The current downcycle has been painful – access to funding is scarcer and takes longer to secure, valuation resets, or structured investments with downside protection are more prevalent, and many companies have restructured or laid off staff. This has forced many companies to rely less on external funding, extend their runway to the next round of financing and accelerate their path to profitability.
While some industry watchers have taken the rapid reversal as a concerning sign of the sector’s volatility, others see through it and recognize the underlying strength of the ecosystem, particularly in Canada.
“The Canadian tech sector has grown over the past 10 to 15 years. The venture capital environment is deeper and broader across all stages, unicorns have emerged in all major Canadian cities and new upshoots are following suit. Despite all the headwinds, the industry has proven to be quite tenacious over the past 18 months,” says Benoit Veronneau, head and managing director of telecom, media, technology and healthcare investment banking for Montreal-based National Bank.
Canada’s tech sector is resilient
Rather than weaken Canada’s tech sector, recent challenges will strengthen it in the long run, ensuring the companies that have adapted are more robust and more attractive to future investors, says the bank’s head of technology and innovation banking, Tuyen Vo.
“A lot of companies in the tech space have pivoted their business models to become more self-sufficient, reduce cash burn and have taken a more balanced approach to growth. Unit economics always have been a key long-term success factor, but accelerating or creating a clear path to break-even has certainly become a key focus point,” says Mr. Veronneau.
“The companies that have changed their approach from growth-at-all-costs to more sustainable growth, they’re the ones who will emerge as more solid,” adds Ms. Vo.
Rapid change forced companies to focus
What made this period of change particularly challenging, Mr. Veronneau says, was its speed, which forced many business leaders to make consequential decisions quickly, with little information.
“It’s not as if this took three or four years to play out – it barely took a few months – which in the history of a company is a very short time frame to readjust in such a substantial fashion,” he says. “Let’s say you decide to right-size your business; if you cut too deep and need to turn around, it’s not an easy thing to do, so finding the right balance is a bit of a trial-and-error exercise.”
The Canadian edge
From that longer-term perspective, Mr. Veronneau says Canada’s tech sector has a lot of advantages, ranging from its top-tier educational institutions, which are graduating 72 per cent more math and computer scientists compared to 2016, to its proven ability to attract talent, partners and investors from around the world.
“From a 164-year-old bank’s perspective, we’ve seen many cycles, and we’re also seeing how Canada has become a place for talent, innovation, and creating leading technology companies,” says Ms. Vo. “That’s why we’re bullish on the sector.”
“We’re seeing new tech companies emerging truly from coast to coast, which is an interesting dynamic relative to where we were 15 years ago,” Mr. Veronneau adds. “The beauty of the Canadian tech ecosystem is that it’s actually quite diversified – obviously AI [artificial intelligence] is what everyone is talking about, and there are great companies pushing forward in the AI space in Canada – but there are actually a broad array of sectors growing in Canada – cybersecurity, supply chain management, payments, financial services/fintechs, IT services/cloud migration just to name a few.”
An optimistic outlook
National Bank is so bullish on Canada’s future in the technology sector that it acquired Silicon Valley Bank’s $1-billion Canadian commercial loan portfolio after the Californian institution faced significant financial challenges this past spring and was shut down by U.S. regulators.
“The SVB acquisition demonstrates our belief and our continued support of the Canadian technology ecosystem and doubling-down on a sector we truly believe in, even when market conditions are probably some of the most challenging in years,” Mr. Veronneau says, and Ms. Vo agrees. “We’ve been supporting the Canadian tech ecosystem for over two decades, across different lines of business, so this is another important step in that direction. And thanks to the acquisition we can now count on key members of the SVB Canadian platform; this is increasing depth, expertise and coverage of the tech landscape.”
Supporting innovation across Canada
Ms. Vo adds that the bank’s involvement in the country’s innovation sector now stretches from coast to coast, with expertise and resources provided to tech companies from their inception to an initial public offering (IPO). Today, National Bank works with tech leaders across a variety of its business lines, including commercial, private banking, financial markets, wealth management, and via its corporate venture capital arm NAventures, which invests directly in Canadian fintech startups.
Working with tech firms at each stage of their development provides the bank with a more holistic perspective on how to support the industry in both the immediate and longer term, Ms. Vo adds.
“We have always had a one client/one bank approach to supporting our clients and have the specialized resources, expertise and products coming together to help founders and entrepreneurs achieve their goals, at every stage,” she says.
“Technology companies’ ramp-up can be explosive, more than in any other industry. We need to be very agile to stay relevant. We accompany them as they experience the opportunities and challenges resulting from accelerated growth and scale. Partnering with tech companies is constantly evolving as these businesses can double or triple within a year,” adds Mr. Veronneau. “We can be there to provide these financial services throughout their evolution in a seamless fashion.”
Ms. Vo adds that the bank is especially eager to highlight tech companies’ success and share their stories at a time of pessimism in the industry. She explains that, like the banking crisis of 2008, global turmoil often serves to demonstrate Canada’s hardiness.
“In every economic or financial crisis, Canada tends to demonstrate that it is a stable, strong partner,” she says. “In 2008 and 2009, Canada emerged as one of the most steadfast banking systems in the world, and with what’s happening in the technology sector, Canada is again emerging more powerful.”
Mr. Veronneau agrees, adding that the recent challenges will only further the Canadian tech sector’s adaptability. “It hasn’t been an easy few months,” he says, “but all the changes that the Canadian tech leaders have made and been forced to make will better position them to take advantage of what’s coming in 2024, 2025 and beyond.”