SVB Financial 1Q17 Earnings Call Notes

Gregory Becker – CEO, President & Director

Raising money was top challenge for startup executives

“The environment for our clients remains healthy, although, not without its challenges. Raising money was the top challenge identified by startup executives in our recent annual Startup Outlook Survey. Fortunately, there is continued investor appetite and capital for good companies, especially those that can demonstrate growth. While U.S. venture capital investment in the first quarter pulled back from its 2016 highs, the number of deals in the first quarter was still healthy and dollars invested increased over the fourth quarter. Overall, we view this progression as an expected and desirable return to normalcy. With estimated levels of dry powder in venture capital greater than $100 billion, most of that raised in the last 2 years, we believe there is sufficient capital to fuel the innovation ecosystem and that good companies will continue to get funding.”

Exit markets are active, but below historic highs

“Having added more than 1,000 new clients in the first quarter, we see evidence that new company formation is still healthy, even if it’s down from historic highs. Exit markets were relatively active in the first quarter, although, they too remain below historic highs. There were 7 U.S. venture-backed IPOs in the innovation space in the first quarter, 3 of which were SVB clients. Another 7 VC-backed technology and life science companies have filed to go public in the second quarter and there is a healthy pipeline of companies that reportedly planning for an IPO later this year.”

M&A remains the most common exit for startups

“Among our clients, the pace of M&A remain brisk and M&A remains the most common exit for startups. Half of the respondents to our Startup Outlook Survey indicated they expect the pace of M&A to increase this year. We believe the current VC market conditions represent a sustainable pace of fundraising and investment. And while exits are off to a modest start, we still expect 2017 to be a better year for liquidity for our clients relative to 2016”

Competition remains intense for all banks

“Stepping back to look at the broader industry, competition remains intense for all banks. Stagnating traditional banks and lightly regulated nonbanks are all searching for growth and the innovation economy is a key target for them. This competition has continued to drive down pricing and impact the pace of loan growth. While the broader markets have been more positive and less volatile than in recent quarters, there is still uncertainty about the health of the U.S. economy, the likely pace of rate increases and tax reform. We believe this uncertainty will likely cause more volatility over the coming quarters.”

We’re now at a healthy level of funding. We should be concerned if we got back to the levels from 2015

“Yes, this is Greg. I think the important point to make is that, the level of investment that we see we would describe and many of the people in the market would describe is being a healthy level. So I wouldn’t say it’s being held back. Actually, for me, it’s a healthy discipline that actually should be in place. And I’ve said this in prior quarters. If we see – if we’ve saw what we saw in ’15 again, that pace of investment, those numbers of companies being funded, we should be a little concerned. And so I think this is a healthy level. I think it’s great.”

Seeing a lot of competition from nonbanks

“We’re seeing less competition from banks, although, it is competitive, but the main competition is coming from nonbanks, who have raised significant amount of private capital to go after sponsored buyout, both senior and junior debt. And who – quite, frankly, they don’t have the same regulatory restrictions that banks have in leverage lending. And then, of course, in private equity services, because of the low-risk nature of that client base of the target market, you see heavy competition there as well. So you’re really seeing it across the board.”