Community banks in California's Silicon Valley, the hub of emerging growth companies and venture capital, are now investing in as well as lending to start-up businesses.
These banks say venture capital investing is a natural step for them because of their close relationships with venture capital firms. The banks rely on venture capitalists for due diligence and support of start-up companies; the venture capitalists depend on banks to provide financing to help expand the businesses they invest in.
The banks "have very strong relationships with the venture capitalists," said Joseph K. Morford, an analyst with Alex. Brown & Sons."I think it's reflective of their dedication to this niche and working with these companies."
Silicon Valley Bank, Imperial Bank, and General Bank are among the lenders that have established groups to invest in venture capital.
Don Cvietusa, senior vice president and manager of the venture capital group at Silicon Valley Bank, Santa Clara, said that venture capital investing, aside from providing good returns, allows the bank to "get closer to the venture capital portfolio companies."
Silicon Valley Bank has been active in this area for about two years. Its venture capital group is not a traditional venture capital unit; it does not make direct investments in companies. Instead, it is attached to Silicon's marketing group and serves as a liaison between the bank and the venture capital community.
The group is responsible for any credit facilities, such as bridge loans and capital calls, that Silicon provides to venture capital partnerships.
It also invests in the venture capital funds managed by the partnerships, which are made through the bank's holding company, Silicon Valley Bancshares.
Such activities bring in additional business for all of these banks.
"This is where we're getting most of our deal flow. Most of our companies are their portfolio companies,"said Sam Bhaumik, senior vice president in Imperial Bank's special markets group.
Through Mr. Bhaumik's group and another unit, Imperial Ventures, the Englewood-based bank has been investing in venture capital for about five or six years. Special markets invests in actual companies; Imperial Ventures, a small-business investment company, invests in venture funds.
The bank has made roughly 15 investments in both companies and funds. All of Imperial's investments have been less than $250,000.
"When these venture capitalists put together their funds, they sometimes invite the bank to participate in that investment. You'll find that Imperial Bank and Silicon Valley Bank both invest in these funds at a very small level," Mr. Bhaumik said.
While the small investment is not enough to make these banks a large limited partner, it does make them a stronger partner with the venture capital firms.
General Bank, Los Angeles, is also active in this business, although it does not actively search for investments.
"We try to make investments in conjunction with a banking relationship," said Peter Lowe, vice president and chief financial officer of General Bank.
The bank started investing in this area one year ago. While the bank does look for an overall synergy regarding its investments, Mr. Lowe said that it will also invest in funds.