It’s a balancing act for banks in the process of determining the “bankability” of startups and early-stage companies, a niche in Orange County that’s becoming a key market for lenders and investors as the economy strengthens and opens to more entrepreneurial efforts.
“As businesses grow and as the economy grows, you’ll see more and more startups jump back into the arena, and they’ll need financing,” said Steve Doss, a senior vice president of Wells Fargo Bank who oversees its Small Business Administration lending group in OC and Southern California overall.
The marketplace of younger companies provides an opportunity for banks to make loans and to help grow the economy, but it’s also more costly and requires higher levels of oversight, including checks for management experience, credit scores and collateral, Doss said.
“Larger commercial banks will take on the risk because they can absorb the loss, if there is one, more easily than community banks,” he said. “But at the same time, I can also say that some of the community banks will have more aggressive credit policies. So there’s no real cookie-cutter approach. At Wells, we are active in the startup lending segment.”
Doss said Wells Fargo works primarily with the U.S. Small Business Administration to provide startup funding and counts on certain guarantees from the agency.
For some lenders, the focus is more on who else would back prospective borrowers to share the risk.
Banks have increasingly sought to partner with venture capitalists to fund fledgling companies, said Rod Werner, managing director of City National Bank’s technology and venture capital banking group.
The bank tapped Werner 1 ½ years ago from Comerica Bank, where he spent 19 years, 15 of which were in tech lending.
Los Angeles-based City National, which has an Irvine office, recently increased its focus on the technology startup market in Orange County, one of three “key regions” it’s identified for overall growth, along with the Bay Area and New York, according to spokesperson Paul Stowell.
In April, the bank also published the first of what it plans to make a quarterly report highlighting OC companies that receive funding from venture capital investors.
“Our efforts are to really work closely with emerging companies that are venture-backed,” Werner said. “We do the traditional lending but also provide venture-debt products to these early-stage companies.”
Venture-debt loans are made on the basis of the venture capital firms that are backing the entrepreneur, as well as their future investment prospects in the subject company.
“Most of these startups aren’t profitable … and we’re looking at a number of factors, like how big the market is, how the company’s performing, the management’s ability to grow that company,” Werner said. “It could be an early-stage business or a much smaller company. But at the end of the day, a lot of it is about knowing the quality of the investors and the relationship, and the level of comfort you have with these investors. Their track record of building great companies goes a long way.”
Werner said most of the venture capital investors he and his group work with are in Northern California, but “we do have relationships with firms in Southern California, [including] Toba Capital in Newport Beach.”
Toba focuses on business software and technology-enabled services. It was founded in late 2012 by Vinny Smith, former chief executive of Quest Software Inc. in Aliso Viejo. Dell Inc. acquired Quest in 2012 for $2.4 billion.
Balancing Risk
Working with venture capitalists has long been a specialty of Silicon Valley Bank, part of Santa Clara-based SVB Financial Group. Historically, it’s had deep relationships with investors and early-stage companies in line with the culture of the region where it’s based, according to spokesperson Carrie Merritt.
It has claims on substantial marketshare in the local and national venture-backed lending spheres, according to Derek Hoyt, senior relationship manager at the bank’s Orange County office in Irvine.
“We bank about two-thirds of all the venture capital firms in the U.S. and about 50% of all the venture-backed companies,” Hoyt said.
The ratio is similar in regard to the bank’s operations in OC, Merritt said.
Silicon Valley Bank has had an Orange County division since 1987 and has about 20 employees here across a handful of core groups. The local office is part of the bank’s network of 28 offices throughout the U.S. and abroad.
Merritt said the bank balances risks and opportunities as it aims to extend support to the “very early-stage” startups that might “still be in their idea phase.” Extending support is not always with financing, per se, she said, “but with connections and advice based on our experience. Not all banks think alike, and we are going to have a pretty different answer than most about when a business becomes bankable. … We’ve got people who are really trying to think beyond traditional banking and push it.”
Not that the bank is pushing without regard to prudence, she added.
“Nobody’s getting their hand slapped,” Merritt said. “The regulators are a hugely important part of our work.”
It helps if the entrepreneurs themselves have track records, said Brett Maver, head of the bank’s life sciences lending group here.
“Many times, our customers are chronic entrepreneurs, so we’ve worked with them through several different companies over an extended period of time,” he said. “Three or four times with successful exits provide further validation that they’re able to drive success.”
He pointed to CrowdStrike Inc., an Irvine-based developer of security technologies founded by serial entrepreneur George Kurtz, whose career includes starting securities company Foundstone, which was later acquired by McAfee. Silicon Valley Bank’s other tech clients here include Kareo Inc., a healthcare software developer in Irvine.
“Certainly, our broad book of business in OC has absolutely grown,” Hoyt said. “The office has grown substantially. There’s definitely room for continued growth in the innovation ecosystem in OC.”
There’s also room for change.
“The good and bad of OC is that it’s such a diverse economy,” he said. “There’s a lot of other things happening here beyond tech, whereas up in the Bay Area, or even Santa Monica, there’s such a large concentration of tech that’s snowballing and feeding on itself in a good way.
“We [in Orange County] have a lot of these technology players but not that kind of concentration that feeds on itself. I think that is something we’d love to change. It’s still a work in progress.”
