Tech startups are not like most new businesses. They often make no money; some have no plans to sell anything. And their assets? Mostly ideas. Their execs? Kind of wacky.
Such companies definitely are not candidates to get bank loans. Commercial banks prefer lending to established businesses with predictable cash flow and hard assets that can be pledged as collateral. Bankers? Pretty stuffy.
But lately, commercial banks – including L.A.’s largest – have started lending to tech startups.
Called “venture debt,” these new loans aren’t secured by real estate or machinery or based on a borrower’s profits. Rather, they’re granted under the assumption the venture capital firms that back startups will invest again, paying off the bank.
Just over a year ago, downtown L.A.’s City National Bank started a tech lending practice, led by a team of bankers hired away from Dallas lender Comerica Bank’s Bay Area offices. Another downtown lender, Grandpoint Bank, launched a startup division in 2012, led by former Yahoo Inc. product manager Petra Griffith. In addition, Silicon Valley Bank in Santa Clara has recently ramped up its presence here, growing its Sherman Oaks office from eight employees just a few years ago to 23 today.
The loans give startups extra cash that helps bridge the gaps between rounds of venture capital investment. For entrepreneurs, a bank loan means giving up less equity to investors and keeping more for themselves. For banks, the relatively high-interest loans generate profits, and might help them connect to young companies that could become the next big thing.
With more lenders interested in venture debt, there’s more competition. Last year, when executives at Hollywood social media marketing startup TheAudience started looking for a loan, they talked to a dozen interested bankers.
“We had more or less every player at the table,” said Mike Drath, chief financial officer of TheAudience, which has celebrity clients such as comedian Russell Brand. “We just wanted to see what the interest level would be. It was quite a positive surprise.”
The firm decided on a loan from City National, which had already provided other bank services to TheAudience and to previous startups led by its founder, Oliver Luckett. For City National, that’s part of the plan: It wants to hold on to Luckett and other serial entrepreneurs by offering everything from basic business banking to venture loans to personal wealth management. It also hopes that by helping the startups of today, it can be the bank for the tech giants of tomorrow, said Rod Werner, managing director of City National’s tech and venture capital banking group.