Befriending A 'Venture Bank' In The Hunt For Cash

01/13/2011 11:20 am ET | Updated May 25, 2011

After three years bootstrapping his sports media startup Statsheet, Robbie Allen decided it was time to raise some cash.

He opened a checking account with a small bank that tailors its services to entrepreneurs, and enrolled in a free program at the bank that helps emerging startups secure venture capital. Soon enough, bankers were introducing him to venture capitalists whom he was pitching his business to.

"The introductions were instrumental in us closing a $1.3 million first round of funding last year," says Allen.

Square 1 Financial, the bank Allen worked with, is one of several startup-friendly lenders trying to help young companies acquire venture capital in the hope that they'll continue to use the bank's services as they grow.

"We can help the startups with introductions to VCs that we know are relevant to them, their sector, their geography and their stage," says Gerald Brady, who directs the Accelerator Program at Silicon Valley Bank (SVB), the largest venture bank in the US.

So are venture bankers mentoring entrepreneurs and opening up their Rolodexes simply out of the kindness of their hearts?

Not quite. "We're basically saying that we're going to make the investment in your business and we'll make it back when you guys are successful in terms of helping you grow," Brady explains.

Venture banks win when their depositors receive venture capital infusions. They also win when, somewhere down the line, their venture-backed clients, who pose less of a risk of defaulting on a loan, need credit. Since the credit is implicitly "guaranteed" by a venture capital firm, the banks can offer more loans at lower interest rates.

Venture capital firms, on the other end, often rely on the banks to issue cheap lines of credit to their portfolio companies to keep them alive and well-capitalized.

What emerges is a symbiotic relationship between venture banks and venture investors that's spurring the flow of capital to cash-hungry companies.

"We're a strategic partner to the companies we work with, even at their earliest stages," says Mark Loranger, vice president of Square 1's Square Roots program. "That means working with the entrepreneurs on their company's story: the development, the executive summary, the slide decks."

SVB's Accelerator Program hosts regular events where startup clients present their businesses to an audience of 150-200 investors. The bank also puts on a speaker series and a "CEO boot-camp" where venture capitalists teach SVB's portfolio companies how to woo them.

Companies enrolled in Square Roots and SVB's Accelerator program don't pay a fee for the introductions, or the mentoring they receive. And neither bank asks clients to sign a contract that would require them to deposit the money they raise at the bank, or use the bank for any future venture lending.

After all, not all startups that use venture banks to connect them to investors have an immediate need for credit. Statsheet, for instance, doesn't have any plans in the foreseeable future to take out a loan. When the company does need a loan, Allen plans to shop around for the best deal, but imagines that it's likely they'll go with Square 1.

"We've obviously developed a relationship with Square 1. They've been a big help to us, so they'll tend to get the preference over some of the other firms."

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