The market is littered with stories of disruptive start-up companies that have scaled up to reach $1 billion status in a few years. For a company to reach this size, it often requires a non-traditional approach from their banking partners.
As demand among start-ups for capital grows – amid a gap in funding and expertise on offer from the traditional players to assist their bid to scale up – new challenger banks have entered the scene.
Silicon Valley Bank (SVB) has from its inception worked with tech start-ups from their initial funding rounds on to banking them as large corporates. The bank, operating out of London since 2006, saw online fashion retailer Farfetch reach unicorn status with a $1 billion valuation in March. SVB has banked the company since its launch.
When looking for new clients, SVB takes suggestions from various parts of the industry, including working closely with its existing client base to identify which new companies are starting to generate interest and might be in need of additional banking support.
Silicon Valley Bank
“The advice is tailored to each client’s business model. Often businesses will look for help on things like structuring a pitch, or which KPIs [key performance indicators] to track. We will offer them high-level advice based on our experience, but we stop short of providing true consultancy services.”
There has also been some developments in the traditional banking space. Barclays has introduced a targeted financing strategy for emerging businesses, including a £100 million fund specifically for financing the growth of tech start-ups. The bank recognised the lack of debt financing available to the industry in the UK, which was hampering growth compared with what their US counterparts were able to access.
Having access to finance from an early stage allows the founders to retain a greater level of control over their businesses.
Corporates need access to banking services that would be traditionally reserved for more mature companies in a much shorter timeframe.
High-growth corporates are typified in the speed they can reach what is considered large corporate status. Traditionally, companies would be expected to grow at 5% to 10% per annum and take 15 years to be considered large. A fast-growth company can attract greater levels of investment and reach the same level within five years.
Barclays is selective over which companies can access these funds, and has outlined criteria on which businesses to include.
Sean Duffy, head of technology, media and telecoms at Barclays, says: “High-growth characteristics often show growth rates of 20% per annum, if not more, combined with some evidence of a disruptive proposition. The service does not have to be unique, but it does need to look and feel different.”
Barclays also looks at the individuals behind the company, and their ambitions for growth. The bank looks for signs that the company has been seeking to grow its business through accessing financing from other sources before it provides investment.
“There also needs to be evidence of external investment, rather than just using their own resources," says Duffy. "The bank does not choose over whether it is an angel investor, venture capital or private equity sources, but there needs to be evidence of this funding.
“The aim of the funds is to support fast-growing companies that would usually meet challenges on being assessed on a standard lending framework, but are exhibiting the potential for substantial growth. Even if the company is still technically loss-making, it can move to a break-even position.”
Assistance needs to go beyond providing financing to these new companies.
Platts says: “When the bank works with a company for the first time, the focus can be on anything from day-to-day support through to helping them with their business plan. If appropriate, they will receive assistance and support on how to obtain new sources of capital, and we set up introductions with potential investors on a case-by-case basis.”
This dialogue helps bring companies onto banking platforms, which would normally be reserved for more established businesses.
Duffy says: “For high-growth companies, Barclays seeks to accelerate banking platform development such as earlier access to platforms relating to Sepa, Faster Payments and other services they need to scale quickly, including FX solutions to help manage currency exposure.”
Platts says SVB will monitor the client’s growth patterns and respond based on the developing needs.
“Regardless of the size of the client, it is the same shape of team that works with them," she says. "Our clients grow so rapidly that we don’t differentiate on service levels.”
At both SVB and Barclays, the staff who work with the high-growth companies are integrated into the existing departments.
|Sean Duffy, Barclays|
Duffy says: “The high-growth managers sit within established teams, but the training is very specific to high-growth companies, using the same set of tools. They are able to make significant decisions on lending.”
Newer companies benefit from having educational sessions arranged to give them a better understanding of the banking components they will need to use, as well as expectations around regulations and anti-money laundering.
Platts says: “We run panels to provide advice on elements of business that a client may not have encountered – or may need to expand their knowledge of. Smaller companies take a lot of benefit from the value-added events. We also give masterclasses on specific topics. It’s about giving the client real added value – that’s our differentiator.”
She says the bank uses such events as an opportunity for the companies to meet with each other and perhaps find assistance from within SVB’s own client base, adding: “We will invite a group of corporates from across the businesses, the M&A divisions, and members of senior banking to discuss opportunities.”
Duffy says working with such high-growth companies is not to the detriment of other more traditional companies that might see a much slower, but still consistent, rate of development.
“Prioritizing the needs of these companies does not affect how we would work with more traditional businesses," he says. "High-growth companies work to see accelerated growth rates and become frustrated if the bank does not understand their needs.
“I don’t think high growth will ever be so disruptive that it will require banks to fundamentally change their processes. Every bank needs to figure out the model to build for high growth that does not pulverize their existing operating model.”