Rod Werner is managing director of City National Bank’s Technology and Venture Capital Banking team, based in Palo Alto with additional offices in San Francisco, Santa Monica, New York and Boston. He manages and leads a team that provides venture debt and various other financial services to companies ranging from pre-revenue, venture-backed startups, to later stage and profitable technology companies.
This interview is part of the Q1 2016 PitchBook Venture Industry report sponsored by City National Bank.
What have you been seeing in your area of the venture capital financing market as of late?
It felt like we kicked off 2016 with a bad hangover and some dour sentiment in the marketplace. At that time, we noticed that many VC-backed companies quickly reduced expenses and began to manage spending more closely in their 2016 budgets. There continues to be market uncertainty over oil prices and the economies of China and Europe, and much concern about what is in store for this year in the venture and tech communities in Silicon Valley with the election and interest rates.
However, it appears that market sentiment has changed for the positive recently. We find that clients and investors are more optimistic than they were a month ago. However, we stress that companies should continue to appropriately manage expenses to extend their runway and focus on growth drivers for the remainder of 2016.
Have you seen any material shifts in City National Bank’s technology lending activity from the end of 2015 through the first quarter of 2016?
No. We continue to lend to fast-growing, market-leading technology companies that are backed by the top venture firms in the U.S. Today, we are one of the strongest financial institutions in the U.S. For our clients, it matters knowing we will be there for them.
The downturn in venture investment and valuations has been the talk of the town for some time now. Have you seen an increase in founders turning to venture lenders?
The market has been on a long, great run since the Great Recession, but it does go through cycles. I personally have been here in the Valley through the dotcom bubble and the financial meltdown, and each time great tech companies emerged during those periods.
That said, we have observed valuation pressure recently and equity capital is taking longer to raise today than in years past for most venture-backed companies. The bar is higher and entrepreneurs are concerned that the equity funding will dry up—if not now, then later this year. This results in more companies proactively looking to raise both equity and venture debt.
Yet at the same time, several of our high-profile, fast-growing, disruptive technology clients have successfully raised large equity rounds this quarter.
What are the typical types of financings you are conducting with your team?
We provide venture debt, equipment financing, recurring revenue and general working capital lines of credit and leveraged finance for fastgrowing, venture-backed and public technology companies. We have a wide range of clients, from prerevenue startups and early revenue companies all the way up to late-stage, post-IPO technology companies with operations globally. They have different needs at each stage of growth, but we are able to scale with them for their entire lifecycle. Most of our early-stage clients have already raised initial venture capital funding rounds to develop products, test market acceptance, gain revenue and achieve market adoption. They come to us at that point when they start to see working capital shortfalls or need flexibility between equity rounds.
What are the key company metrics your team currently assesses as they work through a deal?
We’re always looking for disruptive ideas backed by the best VCs. We look for market potential, competition, revenue growth and profit margins. A strong, collaborative management team with a healthy history and success record is also essential. Additionally, we track how clients perform relative to key milestones and expectations of their boards, to assure they will have access to future capital and the ability to build a company to a successful exit or IPO.
Have your processes shifted at all in light of current market conditions?
No matter what kind of cycle the market is in, we remain focused on working with top management teams with disruptive technologies that can become viable, ongoing businesses that operate for the long term. We’re always looking for clients who have been able to attract investment from the best venture firms in the world. We find that much of our deal flow comes directly from the venture community and from repeat entrepreneurs we’ve funded in the past. With a long history here in the Valley, we’ve seen many of our clients’ companies get sold. Then, they come back to us when they have that next great idea.
How do you feel the rest of 2016 is going to play out?
There tends to be a lot of uncertainty in election years, and 2016 could top them all! We’ve seen extreme market turbulence in the early part of the year and there is likely to be continued volatility for the rest of the year. There is also likely to be continued skepticism in the market, causing delays in financing. We urge young companies to do a better job identifying growth drivers within their respective businesses and spending wisely.
But even though there are real concerns ahead, with talk of slower growth in China and Europe, the U.S. continues to offer investors from all over the world a place to invest in strong, fast-growing technology businesses. We continue to see a lot of liquidity in the marketplace coming not only from the U.S. and corporate investors, but also internationally.
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