Banking on Tech Start-Ups at Silicon Valley Bank, Risky Tech Start-Ups Are Lucrative Business
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SATURDAY, AUGUST 8, 2015 :: LATIMES.COM/BUSINESS :: PAGE C1 COPYRIGHT 2015 / THE LOS ANGELES TIMES Banking on tech start-ups At Silicon Valley Bank, risky tech start-ups are lucrative business BY E. SCOTT RECKARD Few banks are as close to the in- dustries they serve as Silicon Valley Bank is to the technology world. An industry mainstay since the 1980s, the bank veers far from the course of conventional financial institutions. Part lender, part consultant, part cheerleader and part investor, Sili- con Valley Bank has been a nurse- maid to countless start-ups — Airb- nb, Fitbit, Pinterest and TrueCar, to name some recent ones — as well as banking the venture capitalists who fund them. By many measures, the bank has outperformed bigger rivals, not just by lending to fledgling firms but by taking small ownership stakes in them to help offset their higher risks. RBC Capital Markets analyst PHOTO BY DON BARTLETTI Los Angeles Times Joseph Morford, a fan who has fol- DAVE MCCLURE, founding member of 500 Startups, gives a presentation at a San Francisco event in lowed the company for 23 years, April that brought together tech companies and venture capitalists. Silicon Valley Bank was a sponsor. said clients once would jump to bigger banks as they grew. At $40.2 ware, hardware and healthcare com- Other banks, including City Na- willing than others to focus on a billion in assets, Silicon Valley Bank panies. Loans and other assets are tional Corp. and Comerica Inc., have start-up’s growth prospects rather now has the heft to handle them up 81% since 2013. made plays for tech clients “but have than its current financial condition from start-up to initial public offer- Even after a recent sell-off, not had even a small percentage of and to lend money so businesses can ing, multiplying its profits on larger stock in the bank’s parent compa- the success,” said analyst Gary P. expand while awaiting the next loans and fees. ny, SVB Financial Group Inc., has Tenner at D.A. Davidson & Co. round of venture capital funding, These days the bank is following risen 55% in the same period — far “It’s not just a question of being said investor Mark Suster, a client the venture capital trail abroad, with surpassing the gains of giants like there” as the industry takes off, Ten- and managing partner at Upfront 8% of its loans overseas and 18% of JPMorgan Chase & Co., Citigroup ner said. “It’s the relationships Sil- Ventures in Los Angeles. deposits from other countries. Inc., Bank of America Corp. and icon Valley Bank has developed over At Cornerstone OnDemand Inc. Deposits and other funds man- Wells Fargo & Co. The shares have the years and, frankly, their reputa- in Santa Monica, for instance, the aged for clients are up 77% in the shot higher than shares of region- tion. I think they probably get the bank “created a new type of financ- last two years, reflecting venture al competitors as well, with a more first look at a lot of deals.” ing for us that they now use with investments and stock-sale proceeds than twofold gain over the KBW The bank, which recently opened cloud-based companies around the that are flooding the coffers of soft- Regional Bank index. an office in Santa Monica, is more country,” said Adam Miller, chief Note: May not be reproduced or retransmitted without permission. For permission call LAT Reprints at 1-800-LA Times. The sale of this reprint does not constitute or imply the publisher’s endorsement of any product, service, company, individual or organization. C CALENDAR: BUSINESS and video messaging firm Snapchat “The market has become more Inc. is growing up. Google Inc. and competitive, and with greater fre- Yahoo Inc. are setting up Southland quency we have elected not to com- hubs in nearby Playa Vista, close to pete to win business that we thought a Facebook Inc. facility. was too highly leveraged or too Los Angeles also is where the loosely structured,” Marc C. venture capital money is flowing, Cadieux, the bank’s chief credit of- turning it into a major center nation- ficer, told analysts on last week’s wide for venture-backed start-ups, earnings call. said bank Chief Executive Gregory The bank certainly has competi- W. Becker. tors, and analyst Michael Pachter at “Innovation is booming there Wedbush Securities in Los Angeles right now,” Becker said. “The ener- thinks plenty of other banks are PHOTO BY DON BARTLETTI Los Angeles Times gy and growth we’re seeing in the capable of meeting the needs of DAVE McCLURE, left, of 500 Startups chats with Claire Lee of Silicon Santa Monica area reached an in- growing companies for loans to fi- Valley Bank at the San Francisco convention. By many measures, the flection point, so it made sense to nance expansion. But most do tech bank has outperformed bigger rivals. add another location.” lending as only a side business or Given the cyclical nature of the will lend only to companies that executive of the employee-manage- years, the bank said. tech industry, one question is how have grown well beyond the high- ment services company. The bank is aggressive in court- well Silicon Valley Bank can man- risk early stages. It’s common for lenders to provide ing investors as well, part of why it age the next downturn. Most also don’t come close to receivables financing, which uses has become the “first call” bank for After the dot-com bust in 2000 Silicon Valley Bank’s well-connect- money owed to a business as collat- many of them, said James Slavet, a and the financial crisis in 2008, its ed network of outside experts, men- eral for loans. But even before Cor- Menlo Park, Calif., venture investor shares fell more than 70%. That tors, tech executives, venture capi- nerstone went public in 2011, Silicon with Greylock Partners. history weighed on the minds of talists and current and former clients Valley Bank took a riskier step — “When I joined Greylock nine investors after the stock hit a 52- ready to help its upstart entrepre- making loans secured by expected years ago, a top guy at the bank im- week high of $150.63 on July 20 and neurs — no matter how farfetched revenue from contracts for services mediately reached out and said, quarterly earnings were released an idea might seem. the company had not yet delivered, ‘Hey, it would be great to meet up three days later. Becker has heard them all. The Miller said. and see if there’s any way I can be Though its net income rose 69% chief executive raised his eyebrows “Because they start so early, they helpful.’ I didn’t get that reach-out to $86.1 million, beating analysts’ over one plan from Travis Kalanick, are willing to kiss a lot of frogs; they from other institutions,” he said. estimates, it said two large loans a UCLA dropout from Northridge. meet a lot of companies that don’t The bank, which opened in San went sour and helped push an index Kalanick already had built and sold get very far,” Miller said. “But that Jose in 1983, now is based in a of credit troubles to the highest lev- Red Swoosh, which enabled users willingness to work with riskier cluster of low-rise Santa Clara of- el since 2010. Expenses rose, and to swap music and videos over the clients puts them in an advantageous fices where an in-house TV studio executives acknowledged that recent Internet, when he started gushing position later on” as companies grow connects executives to the bank’s outsized gains on stock warrants about a global plan to connect pas- and require more banking services. offices in 27 U.S. technology cen- would probably not continue. sengers with drivers willing to hire Silicon Valley Bank often re- ters and in London, Beijing, The shares plunged, closing Mon- out or share their vehicles. quires founders to hand over small Shanghai and Herzliya Pituach, a day at $137.90, as the sharp drop in “He was penciling out this plan ownership stakes in return for more wealthy Israeli enclave on the wa- Chinese stock prices undermined for world domination,” Becker said. favorable credit terms. Profits on terfront near Tel Aviv. the prospects for Silicon Valley “You sit there and say to yourself: equity warrants — options to ac- As a leader in serving software, Bank’s expansion plans there. ‘This is frickin’ insane. How are you quire stock cheaply — can yield big hardware, biotech and healthcare Executives at the bank have going to do this?’” profits when companies go public. start-ups, with a side niche in lend- warned recently that tech invest- Still, Kalanick became a client, The bank, for instance, recorded ing to premium wineries, the bank ments may be overheating, though and his vision was made real as Uber a $23.6-million gain on warrants in has served Southern California from not to the degree seen during the Technologies Inc., which is valued the second quarter, including $13.9 offices in Sherman Oaks and Irvine. dot-com craze. They said Silicon at $50 billion, based on the latest million related to the initial public It tapped into shifting trends in Valley Bank, while enjoying a rep- round of venture capital it is raising. offering of FitBit Inc., the maker of May by opening the Santa Monica utation for being highly competitive fitness-tracking wristbands. Gains office to focus on the tech boom on loan rates and terms, has been [email protected] on the tactic have exceeded losses along the coast, where online dating ceding some deals to new entries in Twitter:@ScottReckard on early-stage loans over the last 10 service EHarmony Inc.