Private equity units and investment banking groups at big commercial banks fight tooth-and-nail to court business from early-stage companies backed by venture capital but with few exceptions seem to almost actively avoid pitching traditional loan and deposit services to those same potential clients.
The would-be clients are often companies with nothing more than an idea, a certificate of incorporation, and a check from a venture capitalist. Profits are a distant hope. But those checks still have to be cashed somewhere. "In a country where banks are starved for deposit growth, this is an untapped gold mine," said Rosalind Looby, an analyst at Donaldson, Lufkin & Jenrette. 
A handful of local companies now command most of the deposit business. Silicon Valley Bancshares, a $5.4 billion-asset company in Santa Clara, Calif., takes about 50% of the national market. Others that have successfully tapped the segment include $3.6 billion-asset Greater Bay Bancorp in Palo Alto, Calif.; $7 billion-asset Imperial Bancorp and $8.7 billion-asset City National Bank, both in Los Angeles; and Comerica Bank-California, the $5 billion-asset affiliate of the Detroit-based banking company.
Silicon Valley Bank, Imperial, and Comerica also have offices in other high-tech centers, such as Reston, Va., and Austin, Tex.
There is a scarcity of published research on the total dollar amounts that venture capital-backed companies are likely to put in bank deposit accounts. But to get some idea of the potential size of this pool, look at statistics for Northern California, the biggest U.S. market for private equity investing. In the second quarter alone, 511 companies raised $8.9 billion, according to Venture Economics, a unit of Thomson Financial.
Last year, deposits at Silicon Valley Bank rose 26%, to $4.1 billion, from the previous year.
That number doesn't even begin to tell the story. Because Silicon Valley's balance sheet has become swamped with excess deposits, the bank has been busy moving a chunk of those to off-balance sheet accounts. Despite the shifts, at the end of the second quarter year-over-year growth had actually edged up to nearly 28%.
The deposit growth has been accompanied by higher volumes of off-balance sheet deposits. For the size institution it was, the heavy amount of deposits pouring in dragged down its leveraged ratio below what regulators like to see. So, starting last year, Silicon Valley started offering off-balance sheet investment vehicles for deposit customers.
"Deposit-taking is where the growth has been because its clients are so cash-rich," said Eva A. Radtke, an analyst at Prudential Securities.
Naturally, not all of the money given to start-ups in the form of venture capital ends up at a bank. Part of the total venture capital raised yearly is in follow-on financing that goes to older start-up companies. Of the "seed financing" received by a young company, a portion will end up in higher-returning investments managed by brokerages.
But the money that makes it to banks can be sizeable.
"If a company raises $10 million in a year and burns it in a year, its average balance is $5 million," said Clay Jones, a senior vice president in the venture banking group of Greater Bay. Even if the start-up takes out a credit line for $1 million, it still is a net depositor of $4 million. "If you multiply that times a 1,000 companies, you get an idea of size the market," Mr. Jones said.
So where are the biggest national banks?
Not entirely absent, it turns out. But they are only competing head-to-head with the regional players on the fringes, preferring to wait until the start-ups reach a more mature, often pre-IPO stage. This avoids having to swallow some of the risks of lending to customers with no revenues or profits.
Plus, the big banks poach customers away.
"What we've seen is that many of these companies start out with Silicon Valley Bank and then move on to us," often when they start reporting revenues, said Michael McCutchin, managing director for the technology corporate banking group at Charlotte, N.C.-based Bank of America, which markets treasury management services to this segment.
Even though Bank of America does have the ability to make venture capital loans if a relationship with a particular client merits one, "This is not a risk profile we are actively building," said Mr. McCutchin.
Likewise, FleetBoston Financial Corp. and its predecessors have run an emerging-growth corporate banking group for more than two decades. Fleet offers loans and deposit products in the Northeast, but despite Fleet's affiliation with San Francisco investment bank Robertson Stephens, "we have never and continue not to be focusing on lending to emerging-growth companies in California," said Thomas Davies, a managing director.
Risk is a big barrier. Without a thorough understanding of the credit process for these pre-revenue companies - a process that typically involves the bank accepting warrants as a buffer against future losses - lending can seem highly dangerous. "It's not slam-dunk easy to bank these on the credit side," said David Stearns, senior vice president in the high-tech banking group at Comerica Bank-California.
The regional banks seem content with their piece of the business. "It may make more sense [for the big banks] to target these companies once they IPO," said John Dean, president and chief executive officer at Silicon Valley Bancshares, who says his bank's goal is not to be a start-up's bank for life. At a later stage, he said, a company becomes less high-touch and more concerned with a bank's pricing model - which puts a larger institutions at an advantage.
But other characteristics - particularly deposit growth - raises the question of whether there is room for more entrants. "This business extends the natural life-span of a bank's relationship with its clients," particularly if the bank has underwriting and advisory capabilities focused on the tech industry, said David Winton, an analyst at Keefe Bruyette & Woods. "And there's a nice byproduct: deposits."
