Are Venture Banks Strategic Partners?
In my conversations with various venture capitalists about venture debt, I have sometimes heard VCs say, “we think what you’re doing is great, and when our companies need debt we’ll be sure to introduce them to you…but right now they don’t need debt and we don’t see their banking relationship as a strategic one which requires our input.”
It’s a point which is fair. In the grand scheme of all the things start-up entrepreneurs have to deal with, the place where they park their cash is not at the top of the list. While every start-up needs a bank, it’s not necessarily as important as other service provider decisions (I’d argue that your attorney is your most important service provider choice).
The fact of the matter is that before you need a loan, there are no shortage of places to park your cash. You can use your local bank, a large money center, or one of the few banks focused on start-ups. But I do think there are a few ways that these venture banks can be strategic for start-ups,
A bank that works exclusively with start-ups is valuable for precisely that reason - they understand the unique needs of early stage ventures. The inherent act-swiftly-and-fly-by-the-seat-of-your-pants style of a start-up is antithetical to a traditional bank. As a result, many entrepreneurs find that when they’re in a jam and need a quick action for a seemingly mundane task, the big banks do not have the wherewithal or attention to detail for a small customer to make the mundane task happen.
The result is valuable time spent on a phone (or, worse, stuck in telephone operator never-never land). The opportunity cost of this lost time is immense for the task-strapped entrepreneur. And in this sense, finding a partner who understands one-off needs and can act quickly is strategic.
I liken it to the analogy of a race car driver who is responsible for carefully navigating around the track at 150mph+. What would happen if there were a flashing light on the dashboard panel which was not mission critical but required the driver to hold down a button for 10 seconds every lap. Could the driver make it work by pressing the button and continuing along his way? Likely. But it also would hinder the performance of the task at hand - getting around the track as fast as possible.
By establishing a relationship with a bank, even before there is a need for debt financing, you can set yourself up for enhanced financing options down the road. Banks love to work with customers without an immediate debt need as the customer’s deposits are a cheap source of capital to lend to other clients. Once this relationship is established, the bank is likely to want to keep the relationship if a debt need arises for the deposit-only customer. Thus, by starting a relationship early with a venture bank, you can establish some trust that could be beneficial as needs arise.
In addition, the active venture banks work with hundreds of venture capital funds around the country in providing deposit and loan services to their portfolio companies. The network of relationships with these venture funds is extremely valuable and can be a great way to get an introduction to a specific firm you may be targeting for an equity raise. VCs love to get warm referrals and banks love to show potential deals to VCs. When this type of “matchmaking” works, it’s a win-win-win for all parties. Most of the venture banks have programs designed to help companies with navigating the fundraising process - at Square 1, our program for pre-VC companies is called Square Roots and has had numerous success stories.
In summary, while a start-up can definitely choose to bank with any number of financial institutions, there are some definite advantages to working with a dedicated venture bank. I’m obviously somewhat biased in this conversation given my current role as a lender for Square 1 Bank, an active venture banking institution. Similar to our main competitor Silicon Valley Bank, Square 1 remains committed to working with entrepreneurs at all stages.
