch, that would change. "Generally speaking, the goal would be to lend first in Canada, and then begin to welcome them and shepherd them into a cross-border relationship to a U.S. [subsidiary], where we would provide the full banking services to that company," Mr. China said.
"You can no longer wait for sort of reactive solicitation. It's too exciting. The market [in Canada] is so exciting."
With files from Sean Silcoff in Ottawa