High-tech businesses get financial help; Silicon Valley Bank focuses on start-ups

THE BALTIMORE SUN

When Louise Sengupta, a founder of Paratek Microwave Inc. in Columbia, went searching for a bank to establish a line of credit with, she ended up with one practically unheard of in the mid-Atlantic: Silicon Valley Bank.

But Silicon Valley Bank is no stranger to chief financial officers and executives at regional high-technology start-ups.

During the past three years, the Santa Clara, Calif.-based institution has quietly built a $100 million credit portfolio among dozens of promising high-technology ventures in the Baltimore-Washington-Northern Virginia region.

As a result, experts say, the bank has helped fuel the region's booming technology sector by providing critical resources -- namely, money and cash management advice -- to young ventures that otherwise might spend valuable time on keeping afloat rather than on building their businesses.

SVB's success, meanwhile, has drawn a sprinkling of other technology lending specialists to the area.

"They seem to understand the many risks associated with starting and running a technology company," said Sengupta, president and chief executive officer of Paratek. Launched 18 months ago to develop low-cost wireless communications networks, Paratek considered three other lenders before signing on with SVB.

"The bank had a comfort level with risk, which made us feel they were the right one to do business with," said Sengupta.

As Sengupta and other entrepreneurs at high-technology start-ups can attest, finding a banker with enough chutzpah to set up million-dollar lines of credit for operating and equipment needs can be a high hurdle.

Traditional bankers often shy away from such deals as far too risky. For one, these companies often don't even have the requisite three years of financial statements many lenders demand.

Not Silicon Valley Bank's Michael Selfridge.

The energetic San Francisco native, who manages SVB's operations in this region, spends his days striking lending deals with companies that often have no sales, revenue or even products ready for market.

"The less time you spend behind the desk and keyboard, the more time you're devoting to building the brand and the business. I try to be out in front of clients as much as possible," said the 32-year-old.

His focus, the Baltimore-Washington-Northern Virginia corridor, has emerged as one of the nation's hottest breeding grounds for new high-technology businesses, particularly in the Internet, electronic commerce, software and communications industries, according to the Milken Institute, a California-based think tank.

And Silicon Valley Bank has carved out a successful niche among young ventures whose technology or market focus could be rendered obsolete within a few months by the rapidly evolving nature of technology today.

But there's also great potential.

Frank Tower initially set up the Maryland-Virginia operation for SVB in 1996 after spending about two years making inroads from his office in Boston.

Now a partner with Blue Rock Capital, a New Jersey-based venture capital firm with an office in Rockville, Tower recalls that the bank was lured to the region by a handful of venture capitalists, including Charles W. "Chuck" Newhall III at New Enterprise Associates in Baltimore.

"The first thing I noticed when I began contacting companies in the region was that they were literally starved for a bank," recalled Tower. "They couldn't find a traditional bank to lend them money."

Early clients, said Tower, included Digex Inc. and UUNET, today two of the nation's largest Internet service providers.

Selfridge, who previously was a senior vice president for SVB's international banking division, says echoes of California's Silicon Valley can be heard in the Baltimore-Washington-Northern Virginia high-technology corridor.

The region, he says, lacks the sheer mass of technology spinoff ventures and boot-strap technology start-ups that have made Silicon Valley, which stretches from Palo Alto to San Francisco, a mecca for angel investors, venture capitalists -- and even a few blue-blood bankers. But the potential is here.

"The same excitement is here. The same entrepreneurial spirit," said Selfridge.

"It's an exciting place to be doing business because there is this sense that the start-up client today could be the mega company tomorrow."

Despite the risk, SVB estimates that its nonperforming loan rate, or loan failure rate, is between 1 percent and 2 percent, said Selfridge.

That is on par nationally with mainstream lending institutions' commercial loan portfolios.

It wasn't always that way; in 1992 a recession and bad real estate loans led to such high charge-offs that the bank posted a loss and was put under federal supervision. That was lifted in 1995.

Since 1996, SVB has built up a $1.6 billion loan portfolio nationwide and $3.5 billion in assets.

The lion's share of the bank's approximately 90 clients in this region are clustered in the Interstate 270 corridor between Bethesda and Gaithersburg, and in Northern Virginia.

While operations in California have diversified beyond technology into the entertainment and premium wine industries, the area office remains focused on building business with Internet, e-commerce, communications and software companies.

Area clients range from publicly held CoStar Group Inc. of Bethesda, which collects and distributes detailed commercial property information for the real estate industry, to privately held Blackboard Inc. of Washington, which markets online learning software to universities.

Selfridge expects his office to strike about 30 new deals in the region this calendar year and next. The average deal: $1.5 million, usually set up as a line of credit for operating needs or equipment leases.

SVB, which netted $28.9 million 1998, also has broadened into traditional banking services, such as cash management, international financing and restricted stock loans and other executive banking programs for upper-management types.

The company, owned by publicly held parent Silicon Valley Bancshares, also operates offices in other technology hot spots around the nation, including Boston's Route 128 "technology alley;" Boulder, Colo.; Austin, Texas; Oregon and Washington.

Not every start-up with a pioneering idea for a breakthrough technology is a candidate for the bank.

The bank's formula for sizing up ventures has been refined since it was founded in 1983 by Roger Smith to provide banking services to young high-technology companies springing up around Stanford University.

The lending formula has paid off for the bank since it moved into this region in 1996. Initially SVB set up offices in Rockville and Reston, Va., but recently consolidated them into a new central office in Reston, near Internet powerhouses America Online, PSINet, and UUNET.

A key element of the formula, says Selfridge: "We piggyback on the venture capitalists' due diligence."

Translation: The company's preference runs to start-up companies that have received investments from venture capital firms. Venture capitalists usually take great care in reviewing a company's technology, market potential, liabilities and management team, and often assign a partner to the company's board to keep an eye on growing pains.

Other elements of the SVB formula include selecting technology companies that have intellectual property with significant market potential, strong management teams, and assets like customer lists or service contracts that would be marketable in the event that the company tanks. Instead of cash flow, the bank reviews the rate at which a start-up is spending its cash, known as the burn rate.

Fran Witzell is vice president for the Netpreneur Program at the Morino Institute, a nonprofit technology advocacy group based in Reston.

He says that while Silicon Valley Bank may not be a household name among the general population, the bank is well known among high-technology executives and venture capital firms.

"They have significant brand identity in this region now," said Witzell.

The bank, he said, has provided crucial financial resources at a pivotal time in the growth curve of the region's technology sector, whose employment ranks now outnumber federal workers in the Washington area.

"Perhaps the best validation of the Silicon Valley Bank model in this region is the fact that others are now following their lead," said Witzell.

Technology banking niche competitors Imperial Bank of California and PNC Venture Bank, a unit of PNC Bank Corp. of Pittsburgh, have set up offices in the region in the past year, said Witzell.

While competition puts pressure on Selfridge's office to beat the bushes a little harder for new business, he also sees it as a sign that the region's technology sector is thriving.

"Competition demonstrates that this is a good market to be in," he said.

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