CIBC accelerates push into startup financing, spurring competitors to follow

When Canadian Imperial Bank of Commerce acquired Wellington Financial early in 2018, the bank signalled its desire to tap into the expanding ecosystem of high-tech startups that many a banker had shunned as too risky.

Ever since the dot-com boom crashed spectacularly in the early 2000s, banks had pulled back from technology banking and looked warily at software startups as cash-burning ventures that sometimes operated at a loss and had few physical assets to secure loans.

But as Canada’s tech sector flourished, levels of investment and government support were not enough to help companies grow. Canadian tech companies typically turned to U.S. players such as Silicon Valley Bank and Comerica Inc., and competed for scarce pools of venture capital. Those same companies have been underserved by Canadian banks, and by acquiring Wellington’s 17-person team, CIBC picked up the expertise it needed to be an instant competitor.

The challenge for CIBC is to keep its momentum as competition heats up, and forecasters grow wary of how long the current economic expansion can last. “Looking at 2019, it’s cloudier,” said Mark McQueen, the former Wellington boss who is now president and executive managing director for CIBC Innovation Banking. He has vivid memories of the pain tech companies experienced in the dot-com crash and the 2008 financial crisis. Banks have been burned by lending to technology companies before, and CIBC is no exception. As more players pile into the market, driving down the price and conditions on early stage debt, their tolerance for risk could be tested again.

“The whole point was to put more capital into the ecosystem, and it’s happening,” Mr. McQueen said. “And there’s still not enough.”

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In slightly more than a year, CIBC has built a roster of 85 clients and signed or closed more than $800-million in financing, about 60 per cent of them in Canada and the rest in the United States. By comparison, a good year at Wellington would have cleared $100-million to $120-million in transactions, four-fifths of them south of the border. CIBC is now considering 173 prospective clients collectively in need of $1.4-billion in funding.

The incumbents have reacted. Silicon Valley Bank is putting bankers on the ground in Canada after being granted a license to operate in the country in March. Domestic rivals Royal Bank of Canada and Bank of Montreal have become more aggressive in their technology banking efforts. And venture-debt firms such as Espresso Capital have made inroads.

“Suddenly there’s a huge amount of capital that’s flown in," said Matt Roberts, a partner at venture-capital firm ScaleUp Ventures. “Will the momentum of this continue 24 or 36 months out? ... It’s an open question.”

CIBC Innovation Banking arrived with a splash: Its first deal was a US$50-million infusion of capital into social-media management firm Hootsuite Media Inc. This month, the CIBC team made its largest commitment to date: a US$55-million standby credit facility for Lightspeed POS Inc., a cloud-based software provider serving restaurants and retailers.

But the CIBC team’s bread-and-butter transactions are in the $2-million to $5-million range, and it’s this infusion of smaller sums for earlier-stage firms that promises to have the greatest impact on Canada’s tech industry.

“There’s really no company that’s too small or too large for us to look at any longer,” said Amy Olah, executive director for CIBC Innovation Banking, who was at Wellington for nearly two decades.

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Vancouver-based Jane Software Inc. is a good example. Founded in 2014, the company sells software for a monthly fee that helps physiotherapists, chiropractors and other health-care practitioners with tasks such as medical charting and insurance billing. For years, the company used its own revenue to grow. It now has 65 staff and 27,000 clients from Canada to New Zealand.

Recently, Jane went looking for credit to cover potential future expenditures, and switched from a rival bank to CIBC, which provided a $2-million credit line. The world of software as a service, or SaaS, “is like a language you have to learn,” said Alison Taylor, Jane’s founder. And CIBC’s Vancouver-based managing director, Joe Timlin, was fluent.

“It’s the speed difference," Ms. Taylor said. “They can just go back and forth and speak the language faster.”

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Yet, CIBC’s innovation banking unit remains something of a startup itself rather than a meaningful contributor to the bank’s bottom line. Its financial results aren’t disclosed, and, as a result, many bank analysts haven’t paid close attention to it. Mr. McQueen said his longer-term aspiration is to have 1,000 clients. “We’re building a 20-year business that will be meaningful to [CIBC] investors long before then," he said.

As with many startups, the pace of change inside CIBC’s new unit has been its most difficult challenge. Wellington clients did not want to lose people they were accustomed to, Ms. Olah said. In fact, 15 out of 17 stayed. And while the new CIBC unit has worked hard to preserve Wellington’s close-knit nature, “there’s always going to be a bit of culture change."

In its first 16 months, CIBC Innovation Banking has hired 13 Canadian staff and five in the United States, opening offices in Vancouver, Montreal, Denver and Reston, Va., with plans for four more across North America. Talent poached from rivals includes managing director Rob Rosen, who ran Comerica’s Canadian tech banking desk for 14 years, and Denver-based managing director Charlie Kelly, formerly of Silicon Valley Bank.

“A year later, they are the go-to shop," said John Ruffolo, the venture-capital investor who formerly ran OMERS Ventures. But the real test will come when CIBC has to stand by clients through an economic downturn, he said. “Once you get through that cycle, and you know that [CIBC] didn’t panic and they stayed in, that’s when you know.”

The promise of a steady hand in hard times, backed by CIBC’s $600-billion balance sheet, is part of the bank’s pitch to technology clients. When a company has “a hiccup in their revenue,” Mr. McQueen said, they want to know “that the person taking that call has enough seasoning to know the difference between a hiccup and a five-alarm fire.”

CIBC is also betting that the technology sector has changed since the five-alarm fires of the dot-com bust. At the time, bankers worried that tech companies were “fads,” Mr. Rosen said, and doubted the sector would take root in Canada. “Obviously it has,” he added, and "matured now to a point where there are a lot more entrants and there are a lot more options for companies.”