The UK branch of the California bank has profited from other lenders’ reluctance to lend to technology start-ups
Britain’s politicians are desperate for the country to have a thriving technology sector. At every opportunity, ministers will talk up some group of “brilliantly-clever young people” they recently met in east London, who are working hard to build the next Facebook.
Not all of what they say is spin. In the last few years, a flurry of promising start-ups have established themselves as real businesses. The likes of Funding Circle, Shazam and Transferwise have reached the fabled “unicorn” status, raising money predicated on valuations of $1bn or more, and new startups are now being created at a record rate.
But it takes more than a good idea, a few talented engineers and a clever name for start-ups to be successful. For a long time, the common complaint among anyone trying to build a technology company of any size in Britain was that they couldn’t get the financing they needed.
While seed capital was in relatively plentiful supply, allowing an idea to get off the ground, the bank loans needed to support a company beyond its infancy were sorely lacking. Since internet start-ups don’t tend to have the assets or property that loans tend to be secured against, and more often than not are lossmaking for several years, asking a typical high street bank for a loan can be a fruitless endeavour.
In 2012, Silicon Valley Bank opened the doors of its first branch in the UK. The UK arm, a subsidiary of the 33-year-old US company SVB Financial, had been operating in the UK since 2004, but in the last three years has become a major player on the UK tech scene.
As well as loans, the company provides traditional banking services to many of Britain’s most promising tech startups and biggest venture capital firms, many of which find it difficult to open accounts elsewhere. Fintech companies, especially, can be seen as troublesome by more traditional banks, given uncertainties surrounding their regulation and checks on complying with Know Your Customer regulation (not to mention their potential as competitors).
Silicon Valley Bank prides itself on taking a different approach to lending than the major banks. While a large bank might look for more traditional indicators when deciding whether to approve a loan, such as a strong balance sheet, assets and positive cash flow, Silicon Valley Bank’s covenants – the conditions attached to a loan – can be based on factors like customer growth, website visits and so on: things that indicate momentum but are perhaps without immediate reward.
The approach appears to have paid off, at least for the US parent company.Last week it announced that profits in the first nine months of the year had reached $256m, up from $206m a year earlier.
And as the tech scene has grown in the UK – £1.3bn of venture capital cash was invested in technology companies in the first half of the year, up 56pc in 12 months – the UK arm of the bank has benefited. It now has more than $1bn (£650m) in loan commitments, over half of which has been drawn down.
Silicon Valley Bank’s UK division, led by Phil Cox, a veteran of Bank of Scotland and RBS, now has more than 100 staff, and has outgrown its offices in the City of London. It is planning a move to the hip new “Alphabeta” development at the intersection of Silicon Roundabout and the City in January.
The UK branch has more than 1,000 clients, including Index Ventures, the venture capitalists behind many of London’s successful start-ups; Shazam, the music discovery service; and Farfetch, the high-end fashion retailer.
The bank has become one of the backbones of the UK’s thriving tech scene. Clients say that it is not only easier for innovative companies to get financing, but being a customer of the bank can also mean being introduced to deep-pocketed investors.
Now, the traditional lenders are starting to take notice. Barclays set up a £100m UK tech fund earlier this year, saying it wants to “help fast-growing technology businesses accelerate to the next level”.
When it announced the fund, Barclays admitted what many start-ups have been saying for years – that major European lenders have traditionally failed to understand fast-growing technology companies, demanding that businesses generate cash rather than ambitiously put it back into research and development.
This has been one of the key issues holding back the UK’s technology companies against their US counterparts, whose banks – including Silicon Valley Bank itself – are far more willing to lend against growth and potential.
The success of Silicon Valley Bank’s UK division, after it dared to work with companies that other banks would not touch, is now leading bigger rivals like Barclays to follow suit. If more of the UK’s big lenders can take a bit of Californian inspiration, then the UK’s tech scene will be far stronger for it.