Encouraged by rising demand for venture capital, a team of veteran bankers led by the former head of Comerica's venture capital unit has started a bank that will lend almost exclusively to new and emerging companies.
Square 1 Bank, of Durham, N.C., opened its doors Aug. 8 after raising a whopping $105 million. It has one full-service branch in Durham and loan production offices in five technology hotbeds - Palo Alto, Calif., San Diego, Boston, Seattle, and Austin.
Robert Casey, Square 1's founder and chief executive officer, said it was important to raise a lot of money to show potential customers that his bank can compete with rivals - such as the $55 billion-asset Comerica Inc. and the $5 billion-asset Silicon Valley Bancshares Inc., in Santa Clara, Calif. - that have established venture capital divisions.
"We wanted to start as a full-fledged competitor in this niche," Mr. Casey said. "We wanted to serve companies in all stages of growth right away rather than easing ourselves into the market."
Square 1 is the first new bank since the technology bubble burst five years ago to come out of the gates with a focus on lending to emerging companies.
Though start-up companies generally get the bulk of their funding from venture firms, they often need bank loans as well. And because most banks will not lend to a company with no track record or income, a handful of banks have this business largely to themselves.
There are risks, but the rewards can be substantial if a company succeeds. Banks often receive warrants in companies to which they made loans, and cash in big if and when those companies go public.
Still, a number of banking companies, including Progress Financial Corp. in Pennsylvania and Riggs National Corp. in Washington, got burned making loans to emerging firms. As quickly as they entered the venture business in the late 1990s, they left it in 2000 or 2001 as customers they had financed went belly-up or saw their stock prices tank.
Mr. Casey was the head of the emerging growth division of Imperial Bancorp in Inglewood Calif., when Comerica, which is based in Detroit, acquired Imperial in January 2001. At the $7.5 billion-asset Imperial he founded its emerging growth division, and by the time Comerica bought Imperial the unit had $3 billion of deposits and $850 million of loans. (Among Imperial's early customers included were Yahoo! Inc. and eBay Inc.)
Mr. Casey stayed on with Comerica as head of Comerica Ventures and Comerica Capital Advisors, but left in 2002.
After waiting out a two-year noncompete agreement with Comerica, Mr. Casey started out to create Square 1 in January. He received a great deal of interest from many of his former Imperial Bank colleagues.
Square 1's executive vice president, James B. Rutter, and the chief credit officer, Susan G. Casey, who is also Mr. Casey's wife, both worked for Comerica, Imperial, and Silicon Valley Bancshares. And most of Square 1's 49 employees once worked at one of those three banks.
Mr. Casey said that the timing was right to start a venture-focused bank because after a lull of activity, venture capital investing has picked up. In 2004 venture capital firms invested about $21 billion in emerging companies, according to PricewaterhouseCooper's MoneyTree Survey. That was nowhere near the record $106 billion invested in 2000, but it was the first increase in three years. Through June 30 of this year venture firms had invested about $10.7 billion.
In 2004 firms that received venture funding also borrowed about $2.1 billion - roughly 40% of which came from specialty finance companies, according to PricewaterhouseCoopers. Mr. Casey said that while the pool of loans is small, Square 1 has an edge over the specialty finance companies because as a bank it can offer a lower cost of funds.
"The difference with us is that the whole bank is focused on taking care of venture capital firms and the companies they fund," he said. "They have special needs, and we know how to go about lending to very young companies that have yet to attain revenue."
Square 1 is finding customers primarily through relationships with venture capital firms that refer companies they invest in.
Charlotte Chamberlain, an analyst with Jefferies & Co. in New York, said Square 1 may struggle breaking into this business, since it is going after industries that Silicon Valley Bank, for example, has served for more than a decade.
"Silicon Valley has a pretty good lock on health-care and non-Internet high-tech companies, so they will have a tough time going head to head with them," Ms. Chamberlain said.
Square 1 offers these emerging businesses small short-term loans - mostly working-capital lines of credit and standard commercial loans lasting no more than three years. Depending on the company's stage of development, the loans range from $500,000 to $7.5 million. The bank also has a full line of traditional deposit products, all accessible online.
Personal service and access to clients are keys for Square 1, which is why it has opened loan production offices in five other cities. It intends to open additional offices in New York City, northern Virginia, and Atlanta within the next year.
Mr. Casey said he envisions Square 1 having $2 billion to $ 3 billion of assets within five years.
Square 1 does plan to obtain warrants in companies it lends to, and though the depressed value of warrants led to huge losses for lenders like Riggs and Progress, Mr. Casey said he does not see this as risky. He pointed out that the stock market is less frenzied than it was in those days and that Square 1 would be selective in when to exercise warrants.
Risk is further minimized, he said, because of the management team's expertise and Square 1's rigorous underwriting and loan monitoring, including checking on a company's finances at least monthly and sometimes weekly. Also, all borrowers must make a deposit of at least a third of the loan amount in Square 1.
"We underwrite them differently and look at them differently," Mr. Casey said. "And if you know what you are doing, the risk is nearly gone."
