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Data & Analysis

A Deep Dive into Canada's Burgeoning Venture Debt Market

Venture debt, a type of debt financing designed specifically for venture-stage companies, is seeing growing popularity among Canadian companies and investors alike.

Venture debt is primarily aimed at startups and high-growth companies that may not have significant assets or cash flow to secure traditional loans or seek more debt than is available via traditional lending, and is often used in addition to equity financing to extend the runway between equity rounds. It helps startups bridge funding gaps and invest in growth opportunities without diluting existing shareholders.

This article breaks down some of the trends in the Canadian and global venture debt landscapes in the past five years. 

Venture Debt Deal Sizes Growing Since 2018

Venture debt dollars invested into Canadian companies has been steadily increasing in the past five years, according to analysis of CVCA Intelligence data of Canadian venture debt deals from 2019 to September 2023

The total amount of venture debt dollars invested into Canadian companies grew from less than $200 million in 2018 to over $700 million last year. However, with two months left to go this year, it doesn’t look like 2023 will continue the trend. 

In comparison, total global venture debt deal sizes saw a sharp increase in 2021 and 2022 after taking a dip in 2019 and 2020. Similar to Canada, 2023 global venture debt deal sizes up to September is not on track to surpass 2022 figures.

Canadian companies saw a dip in the number of venture debt deals in 2020 during the COVID-19 pandemic, but bounced back to pre-pandemic levels by 2021 and has continued to increase ever since.

Globally, the number of venture debt deals has fluctuated over the past five years, with a spike in 2021, but comparatively less deals in 2022 and 2023.

Among the top venture debt lenders to Canadian companies are CIBC Innovation Banking, Espresso Capital and Brevet Capital Management. 

Mark Usher, executive managing director at CIBC Innovation Banking said venture debt deals have been increasing as most Canadian banks offer it now.

There’s definitely an increased focus on it,” he said. The implication is, all the banks recognize that it’s a growing part of the economy.”

According to CVCA data, over the past five years, Canadian companies have engaged in venture debt deals with several financial institutions including CIBC, Bank of Montreal, National Bank, BDC, RBCx — the tech banking and innovation arm of RBC, and Scotiabank. These institutions are addressing a clear need in the Canadian market for venture debt instruments.

However, Usher mentioned that the market has become more challenging over the past twelve months for providing venture debt, given that venture debt providers usually focus on top line growth. The companies, during the last year, have encountered growth rates to be more challenging than before owing to economic conditions like inflation and higher interest rates.

Alkarim Jivraj, CEO of Espresso Capital, said the Canadian venture debt market is unique in the sense that almost all of the major banks now operate in this category. 

Toronto-based Espresso Capital was founded in 2009 with a focus on tax credit financing, and fully shifted to venture lending in 2016, about the time that the current leadership team bought the business. Espresso’s portfolio is three-quarters US-based, with the balance split evenly between Canada and the UK. 

According to Jivraj, in the U.S, UK and other countries, non-bank lenders represent a far bigger proportion of venture lending compared to Canada, and often provide materially higher leverage than banks do.

While bank participation in venture lending is good for Canadian borrowers, in the sense that they can get their venture debt at bank pricing,’ it has also resulted in Canadian companies carrying less debt relative to their enterprise values than their U.S. counterparts,” he said. 

Also, a market dependent on banks for their venture lending needs may experience greater volatility in lender risk appetites across cycles than a market that has more diversity of lender types,” said Jivraj.

Leading the Charge: Venture Debt Financing Flourishes Among Canadian Lenders

Since 2018, CIBC’s tech lending division, CIBC Innovation Banking has been leading the pack in venture debt funding, with $845 million of capital to Canadian companies. Espresso Capital came in second at $220 million.

CIBC Innovation Banking is a specialized arm of CIBC that in addition to providing capital to the innovation economy, provides financial services and expertise to technology and health-science companies and investors.

Usher said venture debt breaks the​“two rules of lending money” which are ensuring the company has cash flow and having security if the cash flow doesn’t materialize. 

Intuitively, it doesn’t make sense to lend the money because they’re cash flow negative and they don’t have any assets other than the products that they’re developing,” he said. That’s why they call it venture debt because it sounds a bit like venture capital, but it’s debt.”

Usher’s experience is that these companies are in fact less risky than the companies/​borrowers in a traditional bank’s portfolio.” You just have to understand them and lend to them a little differently,” says Usher. 

Addressing the notion of risk, Jivraj from Espresso Capital offered a different perspective, emphasizing the relative safety and the necessity of specialized skills in venture lending. While venture lending may superficially look risky, the opposite is true: private venture lending is no more risky if you compare its losses to the broader direct lending category. However, it does demand a unique set of highly specialized skills and capabilities to manage and thrive in this sector,” Jivraj remarked.

National Bank’s Acquisition of Silicon Valley Bank’s Canadian Portfolio

Canada’s venture debt landscape came to the forefront of the Canadian financial industry this year after the collapse of Silicon Valley Bank in March 2023

The California-based commercial bank, popular with tech startups, left a void in the Canadian venture lending landscape, and several of Canada’s major banks stepped in to fill it.

In August, National Bank bought Silicon Valley Bank’s Canadian portfolio, comprising around $1 billion in loan commitments, $325 million of which were drawn and integrated the assets into its Technology and Innovation Banking Group. Alongside this transaction, National Bank also hired a cohort of ex-SVB employees to join its Tech Banking arm. 

Several other banks have hired former SVB employees, including CIBC and Scotiabank.

Tuyen Vo, head of National Bank’s Technology and Innovation Banking Group said the SVB acquisition is integral in her firm’s bullish outlook on the tech sector in Canada.

We have actively deployed [venture funding] in recent years,” said Vo. We’ve maintained our support to the tech sector through COVID, through the interest rate hikes, the economic downturn. Following years of high growth across the country by NBC Tech and Innovation Banking, we remain confident about the future of Canadian technology-based companies, and our acquisition of the SVB Canada loan book demonstrates this.”

Software Companies Are Top Companies for Venture Debt in Canada and Globally

Technology companies, specifically software companies, topped both Canada and global in terms of invested venture debt dollars.

Canadian internet software and service companies saw $947 million dollars in venture debt dollars invested in them between 2018 and 2023. Non-internet and mobile software companies came in second, with $550 million.

Globally, software companies received $11 billion venture debt dollars. Commercial services was the second biggest category for venture debt.

Implications of Increasing Popularity of Venture Debt

Espresso’s Jivraj said the open question” in his mind around venture debt is whether it will become a more significant portion of Canadian technology companies’ balance sheets.

A little debt on every tech company’s balance sheet is nice, but that won’t really move the needle, in the sense of materially extending runways, materially reducing founder dilution or materially improving investor outcomes,” he said.

James Povitz, a Principal on the investment team at NAventures, National Bank’s corporate venture capital arm, said his firm is seeing some of their portfolio companies, on bridge rounds or on early raises, using venture debt to increase runway even with higher interest rates that come with that.

I think there’s a general sentiment to try to access as much capital as possible as quickly as possible,” said Povitz. 

As a result of more early-stage companies accessing venture debt, said Povitz, these companies not only will have more capital, but will also have to deal with more financial covenants early on.

These covenants will add another level of governance and oversight to earlier stage companies that historically, might not have existed in the same way,” he said.

Another impact of the spotlight on venture debt in the context of the SVB acquisition, said Povitz, is opening the eyes” of Canadian founders to more diverse funding options.

There are a lot of different financing options. They all need to be considered,” said Povitz. I see all of them from government grants to VC dollars to venture debt, growing over time as the financing ecosystem in Canada continues to develop and grow.”

In this comprehensive analysis, Kayla Zhu, Freelance Data Journalist, provides a detailed exploration of the evolving venture debt landscape in Canada.