Why is a U.S. regional expanding to Germany?
It's not too often that a midsize U.S. bank holds a launch party for its new growth strategy ... in Berlin.
But that is exactly what Silicon Valley Bank was set to do in the German capital Monday night, hosting more than 300 venture capitalists, innovators and private-equity firm executives to celebrate its new offices in Germany.
Why Germany, why now, and why this bank?
The $54 billion-asset Silicon Valley Bank is a rare bird, specializing in lending to tech companies and the venture capital investors that are their lifeblood. But like every bank — especially regionals — it is working hard to establish future sources of growth, and it's showing the kind of outside-the-box thinking they all could learn from.
“It is unusual to see a U.S. regional bank expand overseas,” said David Chiaverini, a research analyst at Wedbush Securities. Yet the Santa Clara, Calif., bank has been planning it for a year, drawn by the allure of Europe's leading economic market, he said.
Expanding in Europe makes sense, said Dan Kimerling, a former head of research and development at the bank who is now the general partner at Deciens Capital.
“They’re broadly interested in anywhere there are fast-growing tech companies and venture capitalists and private-equity professionals that invest in them,” he said.
The bank’s German launch is a follow-up to its London debut in 2012, according to Phil Cox, its head of international markets.
“When we launched our bank in the U.K., we did an extensive study of Europe generally," Cox said. "We looked at where we see innovation, where we see startups, where we see firms being formed, money going into venture capital and from VCs into companies, the emergence of growth-stage companies and potentially early signs of exit activity as well."
The three dominant European markets for tech startups, they found, were the U.K. France and Germany, as well as a cluster of companies in the Nordic nations of Sweden, Denmark, Norway, Finland that make a fourth market.
“We’d love to be in all of them,” Cox said. “So Germany was a logical next step for us.”
British newspapers characterized the bank's German plans as a reaction to Brexit. Cox said that is not so.
“It’s a fair conclusion because the way banks move cross border within Europe will be impacted by Brexit, but not the way we’re licensed,” he said. Silicon Valley Bank’s German offices are considered extensions of the U.S. bank, though it did have to obtain a license from Germany’s Federal Financial Supervisory Authority. The approval came last week.
“What a lot of foreign banks have done is build a subsidiary in a country and then plopped what they call a passport or license across border,” Cox said. “That passporting is what gets broken between the U.K. and the rest of the [European Union] under Brexit. Because we weren’t passporting, it didn’t impact our business. We’re just doing it at the same time.”
The bank already works with some German companies in the U.S., particularly a group of companies created by the investor group Rocket Internet. Two are food delivery companies, HelloFresh and Delivery Hero. A third is the online furniture business home24.
It works with venture capital firms around the world as well, by investing in their funds, providing banking and credit facilities to the funds, and providing banking services to the VCs themselves.
Its relationships with VCs are critical to forming opinions about their portfolio companies, Cox said.
“What looks to a traditional bank to be an early-stage, loss-making, cash-burning company, if you’re on the inside having the right dialogue with investors and you understand the objective and how enterprise value will be created in the company, then you can make different decisions about where to lend and provide other banking services,” he said.
Silicon Valley Bank typically starts lending to tech startups at the first (series A) round of funding.
“Our sweet spot would be a company that gets that first round of about $5 million and then starts to grow, alongside those professional investors, not only building the company for enterprise value but also providing working capital support and growth finance as that company starts to get sales, develop its products and build its business,” Cox said.
In its early days, he conceded, the bank would lend to early-stage companies only to have them go to a larger banks when they scaled up. Building the bank’s global footprint helps the bank hold on to those companies over time.
The tech and fintech markets are strong in Germany, Cox said.
“If you look at Europe, you have London, Berlin, Frankfurt, Paris, Stockholm — these are places of technology innovation,” Cox said. On top of that, Frankfurt and London are the two biggest financial centers.
“And around London and Frankfurt you’ve got the creation of a number of fintech companies that are looking at different models around banking, foreign exchange, payments, marketplaces and exchange of goods and services,” Cox said.
Local banks in the U.K., Germany and other European countries struggle to develop the expertise to make good decisions with such companies, Cox said.
“It’s not an activity, we would contend, that banks can play at or experiment in,” he said. “One of the strengths of SVB is a very deep global expertise in what’s happening in innovation more broadly.”
In addition to Berlin, launch parties will be held in Munich and Frankfurt to introduce influencers, CEOs, VCs, and investors to the bank.
Another plus to Germany: Like their counterparts in the U.K., Germany’s regulators are progressive and see part of their mission is to support new entrants, Cox said.
Next up, Silicon Valley Bank is looking to finalize its bank license in Canada and open an office in Toronto. France and the Nordic region are to come sometime after that.
“The bank’s credentials working with tech companies plays well across borders because Silicon Valley is such an aspirational place for people that are looking to build tech companies,” Cox said. “We’re thankful that we tend to get a warm reception when we go into new markets.”
The bank already serves 50% of venture-capital-backed companies in the U.S., Chiaverini said.
“If they were to get close to that, or if they were to have even less than half that [in Germany], they’d still be pretty successful there,” Chiaverini said. “It makes a lot of sense for them to do it given their niche focus. Their brand is very strong in the industry, and they’re going to attract clients there. It will probably be slow in the early years, but for the long term, 10-30 years from now, they’re going to look back and say it’s a good thing we entered Germany, the U.K. and Canada when we did.”
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