David Ketsdever and Greg Becker

Technology's Banker

December 05 / January 06 By: Dean Takahashi Volume 3 Number 6

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Silicon Valley Bank is a unique financial institution. Founded in 1982, it focuses on banking for technology-related companies. The idea was to help entrepreneurs in the technology business get off the ground. So the company started out with practices that were very different from typical banks. It took risks by lending to companies that were not profitable and might not be for some time. Staying close to the entrepreneur has been its mantra. No other financial institution in the country was built from the ground up to be a banker to startups.

"Technology-related companies are investing for a fairly long period, losing money and requiring a lot of capital," says Greg Becker, chief operating officer of the bank's commercial banking practice. "The venture capitalists finance them. Our bank built up a unique knowledge of how that model works. We work with a significant number of companies that are pre-profit or in some cases pre-revenue."

Now the company has 1,000 employees with 27 branches across the U.S. and two overseas. It has quarterly average deposits of $4.1 billion, average gross loans of $2.3 billion and $12.3 billion in average client directed funds. Its success, and recovery after the downturn, is a bellwether for the health of the tech industry. Deposits, investments, loans and international income growth have been going in the right direction this year.

"While it takes on risks that others avoid, it also earns outsized returns on its lending through high-interest-rate spreads and warrant income," says Fred Cannon, a Wall Street analyst at Keefe, Bruyette & Woods. "It is paid well through the unique risks it takes."

So what are the indicators about the bank's bread and butter, the formation of new startups? The number of small companies being formed is down dramatically. A record 3,840 companies were formed in 1999, but that dropped to 1,202 in 2001 and steadily declined to only 34 so far this year. But the bank's deposits have gone up because venture money is still pouring into existing companies that are getting more funding in later stages, according to Gary Townsend, a Wall Street analyst at Friedman Billings Ramsey.

Over the last 23 years, it has worked with more than 30,000 companies. It played an important role in lending money in the early years to what are now big tech firms: Cisco Systems, Electronic Arts, Intuit, JDS Uniphase, KLA Tencor and Veritas. The bank has 11,000 clients today, and half of all venture-backed companies in the U.S. are clients. Through its venture arms, the company has limited partnership interests in more than 250 venture funds, and 515 venture firms are among its clients. Cannon says that the company has the niche of lending emerging companies largely to itself.

"We have a great deal of interaction with venture capitalists," Becker said.
Commercial banking accounts for about 70 percent of the bank's business. Within that, about 60 percent is focused on technology, 25 percent on life sciences, and 15 percent on wine. The company also has divisions that provide services to venture capitalists, global businesses and private clients who have high net worth. Its affiliates include SVB Alliant for technology merger and acquisition services, SVB Securities for broker-dealer investment services, and SVB Asset Management, a corporate investment advisor.

For startups, Becker says that the bank has a wide variety of financial options beyond a typical business loan. "We tailor our product so we can offer them more value than other banks," he says.

Banks typically lend based on cash flow, but many tech companies don't have cash flow. The company will make loans based on the pedigrees and connections of the founders of a company. Silicon Valley Bank will do equipment financing, working capital loans, loans based on intellectual property. It issues asset-based lines of credit or receivable-based lines of credit, with little regard to financial condition. The terms are better for startups with good prospects. For those struggling, the loans are tied to assets so that the bank's exposure isn't as bad in case the company goes belly-up. The startup with the good prospects would have fewer restrictions on funding, while the one that is struggling would have to meet certain financial milestones.

By lending to venture-funded startups, the bank makes its venture capital money last longer so that they have a longer runway to get their business started and don't have to return to the VCs—€”and give up more equity—€”so soon. That means the founders of the company wind up owning more of their own business at the outset.
"We play an intermediary role," he says. "It's like we're coming in at the same time as the VCs, but we are a lender."

In that sense, Silicon Valley Bank's traditional business isn't venture capital. It makes loans. It doesn't take equity stakes and so it doesn't take the same kinds of risks that VCs do. Since its financial instruments are often backed by some kind of asset, the company isn't as exposed to risks as VCs are and so it doesn't have to be as concerned about picking only winners. But the company does work with serial entrepreneurs that it has financed before. It will make loans to repeat CEOs or repeat CFOs.

"We have proven ourselves to be go-to, patient people who work in good times or bad," Becker said. "That's a differentiator."

When Becker joined the company in 1993, its market capitalization was $50 million. Now it hovers around $1.9 billion.

It's come a long way since it began trading over the counter in 1984. The bank merged in 1986 with National InterCity Bancorp but by 1988 it still had only five branches in Silicon Valley. By 1989, it opened a key branch at 3000 Sand Hill Road, the business park in Menlo Park, Calif., that is home to dozens of venture capital firms.

Around 1990, Silicon Valley bank expanded geographically. It set up branches in other technology hotbeds, including Boston; Beaverton, Ore.; and Orange County, Calif. The office in Boston has built up to 90 employees. Now it has 27 domestic branches, and in September, 2004, it established its first international branches in London and Bangalore, India. The strategy is to follow the technology innovators.

In 1992, the company posted its first loss as a result of difficulties in the real estate market. It reengineered its business and named John C. Dean as president and CEO. One of his first moves in 1994 was to establish a premium wine practice.

While that seems like an odd extension of a technology-related practice, Becker says it made sense because so many of the company's customers had opened or bought their own vineyards. Venture capitalists and technology executives have used their riches to spend on their favorite passions, including wine. So Silicon Valley Bank by default built up its own expertise in wine. Throughout the 1990s the bank opened new offices and raised another round of private capital.

Kenneth Wilcox joined as president in 1999 and the company went public that same year, raising $55.1 million. In 2000, the peak of the internet bubble, the bank raised another $91 million in a secondary public offering.
The tech downturn struck and many of the bank's companies hit tough times. But in contrast to venture capitalists and owners, the bank didn't suffer as much. Frequently, bigger companies bought the assets of failing companies. Hence, the bank could recover its loans. In bankruptcies, secured lenders get paid first as well.

Still, around 2000, the company exited other industries such as real estate and entertainment loans for films and media. In 2001, Wilcox became CEO. Then he acquired Alliant Partners, a leading boutique investment bank that specialized in technology mergers and acquisitions. Alliant has done over 400 mergers in its 15-year history, but since the slowdown it has done about 20 deals under SVB.
The logic of that deal was that the bank could form relationships with startups from their inception through their entire life cycle until they either went public or were acquired, said David Ketsdever, CEO of SVB Alliant. The SVB Alliant division arranges private placements for private companies, or PIPEs, (private investments in public equities), for public companies.

"We focus on the advisory side of investment banking," Ketsdever said.

The investment was part of the strategy to do more within the four targeted market niches. The bank is also concentrating its activity in those four sectors through geographic expansion.

Competitors offer a high-tech practice, usually a division within a larger bank, but no one is as focused as Silicon Valley Bank.

In 2002, the bank acquired Woodside Asset Management, an investment advisory firm, to expand its private client services. It also launched SVB Securities, a broker-dealer subsidiary. And as the economy slowed and the technology downturn was in full effect, the bank narrowed its focus to specialities in technology, life science and premium wine niches, in addition to its private equity services.

During the slow years for tech companies, the bank launched private placement advisory services for companies that could no longer tap the IPO market so easily. It also held a tech investors forum.

Overall, Townsend says the main risks to Silicon Valley Bank are the state of the economy and a possible decline in venture funding. But he says that because the bank has spread out its risks, with the positives of strong foreign exchange income and good performance at SVB, Alliant is balanced against concerns about historically weak levels of new company formation.

Dean Takahashi is a staff writer at the San Jose Mercury News.