It's go for bespoke tech bank in Ireland

Silicon Valley Bank expects to loan $50m over the coming year to Irish tech firms to fill a gap in the market between seed capital and later stage funding

IT MAY NOT have a branch, or even an office in Ireland, but Silicon Valley Bank (SVB) is nonetheless one of the few financial institutions that is actively lending to Irish businesses. The bank has already done “a number of loans” in Ireland since signing its agreement with the National Pension Reserve Fund (NPRF), and has plans to lend up to $50 million over the coming year.

The US bank, which specialises in lending to technology companies, first announced its arrival in Ireland last June, as part of an agreement with the NPRF.

This will see the NPRF invest in a venture capital fund run by an arm of SVB, and in return, SVB has committed to lending $100 million to Irish companies over the next five years. But according to the bank’s executives, there is potential to exceed this target.

“Our view is that it’s a great market for us, as there are lots of companies at an early/mid-stage. We’re excited by it,” notes chief executive Greg Becker.

Becker was in Dublin last week (September 12th) along with chairman Roger Dunbar and Phil Cox, head of EMEA and India, to meet with venture capital (VC) funds to scope out the potential of working together.

So far, the bank has been “extremely well received” in Ireland, as Cox, whose remit includes its UK branch which it opened in June, puts it, and he expects it will fill a gap between seed capital/early stage funding – which may never have been more plentiful – and later stage funding. This can prove more problematic to high-growth companies.

Cox expects that the bank will do about half of its targeted business in Ireland this year.

“We hope to deploy $50 million in the first year. We see lots of opportunities in front of us,” he says.

Key to this will be the appointment of a person on the ground and recruitment is a work in progress.

“We’re looking for an individual to be more dedicated to Ireland, and we’re trying to figure it out at the moment,” says Becker, adding that the longer-term plan would be to develop a team in Ireland, reporting back into the UK where it has a branch.

The bank focuses on the tech sector, allowing companies to “grow fast” by subsidising VC funds with debt. And, while banks around the world struggle to regain their balance in the wake of the financial crisis, by pinning its tail to the technology sector, SVB continues to drive forward. Last year, it grew its global loan book by 30 per cent, and this year it is aiming for an increase of 20 per cent.

“SVB is really unique. We’re one of the few banks to loan you money when you need it,” says Dunbar with a smile.

The bank lends from start-ups all the way up to companies doing billions of dollars in revenue, although it is “less likely” to lend to start-ups in the pre-revenue phase.

“You won’t see any other banks lending to pre-revenue, negative cash-flow companies. It’s what distinguishes us,” says Dunbar.

While unwilling to disclose exactly how SVB can lend to such risky prospects as nascent tech companies and come away with their shirts still on their backs, Becker does give an insight into the bank’s “secret sauce”.

“It’s about understanding all the parts that make up a company, and about pattern recognition. We understand what challenges a company faces as we’ve seen it before,” he notes.

“A traditional bank says ‘give me your accounts for the past three years’ and asks what are your profits, what assets are on your balance sheet, what guarantees can you give me. We look for a different blend,” Cox adds.

So what questions should companies interested in getting a loan be prepared for?

“The first question I ask is what’s the technology or intellectual property, then you look at the market, and whether or not the technology can change, disrupt, enhance or simplify it. Who’s in the team and who the investors are is also important,” Cox says.

It’s bespoke financing.

“Banks have a box that they try to fit companies into. We don’t have a box,” adds Becker.

While SVB also runs a venture capital fund, it typically likes to invest with other VC players, and its banking arm does not compete with them.

“VCs are great partners of ours, but we don’t want to compete with them,” says Becker, adding that if a VC is willing to invest an additional $5 million into a company, then SVB might stump up another $5 million. “All of a sudden, the company becomes able to grow fast.”

Of course, while VC funds take an equity stake in an early stage company hoping it will one day lead to a lucrative exit, such as an IPO or trade sale, lending does not have the same potential.

In this regard, if SVB lends at an early stage, then its deal is likely to include a warrant, which will allow it to take an equity stake in the company at some point in the future. At present, it is sitting on these options on tech firms all over the world. But SVB is not really about venture capital.

“We do a lot of lending with no warrants, especially to bigger companies,” says Cox, adding that while the upside may be limited, so too is the downside. After all, debt is repaid before equity, so if a company goes to the wall – which is not too infrequent an occurrence in this sector – SVB has a better chance of getting its money back.

“Nine times out of 10 we’re repaid first, and only sometimes do we have to write-off a little bit of money,” says Becker.

But if there’s a lesson to be learned from Ireland’s bust it’s that putting all your eggs in one basket – or property – can prove perilous. Is there a possibility, therefore, that SVB might strike out on technology? After all, some commentators argue that valuations of tech companies are reaching bubble levels.

"I don't think that we're in a bubble," asserts Becker, adding that at the time of the dot.comcollapse, companies "literally had no value". "The business was just an idea. Now there is still enterprise value there," he says.

For Dunbar, who first came to California’s Silicon Valley in the 1970s, there is always an ebb and flow, recalling the 250 disk-drive companies that used to be in business before radically reducing to just three. To protect against investing in obsolete technology that might one day go the way of the disk drive, SVB now focuses on the skills behind it.

“We used to invest in technology, but now we’re investing in innovation,” he says.