I have two TV guilty pleasures that my wife endures: Spike TV's Bar Rescue and ABC's Shark Tank. On Shark Tank, this interesting fellow, Steve, pitched for $10,000 from the sharks for his business... I Want to Draw a Cat For You. I was highly entertained by the idea. So I had Steve draw me a cat, and I'm sharing it with you.
How often do I hear bankers wish they can get more activity from branch personnel? Almost daily. So I thought I would memorialize this conundrum in a cat drawing. And yes, I did pay $9.95 for it. Enjoy!
Why did Willie Sutton, famous bank robber from the 1920's to 1950's, rob banks? "Because that's where the money is." Sutton, by the way, denied the quote. But we can't deny it's true. Financial institutions remain the place to go for money.
So why do FIs opt for the sideline in participating more fully in innovation? I recently wrote on these pages that FIs should develop Shark Tank like processes to get early stage equity capital into the hands of nearby entrepreneurs to fuel growth in local markets.
But bankers generally don't like to be at the tip of the spear in product and service offerings. In many cases, it's far too risky to undertake a strategic direction that has been untested. The potential for failure is greater. So we opt for making incremental improvements to business as usual. But in my opinion, business as usual is a riskier course. Better to innovate and go out swinging, than to remain mired in the past and go out with a whimper.
But there are some leading edge bankers to use as your guidepost. Take Silicon Valley Bank in Santa Clara, California. Here is a bank that nurtures start-ups from the garage to global distribution (see picture from their investor presentation). Through their Accelerator Solutions, they package products, expertise, and connections into one business unit to improve the likelihood of start-up success. The bank has maintained an ROA at or near 1% throughout the financial and economic doldrums.
I understand SVB's location allows them to specialize in serving tech start-ups and venture capital firms. But innovation need not start in northern California. In fact, I would put to you that this region benefits tremendously by having nearby support systems that foster innovation. Your markets can too. And why can't it start with your FI?
Here are three things I think your FI can do to foster greater innovation in your markets that can drive economic prosperity, and therefore your success, for generations:
1. Develop specialized expertise within your FI to help entrepreneurs get their businesses off of the ground;
2. Create flexible product packages to make banking simple for early stage companies;
3. Find creative means to get capital in the hands of promising companies. This can be done through equity funding similar to what I proposed in my Shark Tank post, partnerships with various VC firms and institutions such as nearby insurance companies, factoring firms, etc., or outright balance sheet lending so long as you put a wall around the risk.
Should we continue to lament about our local economies or should we do something about it?
~ Jeff
P.S. Subsequent to this post, Inc. Magazine published an article It Might Be Time to Break Up With Your Bank describing great alternatives to bank financing for small businesses. Why can't we either do this lending or develop relationships with reputable lenders, as determined by our due diligence, and serve as brokers to this financing and advisers to our client?
Reality shows are generally not my thing. Don’t get me wrong, I’m often subjected to the genre because I submit to family preferences. How else would I know that Emmitt Smith is quite the twinkle toes. But, while channel surfing, I discovered Shark Tank.
On Shark Tank (see the clip below), entrepreneurs pitch their ideas to a panel of angel investors, known as sharks, to win funding for their enterprise. The sharks, one of whom is Mark Cuban, the colorful owner of the Dallas Mavericks, pillory the entrepreneur with questions about their product(s) and business plan. After the Q&A, they decide if they want to fund the venture, and at what level. Watching and listening to the questions, answers, offers and counteroffers is fascinating.
I recently read a NY Times You're the Boss Blog article regarding how banks can fund small businesses. It made me think of Shark Tank. Businesses evolve through various stages. In early stages, entrepreneurs struggle to get funding. It’s generally too risky for a bank loan. So, early stage funding typically starts with owner’s capital, then to friends and family if it gets that far, then to angel investors. Banks will entertain a loan typically after a few years of successful operation. There are exceptions, however. The SBA loan program was designed to get earlier stage capital to entrepreneurs. But generally, young businesses need equity, not debt.
Many banks are headquartered or have significant presence in communities that are experiencing economic difficulties. This impacts loan quality, loan demand, growth, and profitability. But most banks remain on the sidelines when it comes to small business formation. The businesses formed today, appropriately capitalized, will be those that sustain our communities in the future. Some of the fastest growing companies today are not that old...i.e. Priceline.com, VistaPrint, Netflix, etc.
These businesses needed capital. Many top new companies are located in California’s Silicon Valley, and not coincidentally, that is where many venture capital firms are located. As traditional providers of capital, can banks participate in funding early stage ventures? I say yes because of community banks’ unique position in our communities.
But funding early stage businesses does not have to be with the traditional bank loan, or even an SBA loan. These are equity investments, higher risk seeking higher return. I think banks can sponsor their own version of Shark Tank. Not as sole investors in an angel fund, but as investors and managers of an angel fund, much like the sharks of Shark Tank. What would be bankers’ objections:
1. It is an impermissible activity… jfb response: Put it at the holding company. Many banks manage mutual funds in their trust companies, don’t they?
2. It wouldn’t be profitable… jfb response: I wonder how venture and angel funds do it? A small, $10 million fund can earn a 2% annual fee ($200,000) and 20% of the “ups” (fund returns). So if an angel fund averaged a 10% annual return (low for venture fund standards), the revenues to the manager of the fund would be $400,000 ($200,000 annual fee plus 20% of the $1 million annual return). You couldn’t manage a $10 million fund for $400,000/year?
3. We would have to turn down more businesses than fund… jfb response: True! But it would force startups to develop a business plan to chart their future and present to the sharks. Even if the venture doesn’t win the funding, the entrepreneur would have thought through the business more thoroughly. How many times do you drive by a new business that you don’t think will make it? Through this process, those that get turned down may turn their entrepreneurial spirit to a more sustainable venture, or burn with a greater desire to prove you wrong!
The benefits, in my opinion, would be:
1. Get more funding to promising startups. One of the top reasons for business failure is lack of capital.
2. Turn your community into a business incubator. Bring enough publicity to your process, you are likely to get more businesses seeking funding. Do you see having more, higher quality startups in your community as a good thing?
3. Build a sustainable future for your community. The employers of today are not likely to be the employers for the next generation in your local area. Acquisitions, changing consumer preferences, and general corporate inertia make today’s strong business into tomorrow’s dinosaur. Remember the Palm PDA? Strong, vibrant communities should always be looking to the next ventures that will sustain them into the next generation.
What do you see as advantages and disadvantages of a community bank sponsoring its own Shark Tank?
