Once scientists, engineers, or computer whizzes with great ideas become entrepreneurs, their thoughts might turn immediately to finding an angel investor or a venture capitalist to help them move from garage to commercial office. But often a bank is the best place to start the process, suggests Rich White, relationship manager at Silicon Valley Bank.
Banks provide debt financing, whereas venture capitalists and angel investors are looking for a piece of the business. Because new companies would prefer not to give up ownership to an outsider, debt financing is often the vehicle for loans to cover smaller expenses like covering the short-term cash fluctuations of a business over a three to four-month period. Conversely, securing equity funds from an angel or a venture capital fund usually comes into play to support the development of intellectual property, the hiring of key personnel, or the expansion of the sales force to bring in new clients.
White will speak on “Venture Banking in Your Future” for the New Jersey Entrepreneur’s Forum on Thursday, November 12, at 4 p.m. at the Commercialization Center for Innovative Technologies in North Brunswick. Cost: $40. To register, go to www.njef.org, or call 908-789-3424.
Before a bank will loan money to a company, it must be convinced that the business has value that the bank can lend against. That value might be in the form of equity backers like venture capital funds that have invested in the company, or it might be intellectual property that the bank feels is helping the business grow and generate revenue.
Banks provide different debt products across the whole business cycle. “We are able to work with companies that could be pre-revenue but have venture capital support behind them,” says White, “up to publicly traded companies with hundreds of millions in revenue.”
White likes to start building relationships with entrepreneurs very early in the business cycle. Then when they are ready for a loan, they submit a business plan accompanied by historical and projected financials, which the bank uses to determine whether a loan request is reasonable and in line with the value of the business.
White’s institution, Silicon Valley Bank, works specifically with technology and life science companies. For a young company with $5 million revenue today, the bank might start with a $1 million line of credit; over time, as the company matures, wins new business, and develops new products, the bank can scale up the pool of credit products it offers.
But even when a company does not yet fit the bank’s criteria, says White, Silicon Valley can serve as a “relationship partner,” guiding the company in its growth. White outlines the types of services it can offer a company from birth to maturity:
Basic banking services. “If XYZ company is not at a point where it needs debt financing,” says White, “we are a bank and can open a deposit account and help with day-to-day cash management needs.”
Accounts receivable lines of credit. For companies that sell products, their balance sheets show an accounts receivable base representing money they are owed by clients. For these companies, White might suggest opening a line of credit with the bank.
“If a company’s cash position is bouncing up and down over a 120-day period to fund growth,” he explains, “the company might use an accounts receivable line of credit to borrow against, based on the value of the accounts receivable.”
Introductions to professionals. A bank can introduce entrepreneurs to key players in local markets that could potentially help the business grow. For early stage companies — “two people with an idea” — White might suggest an angel fund, and as the business starts to generate revenue, make introductions to venture capital funds.
Businesses must be aware that when funds invest in a business, they take an active role — for example, helping the management team to identify key personnel the business should hire or even replace.
Banks also work closely with professional service groups in local markets and can make introductions to intellectual property lawyers, accountants, and insurance providers.
Equipment financing. Further along in its growth, a biotech company that has raised, say, $20 million from its investor syndicate might ask the bank for equipment financing to either build out its laboratory facilities or upgrade computer servers. The company could then draw down on the financing and repay the loan over a three to four-year payback period.
Acquisition financing. When companies have matured to the stage of being publicly traded a bank can offer high-level financing. “Depending on the strength of each company’s financials,” says White, “we can look to layer debt financing on top of an equity financing.”
White, a lifelong New Jersey resident, grew up in Mount Laurel. His mother was a nurse before he and his two brothers were born, but then became a homemaker. His father was a certified public accountant; early in his career he worked for Peat Marwick, but then moved over to banks and recently retired from Wachovia.
White studied economics and political science at Georgetown University, where he graduated in 1995. For the next year and a half he had an internship with Congressman Jim Saxton, then moved back to New Jersey in 1996 to serve as staff assistant for Saxton’s re-election campaign.
When the campaign was over White worked with a financial consultant in the Mount Laurel branch of the brokerage firm of Smith Barney, while going evenings for his MBA in finance from Rutgers.
In 1999, through an acquaintance who was the third hire of Silicon Valley Bank, White got a job underwriting loans for the Radnor, Pennsylvania-based bank. At his current position as relationship manager, he is responsible for generating new business, maintaining a relationship with existing accounts, and being an advocate for the bank among lawyers, accountants, and other professionals.
Although some banks might be tight on funds due to the current recession, White emphasizes that Silicon Valley Bank is looking for opportunities to deploy capital as it continues to support its existing client base.
“We as an institution kept to the principles of working for technology and life sciences and have not involved ourselves in real estate and derivative trading,” says White. “Our core asset is client deposits, and we want to be careful, but the errors of our peer group did not affect us as an institution.”