A Founder’s Guide to Venture Banking
By: Scott Wolfgang
Tags: Credit Cards, Venture Debt, Banking, Letter Of Credit, Debt

As someone who underestimated the value of a venture bank as an investor, but went on to appreciate it fully as CFO at a venture-backed startup (now a banker at PacWest), I thought this would be a worthwhile read for founders. It explains the common, real-world services a venture bank like PacWest or SVB provides and how partnering with an institution like this on Day 1 can eliminate major headaches and operation debt associated with switching later in the game.

When you first start a company, conventional wisdom would have you open a business account with your personal bank — usually Bank of America, Wells Fargo or Chase. In the early stages of your startup, this will generally be fine as the main activities will be 1) automatic deposits from payment services like Stripe if you are lucky enough to have revenue 2) physical deposits of customer checks on your bank’s mobile app or at the teller/ATM and 3) payments via ACH or check for expenses like payroll and rent. All three are fairly basic functions and standard services than any bank can provide.

As you begin to scale, you will likely start to run into challenges with a bulge bracket bank around these themes:

Fundraising and Infrastructure: Bulge bracket banks don’t know VC’s, law firms, accountants or other service providers in the market where connections are mission critical. Most venture banks have Startup Services teams whose job it is to connect startups with these players and provide value added resources. At PacWest, we offer free banking services to startups in their early years and run a significant amount of programming tailored to their needs like monthly breakfasts with experienced founders and VCs to share insights. We also connect startups with infrastructure partners like AWS who offer incentives and perks to help resource constrained startups scale more efficiently. Getting a lease: Once you raise money and decide it’s time to move on from your coworking space, you will need to sign a lease and put down the requisite security deposit — generally 3-6 months of rent ($50–100k+). In the commercial world, the deposit comes in the form of a Letter of Credit (LC), which banks issue. Even if your large bank issues LC’s to money losing startups, good luck finding who you need to talk to and navigating the paperwork/process associated with the process on your own. LC’s like this are standard for venture banks and we can turn these around quickly and seamlessly saving you tremendous headache and boatloads of time. Credit Cards: Most founders I know generally start out with something like an American Express Business Platinum that provides points for business expenses — how else can you afford a vacation (assuming you can make the time). Ironically, though it’s called a ‘business card’, they require personal guarantees from founders AND the activity gets recorded on personal credit reports. Sign up for Credit Karma and watch the havoc $10k+ in monthly expenses has on your credit score. Venture banks routinely issue cards to startups burning cash along with large enough limits to run the business while not taking on personal credit risk. Debt: Venture capital can be extremely dilutive — each early funding round can take between a 20–30% equity stake in your company. A way to help fund the business to key inflection points with less dilution is through venture debt (you pay back principle and interest rather than give away equity ownership). This is a great piece by Bessemer on the pros and cons of venture debt, but if you want debt, venture banks are the ONLY banks that will provide it to unprofitable startups and this funding can be an integral part of scaling your business while maximizing ownership. Customer Support: If it’s frustrating to talk to your bank today, just wait until you are a scaling business with your hair on fire and dealing with all the issues above PLUS FX, domestic and international wires, lock boxes and/or automatic check scanners. The large banks tend to treat all customers the same way whether they have $10.00 or $10 million in their account. And they don’t understand the world of venture backed startups at all. At a venture bank, you usually get a dedicated account manager and ALWAYS a team that implicitly understands your business needs and can anticipate the challenges you will face at all stages.

Founding, running and scaling a startup is hard. The best advice I can give founders is surround yourself with the right partners, vendors and investors as soon as possible. There is nothing worse than having to change your tech stack, investor syndicate, lawyer or banking platform while scaling your business. So rather than create unnecessary headaches and operational debt down the line, reach out to a venture bank to set up your account on Day 1. Just like your lawyer, accelerator and investors, it will prove to be an invaluable partner on your journey.