August - 2000 - issue > Cover

Over the past one and a half decades, Silicon Valley Bank has personified its own successful high-tech clientele - drive, growth and an entrepreneurial attitude. siliconindia interviewed John C. Dean, Chairman, President and CEO and Harry W. Kellogg, Jr., Vice Chairman and Head of Strategic Initiatives at Silicon Valley Bank, to explore how their firm has been intimately associated with some of the high-tech success stories in the recent past.


Excerpts:

siliconindia: What is Silicon Valley Bank’s business model?


John Dean: Our business model is very focused: lending and providing other financial services to emerging growth technology and life science companies that are often — but not always — venture capital backed. We go with the company typically from idea to the concept to the IPO. That’s the business we’ve been in since we started 16 to 17 years ago and one that we dominate today. We have built this business through relationships throughout the US, and have a very strong interest through alliances to build the business throughout the world.

Harry Kellogg: And across the country. There are some international alliances and things going on, obviously, in India and in Europe, Israel and the Far East. The bank’s brand, and really the franchise banks of this bank, have expanded enormously with what’s going on in the high-tech industry.


Has this business plan changed over the 15 years?


JD: Absolutely. Even seven years ago when I joined the bank, we were focused on very few products, had no contacts or relationships established with clients internationally — we were primarily a northern California based business, and the practices or niches that we chose and their focus were very different. When we started off, our predominant business was with the semiconductor and computer peripheral companies. Seven years ago, biotech was hot, seeing pre-revenue IPOs. The software space was hot and was growing exponentially. If anyone had said to me five or seven years ago that in five years 50 percent of the clients are going to be Internet related, I would have said “Internet what?” So, the shifts in just the technology sector have been significant.

The array of our products are much broader and deeper in terms of cash management, international services, factoring asset bases, leasing, corporate finance, and so on. We have gone from three or four basic products way back in the ’80s to over 50 products now.


HK: The other wave that we have seen fairly recently — and I think we caught the wave before others did — was the advent of the angel investors. There has been an huge impact of the IPO surge on the personal wealth of individuals, and they have been investing huge amounts back into startups.

We are the only bank that is niche focused – we have specializations in all the industry segments within the technology and life sciences space. This really helps when our account officers are out interfacing with the CEOs of these companies.


JD: Our first realization is that technology is not Silicon Valley – there is growth in this area throughout the US. Entrepreneurial technology companies exist throughout the world and we need to learn about the shifts and changes that are taking place, so we can participate and benefit from in better ways. This is not merely in terms of opening offices in newer markets, but also looking for strategic partners and creating linkages with technology entrepreneurs in those areas, because we increasingly believe that the flow in terms of capital, technology, manufacturing, distribution, packaging and licensing is a worldwide phenomenon. This will enable us to do a better job to introduce our clients to the world, and provide assistance to non-US companies who want to set up business here.


What characterizes a Silicon Valley Bank partnership with other vendors?


JD: It could vary depending on whether it’s a partnership overseas, an alliance with eSource (an Internet resource center), or whether it’s a partnership in terms of some of the products we’ve been delivering. We are very focused, so we do not have every product in the United States. Our clients got to get the best of everything. We don’t provide trust services or investment advisory services because we don’t have the critical mass in terms of demand from our portfolio clients. But since there is a need, we will establish partner relationships with third parties, to deliver excellent best-of-breed services. Internationally, a partnership may be in terms of referrals back and forth, investing in a venture fund in Singapore and their having an office here and we introducing them to clients. We have an interest in an Asian partner because eventually they’re going to want to either distribute, manufacture or license their product and services in Asia. This type of partnership will be on the basis of client referrals, mutual investments in different funds, and us servicing their client portfolio here, or their servicing our clients going into Asia.

Another type of partnership is in relation to eSource, where we have third party providers who are really trying to access our client base. A good example is Steelcase, a billion dollar revenue company and the largest manufacturer of office equipment in the world. It is very interested in our client base because in that client base are the future Ciscos and Amazon.coms. If they get in early enough in their lifecycle through us, they could provide those companies their products faster, at the right price and with a service for which they could rely on the entire Silicon Valley Bank relationship.


HK: A lot of our partnerships are informal — we don’t have any written agreements or memos of understanding — but are based on the years of individual relationships we have developed over the years with investors or financial institutions in the Valley and around the world, venture firms, law firms, accounting firms and others. So when an entrepreneur comes to us and says, for instance, “Introduce me to the angel community,” or “Which law firm can help me?”, we will be able to help through our relationships.

If you are an entrepreneur, what’s your driver? It is to take your product to the market as quickly as possible and dominate the space. If you are the first, typically you win. You have a host of other things you have to get done.


JD: If you’re just looking for the lowest price on loan and the highest price on your deposit, probably you shouldn’t bank with us. But if you are saying to yourself, “Which bank can help maximize shareholder value?” — I’m prejudiced, but I believe we can do a better job given our knowledge of the industry segments and our relationships. Not that we can’t do it at all — we are very small — but we have very talented people in the areas in which we do provide services … we get very high ratings in terms of industry knowledge, with great client service. We know where to go to help you; how to leverage the market place of the alliance partners; and to give you everything to be successful.


Have you begun to formalize some of these informal relationships so that the bank is not left out of the upside?


JD: You sound like Harry! (laughs). If you call me and say you’ve got the business plan and would I connect you to the right people, I would be happy to make the phone calls. But if you really want us to sit down and put together a plan to raise capital for you, it’s fair for us to have more coverage if we are successful in doing that, by having an opportunity to invest a small amount. So what has changed since I have been here is that we are selectively taking equity positions of fifty to sixty thousand dollars at those early stages of companies.


How has this worked out?


HK: Very well. Entrepreneurs typically know who the right investors are, but they don’t have access to them. We just pick up the phone and target the VCs who could help these companies. Some of these VCs get thousands of business plans every month.


Over the years, more competitors have encroached on your space, and less vice-versa. What do you feel about that?


JD: Imitation is the best compliment, and we are constantly being complimented! And this is just business, you’ve got to expect this. This makes us a better bank, because when you do have competitors, you are forced to raise the bar higher and faster than when you had no competition. We’ve had some good competitors in the market. In terms of market share, we lead the pack. Our own and third-party analysis has shown that we have some clear differentiating advantages. This is not 5 percent of our business! So I tell you that we are very committed to our space.


How do you feel about losing clients like Cisco when they become bigger companies?


JD: Most banks say to their clients: “We want you for life.” We say to our clients: “We want the relationship only till we bring you the value that you really want from us and that only we can bring.” Typically for our clients, about one or two years after the IPO, or after the company goes beyond $250 million in revenues (although we have some $500 million a year companies as clients, too), it becomes a little less of a relationship, and something closer to a commodity business. At that stage, the entrepreneurs go into the background, often to start all over again, and professional managers come in. We do better with entrepreneurs than with professional management.


HK: Which is exactly what happened with Cisco. We knew the founders, and were with them till about $200 million in revenues. At that time we did not have the broad array of products and services that we have today, which enables us to stick with companies much further today. A professional management team came into Cisco and the founders left. The great thing about this Valley is its serial entrepreneurs, and we get those folks as clients in their next startups.