City National Bank is a relative newcomer to the venture capital world. Just three years ago, the Beverly Hills-based bank lured away a key Silicon Valley Bank executive to launch its venture capital business. But the bank is now trying to make up for its late entry. After making about 20 loans to technology startups last year, City National is on track to make an estimated 30 loans this year. For each of these deals, City National has accepted warrants as part of the companies' repayment packages, a technique developed by rival Silicon Valley Bank.

What's more, City National opened up a new office in Sherman Oaks last August that will focus exclusively on financing emerging-growth companies. It will concentrate on the so-called "101 Technology Corridor," which stretches along the Ventura Freeway from Calabasas to Santa Barbara. "This is where the Southern California economy is going," said Beth Kinsey, the former Silicon Valley Bank executive hired away by City National to become its technology practice manager. "You need to be doing business with tech companies."

But City National isn't satisfied with staying local. Just last week, the bank announced it is establishing a beachhead in Silicon Valley Bank's own backyard by opening an office in Palo Alto. "Despite its reputation for being a conservative bank, City National has been very active in the emerging-growth area recently," said Rockwell Schnabel, general partner and founder of Los Angeles-based Trident Capital Inc. "The bank wants to get involved with companies at an early stage, supply them with banking services at that time, and then continue to supply those services on down the line."

Pipeline to opportunity

Like other banks seeking entry into the venture capital world, City National has worked primarily through venture capital funds. One such fund is Westwood-based East-West Venture Group. "As a smaller bank, City National can be more entrepreneurial," said Paul Nadel, East-West's managing partner. "One thing they do is actually pitch their customers to venture capital firms like ours. They'll call and say, 'Hey, we've got a really good customer that's looking to raise financing.' It's in the bank's best interest to contact us because they want their loans secured with venture capital." But more frequently, the tips go the other way, from the venture capital firms to City National. Sometimes, the bank will be asked to consider an equipment loan; other times, it will be sought out as a place to deposit funds. "It's a way for City National Bank to raise new low-cost deposits to fund loan growth in other parts of the business," said Joe Morford, an analyst with Dain Rauscher Wessels Inc. in San Francisco.

Like other banks seeking entry into the venture capital world, City National has worked primarily through venture capital funds. One such fund is Westwood-based East-West Venture Group. "As a smaller bank, City National can be more entrepreneurial," said Paul Nadel, East-West's managing partner. "One thing they do is actually pitch their customers to venture capital firms like ours. They'll call and say, 'Hey, we've got a really good customer that's looking to raise financing.' It's in the bank's best interest to contact us because they want their loans secured with venture capital." But more frequently, the tips go the other way, from the venture capital firms to City National. Sometimes, the bank will be asked to consider an equipment loan; other times, it will be sought out as a place to deposit funds. "It's a way for City National Bank to raise new low-cost deposits to fund loan growth in other parts of the business," said Joe Morford, an analyst with Dain Rauscher Wessels Inc. in San Francisco.It also allows City National to get in on the ground floor on companies that have tremendous growth potential. Relationships are cultivated at the start-up stage; then, as the companies go public or get acquired by larger firms, the hope is that the companies will continue to use City National as their primary financial institution. Morford said City National is in a good position to go after some of L.A.'s multimedia companies. That's because it already has longstanding ties to the entertainment community. Indeed, earlier this year, City National's Kinsey said the firm is planning to pursue companies with broadband and other streaming-media technologies that are used as platforms by entertainment content providers. But City National's move into the venture capital world is not without risk.

Tumultuous waters

"This takes City National into a very different risk profile than it's used to," said Vince Piazza, an analyst with Standard & Poors Equity Group, who tracked City National up until three months ago. "These can be very volatile investments, up one quarter and down just as sharply the next. You need a different type of management structure than for your typical banking clients." As an example, he said, a typical bank needs $10 in good loans to offset every $1 in bad loans. But the way the venture capital world works, one must allow for about 75 percent of the investments to founder. "It's that other fourth that carries the tremendous upside that allows you to cover the losses from the 75 percent," Piazza said. "Most banks just aren't structured to handle this." He said the real test for City National's venture capital business will come during a downturn, when most banks typically exit these high-risk areas. In the meantime, City National shareholders don't seem too worried about the long-term risks of the bank's foray into the venture capital arena. City National stock closed Sept. 19 at $39.31 a share, just below its 52-week high of $41.50 recorded last November. In fact, the stock has hovered in the $35 to $40 trading range since it recovered from the Nasdaq slide in mid-April.

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