New bank to help tech firms flower

The arrival of Silicon Valley Bank in Ireland will benefit tech companies scaling up, rather than start-ups

IN THE CURRENT economic climate, the news that a new bank is to enter the Irish market is bound to make the headlines. Earlier this month Silicon Valley Bank (SVB) announced that it is to lend an estimated $100 million (€80 million) to technology companies in Ireland.

The announcement is part of a collaboration with the National Treasury Management Agency (NTMA) which will see Ireland’s debt management agency invest $50 million into funds managed by Silicon Valley.

For those in the know, the news that SVB was dipping its toe into the Irish banking scene was not a big surprise. Ireland has been on SVB’s radar for some time. Due to the international nature of the tech industry, the bank already deals with a number of Irish technology companies, and has contact with a lot of players in the venture capital industry.

The California-based bank’s roots stretch back 30 years, evolving in parallel to the nascent technology sector. The Nasdaq-quoted company, which is a niche lender to the tech sector, now has 27 US offices and seven international operations in China, India, Israel and the UK.

SVB, which aims to lend $100 million to the Irish tech sector, will target fast-growing businesses in the fields of technology, life science, cleantech, and private equity and venture capital businesses.

Its entry into the market, comes as the Government announced details of its long-promised microenterprise loan initiative, which will offer €90 million in new lending to 5,500 micro-enterprises. The initiative is the latest addition to a suite of finance measures aimed at small businesses offered by the Government, such as Innovation Fund Ireland.

But will the entry into the market of a private bank specifically targeted at the tech sector make a difference to the funding landscape for tech companies?

As it stands, it appears that Silicon Valley Bank will be offering debt finance, or traditional lending to tech businesses. Because it will only operate as a lending back, and will not be taking deposits, the bank is not obliged to obtain a banking licence, though it is worth noting that it has recently opened a fully-serviced bank in the UK, and has not ruled out developing its presence further in Ireland in the future

Brian Caulfied, partner in DFJ Esprit and non-executive director of the Irish Times Ltd, says the arrival of the American bank in Ireland is “hugely positive” for the tech industry here. “They are a very specialist bank; they understand the needs of technology companies much better than more traditional lenders do. Their entry will be hugely beneficial,” he said.

He points out that their main benefit will be for companies scaling up, rather than start-ups.

“Typically, a lot of companies which are targeted by banks such as Silicon Valley Bank are already backed by a venture capital investor, which is making good progress in growing their revenues, and need additional finance to continue rapid growth. By definition, you need cash flow to finance debt.”

One Irish tech company which is a long-standing Silicon Valley Bank customer is Openet, the software company which won the 2011 Ernst Young Entrepreneur of the Year competition. Chief executive Niall Norton is hugely positive about the bank, with which it has had a significant relationship for about eight years.

According to Norton, banks such as Silicon Valley Bank have an instinctive understanding of the needs of tech companies. “I often tell the story of how in 2007 we started ringing around Irish banks when things were really getting going. We were told ‘we will lend you money to buy your building, but not to build your business’,” he recalls.

Openet has working capital facilities of about $10 million with the bank. Together with SVB, it also works closely in conjunction with Kreos Capital which provides venture debt to Openet.

By offering loans directly targeted at tech businesses, Silicon Valley Bank can be seen to be filling something of a hole in the tech financing landscape.

In an industry that is driven by the venture capital sector, the issue of bank finance specifically for tech companies tends to be overlooked. (The Irish Software Association is currently embarked on a study to evaluate the banking finance needs of tech companies.)

As Darren Daly, partner and head of the ICT group at law firm Byrne Wallace explains, early stage companies in particular, by definition, are often excluded from traditional debt finance. “Normally the bulk of funding for tech companies up to mid-range of their life cycle is equity funding because they don’t have any assets to back up lending.”

It is this conundrum that the new microfinance fund launched by the Minister for Enterprise earlier this month seeks to address. The €90 million in new funding is to provide loans for commercially viable proposals that do not meet the conventional risk criteria applied by banks, due to factors such as the absence of collateral.

As Darren Daly points out, the most efficient way for any company to operate is to utilise a range of funding methods. “Ideally they should have a combination of debt and equity capital. What tends to happen is that tech companies utilise the equity capital they initially raise at too fast a rate, to fund day-to-day requirements.”

One of the obvious attractions of traditional loans, or debt financing for tech companies, is that it is a lot less dilutive than venture capital funding, which takes the risk, but also takes a significant chunk of equity if the company performs well.

In reality, the line between debt financing and venture capital in larger scale companies can be blurred. For example, in some cases, Silicon Valley Bank provides high interest loans and also puts warrants on those loans that give the bank an option to buy shares at a future point.

Brian Caulfield says the new access to debt financing that will be made available through the arrival of players such as Silicon Valley Bank into the market will also encourage companies not to sell out too soon.

“One of the challenges is, when companies get to a certain stage there is a temptation to exit relatively early rather than take the significant dilution involved in venture capital.” He argues that the availability of more traditional bank loans will encourage entrepreneurs to stay on and build the company further.

Darren Daly also highlights another advantage of private sector involvement in the tech finance space. He points out that many of the structures and formal processes through which state-backed funding for tech companies is administered is too complex. “It would be very welcome if they could put in place simplified, appropriate structures that would enable early stage companies to get access to funds.”

Overall, most see the arrival of Silicon Valley Bank into the Irish banking sector as a huge endorsement of Ireland’s tech industries, as well as a wake-up call to some of the more traditional banks. After all, the bank’s decision to locate in Ireland is ultimately based on commercial interests.

“The tech landscape is very vibrant, more vibrant than I’ve seen in a long time,” says Darren Daly, who works with a number of tech companies. “The commercialisation opportunities coming out of universities are much more sophisticated: on a social level people are much more entrepreneurially minded. We’re also bound to see more spin-outs coming out of some of the bigger, more established companies that have set up here over the next few years. That bodes well for the future.”