“The Seeds are Sprouting” – A talk with… Silicon Valley Bank
There were a lot of rumors in recent months, but it’s been certain since late May 2018: Silicon Valley Bank (SVB) is now officially represented in Germany. We wanted to know what startups can expect from the new player, what makes the American bank so special and why the German market is so exciting. So we met up with Christian Hoppe, Managing Director of SVB in Germany, at the Noah Conference.
SVB was founded roughly 35 years ago in the US and made a profit of 490 million US dollars in 2017. With more than 2,500 employees around the world, 200 of whom are in the UK, the bank has now also opened an office in Germany. Without having a full banking license yet, business is predominately focused on granting loans. And why is that such a hot topic in the startup scene? How can startups benefit from SVB compared to loans from other banks? Christian Hoppe answered:
“The simplest point is that we provide loans at all. Most of the time for early-stage startups, they don’t pass bank’s risk profiles. In contrast, we take a look at the startups, we understand the companies and we understand technology. And we’re not afraid to give someone a loan that will make a loss.”
Almost like a marriage – a holistic approach
SVB will also be opening up its network in the venture capital scene. That’s exciting because the bank has 2,400 venture funds as clients. As a result, when a startup is planning its next round of financing and needs to be introduced to a strong VC, it’s very likely close contacts already exist that will make an introduction possible. And that, in contrast to other places, is done free of charge.
The same is true if a startup wants to expand, for example by way of acquisition. In this case as well, the target object may well already be an SVB client. SVB currently employs this model more in the US where the bank has already financed more than 30,000 startups.
From initial contact to contract conclusion, it can easily take one or two years. SVB says itself that they are not driven to make transactions. If a startup with the right business model approaches the bank, their employees first meet with the startup and share their expertise without obligation. According to the motto: Do something good for the ecosystem and it will come back positively at some point.
“We’re not directly discouraged if we realize: We won’t be making a deal tomorrow. What we ask is more: How can we help you? It’s almost like a marriage. We provide financing and would prefer to stay with them forever.”
And how does the business model pay off? Christian Hoppe responded:
“We stay with a company from Series A to IPO, until they’re multinational. The best example is Cisco where we’re still providing financing.”
So why does SVB finance companies, in contrast to local banks, that don’t make a profit, but instead a loss?
“Our extensive experience in the field in Silicon Valley means we understand the risk and can manage it precisely because we understand it. Of course, it’s not as if the coupon rate is identical to a local bank loan at one percent. It’s risk adjusted and in line with the market,”
explained the Managing Director of SVB Germany. SVB also bases it on the product. They are not, however, fixated on a specific industry. Christian added:
“With venture debt, for example, you don’t have to provide personal collateral. We finance everything that is innovative and disruptive with a very strong link to technology. Plus life science.”
Don’t dilute shareholdings
Something that in contrast is very important to SVB, especially for early-stage investments, is that previous financing rounds have a specific minimum volume and that “good” investors are already on board. If that’s the case, SVB might actively approach a founder who is currently raising a 10-million round and offer them an additional 30% for that round as venture debt. Startups benefit from having capital available for a longer period of time, can perform the next round based on a higher rating and are able to grow more as a whole. And ultimately they don’t dilute their participation quota.
We wanted to learn more about SVB’s decision-making criteria. Is it the idea, the team or having an exciting investor already on board? Christian commented:
“Investors are extremely important, followed by a minimal margin, but really minimal, by the team. And then comes the business model.”
After all, there are some very successful business models that are copycats. If investors think an idea is good and promote the startup until it becomes successful, and the team is also able to implement everything, then that might be more important than the idea itself, said Christian.
SVB already has several clients in Germany. Some Munich startups that have been financed by the bank include Lilium and eGym. For the bank, Germany is the most interesting market in continental Europe. The office in the UK quickly grew to 200 employees after opening a few years ago. And from the 23 billion US dollars of total credit granted globally, 3 billion went to the UK. The bank would like to continue their success story in Germany. The potential is huge, said Christian:
“Germans are quite often engineers, like to develop and are very strong in innovation. The current phase is exciting. And it’s definitely the right timing in Germany.”
Christian emphasized that their expansion has nothing to do with Brexit. The bank had already considered coming to Germany three years ago. But at that point in time, there weren’t as many large financing rounds. As a financier on the debt side, the current situation provides a better environment than 2015. The amounts in VC funds are steadily growing. On top of that, some startups have made an exit and the founders have since become business angels who now invest their money in new startups while being aware of the risk. There are also more serial entrepreneurs who know exactly how to scale and proceed step by step. Christian commented:
“We’re starting to reap what was planted three to five years ago. We can see that little plants are growing.”
“And you’re watering them now?” we asked him. He responded:
“Yes, with pleasure. I like the metaphor too, because you have to be very careful – with venture debt as well – to not drown your plant. It’s a considerable task and you also need experience.”
The Managing Director of SVB Germany also feels both sides bear responsibility and need to act carefully. After all, too much money is not always a good thing. The timing has to be right. And venture debt is not always the right way to finance a company – but it can be for many.
So when will there be a SVB office in Munich?
The bank is already meeting with some excellent candidates. SVB would also like to open a representative office in Munich at some point because the Munich market is rated as “extremely exciting.”
“And that’s not only on the startup side. We don’t only finance startups, but also venture capital and private equity funds. And Munich is definitely a stronghold in both regards.”
said Christian. He added:
“I’m so excited about Munich. The city is a great location because Munich is so laid back. And I think the ratings are fair, not too exaggerated.”
The aim is to perhaps even have the first SVB employees working in Munich next year. We can’t wait to hear more.