Silicon-Valley-Bank

HarvardBusinessSchool9-800-332Rev.May30,2001AnnK.Leamon,ManageroftheCenterforCaseDevelopment,preparedthiscaseunderthesupervisionofSr.LecturerG.FeldaHardymonasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©2000bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1SiliconValleyBank“Theyneedtomovetowardequity.”—TimDraper,managingdirectorDraper/Fisher/Jurvetson,ofSiliconValleyBank.JustbeforeChristmas1999,KenWilcox(HBS’83),presidentandCEOofSiliconValleyBank,theworld’slargesttechnologylender,stoodwithJohnDean,chairmanoftheboard,andstaredoutofWilcox’sofficewindowatthesmokersclusterednearby.WilcoxwasfingeringthemacraméstringfromTimDraper’sBizWorldentrepreneurkit,giventohimtheyearbeforeandusuallyusedtoteachbusinessskillstothird-andfourth-graders.HesaidtoDean,“Wekeephearingthesamecomplaintfromtheventurecapitalists,thatwe’renotgivingthemenoughtimetodecidewhetherornottofundtheircompaniesbeforewecalltheloan.Thereseemstobeafundamentalchangeinthemarketandweneedtofigureouthowtorespond.”SiliconValleyBank(SVB),foundedin1982,hadloanedmoneytosuchventuresasAmazon.comandCiscoSystems.Thefirmhadassetsof$4.6billionandofficesin12statesserving5,000clients.Itseasternandwesterndivisions,separately,rankedfirstandsecondintheglobaltechnologylendingmarket.Takenasawhole,thebankhada65%shareofventurecapital(VC)-backedtechnologystart-ups,1andservedanimpressiveportfoliooftechnology,lifesciences,andspecialindustry(premiumwineries,media,andhealthcare)clients(seeExhibit1forproductlinesandExhibit2forfinancials).Itssuccesshadbeenbuiltonenduringrelationshipswithventurecapitalfirmsandawillingnesstolendtocompaniesbeforetheyhadrevenue2onthevalueofintellectualpropertyandfutureequityinfusions.Inparticular,SVBwouldprovideloanstostart-upsbackedbygoodventurefirmsinexchangeforinterestandwarrants(optionstopurchasestockatasetpriceinthefuture).Withinthepasttwoyears,however,newproductshadbeenintroducedtotheventurefinancemarket.Inreturnforhighinterestratesandwarrants,financialservicescompaniessuchasComdisco,Lighthouse,andWesternTechnologywereofferingsubordinateddebt3topre-revenuefirmsthathadventurebacking.SVBwasthenprecludedfromestablishingrelationshipswithearly-1EvaRadtke,“SiliconValleyBancshares,”PrudentialSecurities,January6,2000.2Knownas“pre-revenue”or“pre-rev.”3Subordinated(sub)debtreferredtoloansmadebycreditorswhoseclaimsweresecond(subordinated)tothoseofothercreditorsshouldthecompanygobankrupt.Duetothedegreeofrisk,theinterestrateonsubdebtwastypicallyhigherthanthatonsecuredloans.800-332SiliconValleyBank2stagestart-ups,missingoutonapotentiallong-termcustomeraswellaswarrantincome.MorealarmingtoWilcox,thecompetitionwasfocusedonthestart-upsbackedbythoseVCsthat,inSVB’sopinion,hadthebesttrackrecord,andwhoseenterprisesthusseemedmostlikelytosucceed.Althoughthebankwasabouttoreportrecordnetincomefortheyear,Wilcox,whohadrecentlybeenappointedpresidentandCEO,wasworried.Giventhespeedwithwhichtheworldofventurefinancingmoved,heknewhehadtorespondtothenon-banks’challengefast.VentureFinancingVenturefinancingwasnotanewphenomenon;uncertainandthereforerisk-pronebusinesshadalwaysexisted.Alongwithhightechnology,enterprisesinpharmaceuticals,energy,andevenretailhaverequiredventurefinancing.VenetianmerchantsintheMiddleAgesformedgroupstoinvestintradingventures,sharingboththerisksandtheproceeds.Inoneofthemostfamousventure-financedoperations,QueenIsabellaofSpainfundedColumbus’sexpeditiontotheNewWorld.Thisalsoillustratedtherisksrunbysuchinvestors;contrarytoexpectations,theexpeditiondidnotfindgold.Theprocessoffundinganewventureforcedtheentrepreneurtotradeownershipforcash.Anentrepreneurhadagoodidea,alotofequity—itwas,afterall,heridea—andnomoney.Themoreriskytheidea,themoreequitytheownerwouldhavetogiveupinordertoreceivefunding.Overtime,anumberofmethodsandsourceshadarisentofundbusinesses,includingindividual(angel)investors,angelgroups,privateandcorporateventurecapital,ventureleasing,andafewbanks,ofwhichSVBwasone.Eachhadaroletoplayinastart-up’slifecycle(seeExhibit3).Eachalsohaditsownbenefitsanddisadvantagestoanentrepreneur.Eachalsowaslookingforthecompanytogrowandcreatevalue.Formany,thisculminatedina“liquidityevent,”whenthestart-upeitherwentpublicinaninitialpublicoffering(IPO)orwaspurchasedbyanotherfirm,yieldingareturnontheirownershipshares.VentureLeasingWhilewealthyindividuals(angels)andprivateventurecapitalhadalonghistory,ventureleasingwasarelativelynewfinancingmechanism.Inthelate1960s,newtechnologyfirms,particularlyontheWestCoast,couldnotobtainbankfinancingtopurchaseequipmentbecausetheylackednotonlyprofitsbutevenpositivecashflow.Thiswasaparticularproblemforfirms