No deposit, no return

Banks diversify products and services to offset decline in deposits from dearth of venture capital

You would think that with venture capital funding falling precipitously during the past two years, banks would be giddy about the opportunity to jump in and fill the void. But truth be told, banks have been hurt from the parched flow of cash trickling into their deposit accounts.

A new study to be released after Memorial Day by financial auditing and research giant Ernst & Young LLP shows venture funding nationally falling 80 percent since 2000. And with fewer VC dollars funding startups, bank deposits also have fallen.

Deposit levels are important because banks make profits by charging banking fees. Deposit levels also are used by regulators to set the maximum amount any bank is allowed to loan to its customers.

“It’s a tough time for bankers these days and it’s forced commercial bankers to look upmarket at companies that are more established and in some cases these companies are already public,” says Stephane Dupont, group leader of Ernst & Young’s Bay Area-based Capital Advisory Group.
One of the companies changing with the times is Silicon Valley Bank of Santa Clara.

“Our strategy over the last couple of years has been to refine our focus so that we’re dealing with high-technology companies, life sciences and ultra-premium wineries and private banking of individuals who are in those markets,” says Marc Verissimo, chief strategy and risk officer at Silicon Valley Bank (Nasdaq:SIVB). “We are expanding our services to all technology companies, including those that are privately held and not venture-capital backed as well as public companies.”

Comerica Bank-California is a San Jose-based subsidiary of Comerica Bank (NTSE:CMA) of Detroit and is Silicon Valley Bank’s largest competitor in attracting VC-funded deposits.

“Venture capital funding is back to levels that we think are more sustainable,” says Jim Ellison, Comerica’s managing director of its venture capital operations. “We actually have not seen any real decline in our deposit base. I think that we’ve actually seen our deposits steadily grow.”

Ellison acknowledges a slight decline in VC deposits in 2001, but says overall deposits grew again from 2001 to 2002.

Ellison says with $53 billion in assets under management, Comerica has the ability to withstand short-term deposit losses.

Silicon Valley Bank, with less than $4 billion in assets, has little choice but to expand beyond VC-backed startups.

According to a forthcoming Ernst & Young report on 2002 venture capital, $19.4 billion in venture capital was dispersed in 2,056 rounds of funding last year.

That’s down from 3,034 rounds worth $34.6 billion in 2001 and $93.8 billion in VC funding in 6,101 rounds during the height of the market in 2000.

With its large exposure to VC-backed startups, Silicon Valley Bank saw its total asset levels steadily decline from 2000 and saw a bottoming out last year when deposits fell below $3 billion before recovering by year end.
“We avoided the dot-com boom as far as lending money, although we certainly took deposits from dot-coms and probably lost about $2 billion in deposits when those companies went away,” says Silicon Valley Bank’s Verissimo.

According to the latest report from the National Venture Capital Association, funding for the first quarter of 2003 was $3.8 billion nationwide, down from $4.3 billion in the previous quarter.
“Still, that’s a significant amount,” says RBC Capital Markets analyst Joe Morford of San Francisco.

RBC makes a market in Silicon Valley Bank stock and managed a public offering for the company in the past year.

“That’s where we were back in 1997 and while it’s certainly off the peak in early 2000, it’s a significant amount of money that’s being put to work each quarter,” he says.

Still, with a smaller VC market, banks look to innovation to grow in other ways.

“One interesting solution at Silicon Valley Bank is that they added services to their portfolio. They added an asset manager and they also added mergers and acquisitions services,” says E&Y’s Dupont.

Silicon Valley Bank says that’s been a key to their turnaround.
“About a year and a half ago we acquired Alliant [Partners of Palo Alto], which was a boutique mergers and acquisitions firm focused on the technology marketplace. That’s been very successful for us,” says Silicon Valley Bank’s Verissimo.

“In the Bay Area they used to have the four horsemen in Hambrecht & Quist, Montgomery, Robertson Stephens and Alex. Brown,” he says. “But they were all acquired by larger entities and their focus on the middle market has gone away,” Verissimo says.

Silicon Valley Bank also added Woodside Asset Management to its stable last year, adding private banking services to its portfolio.

“Our number of clients has remained flat even though the market has shrunk quite a bit. As for VC-backed companies, we’ve gained market share in that market plus we’ve been able to add non-VC-backed and public clients” Verissimo says.

At least one analyst says that strategy is paying off.

“I think Silicon Valley Bank has been able to hold their own through a combination of expanding market share as many of the other players have pulled back or gotten out of the business altogether,” says RBC’s Morford.
But don’t expect venture capital to be forgotten by banks.

“We’re not turning our back on VC-backed companies; it’s still a primary focus,” says Silicon Valley Bank’s Verissimo.

“Over the past couple of years, we’ve seen almost every other commercial bank get out of the business as far as actively doing this,” he says. “I’ve been doing this for 22 years and it’s a pattern that when times get tough, usually you have a smaller pie and not as many hands will reach in. The nice thing is you tend to lose a lot of competitors.”

“At the end of the day we are absolutely committed to venture capital; we believe that over time this will continue to be a driver in the American economy,” says Verissimo.