×

City National, a major lender to start-ups, is done backing early stage tech companies, say sources

In late November, City National Bank's Rod Werner made a bunch of phone calls to his colleagues at venture capital firms with an unfortunate message.

City National was getting out of the venture debt market, meaning no more lending to early stage start-ups. The firm was instead focusing more on bigger companies and private equity.

According to multiple sources, who declined to be named because the conversations were private, Werner, managing director of City National's technology and venture capital banking group, said the bank's parent company, Royal Bank of Canada, was feeling some regulatory heat.

RBC acquired Los Angeles-based City National last year for $5 billion, and in the deal assumed a growing portfolio of high-risk debt tied to young technology companies.

In an official statement to CNBC.com, City National offered a softer message, and a spokesperson declined to comment on anything regarding regulators.

"We will continue to bank early stage companies — and technology companies across the board — but we are narrowing our focus on the types of loans we make and expanding efforts to lend to more established companies," City National said. "Working with RBC Capital Markets, we believe we can be a vibrant contributor to the growth of a wide range of technology companies and entrepreneurs."

RBC's U.S. banking regulator is the Office of the Comptroller of the Currency, which also oversees City National.

The Comerica Bank Tower stands in Dallas, Texas.
Matt Nager | Bloomberg | Getty Images
The Comerica Bank Tower stands in Dallas, Texas.

City National's departure from early stage dealmaking leaves a gap in a niche corner of the start-up financing world, where only a handful of banks operate, most notably Silicon Valley Bank. It's also another sign that certain pockets of capital are drying up as investors reckon with the weakest tech IPO market since the financial crisis and a rationalization in valuations from the heady unicorn days.

During the start-up financing boom, which peaked in mid-2015, City National was a particularly aggressive provider of debt. Werner joined City National in 2012 to start the venture practice after spending two decades at Comerica, one of the other leaders in the market. Comerica is experiencing changes of its own, with Greg Belanger, president of the tech and life sciences practices, retiring in October.

Comerica confirmed Belanger's departure and said the bank hasn't determined his successor yet.

"We've been through numerous economic cycles over the last two decades and are as committed as ever to financing early, growth and late-stage technology companies," said Judy Love, president of the bank's California market. "With our years of experience working closely with start-ups and our venture capital partners, we know this space well."

City National's Werner is known by everyone in the venture universe, and he's said to be quite the salesman. He has courtside seats at Oracle Arena for Golden State Warriors games and isn't shy about inviting prospective borrowers to join him, sources said. City National is a sponsor of the Warriors through the end of this season.

In late 2014, CNBC reported on City National's expansion in tech and the pressure the bank was putting on market pricing. The emergence of City National and a few other players pulled rates down by 15 to 20 percent over the course of a year, bankers said at the time.

Cheap debt was a boon for start-ups, as it opened the door to affordable capital without forcing founding teams to give up ownership. As recently as October, City National participated in a $14.3 million financing of marketing analytics start-up Metamarkets.

"Over the last three years, they've been an extremely important participant in the venture debt financing market, particularly in technology," said Haim Zaltzman, a partner at law firm Latham & Watkins in San Francisco and an expert in venture debt.

Zaltzman estimates the venture and growth-stage debt market, which includes early and late-stage deals, equals about $12 billion to $15 billion a year. On the equity side, venture capitalists invested $59 billion in U.S. start-ups last year, the most since the dot-com bubble of 2000, according to the National Venture Capital Association.

However, the NVCA reported in October that the number of companies receiving funding has dropped for five straight quarters.

With venture investors getting more discerning, start-ups are vanishing at an accelerated pace. Notable names like One Kings Lane, Beepi, FlightCar and Vouch either shut down or sold for a fraction of their latest valuation. More companies closing their doors leaves City National and other lenders facing heightened risk that debt won't get repaid.

"Some banks finally realized, we don't understand this sector as well as we thought we did," said Dan Myers, CEO of Bridge Bank, one of the remaining venture debt providers. "Ultimately they made the decision to ramp down or exit."

At the time it was acquired, City National had $22.5 billion in outstanding loans and leases, a 17 percent increase over the prior year.

The bank didn't break down its venture business, but said California represented 72 percent of total loans outstanding. Many of City National's customers are in the entertainment industry.

"When the market turns, those guys stay in the market." -Jeff Richards, managing partner at GGV Capital

Bridge is gobbling up some of the business that others are leaving behind, Myers said. The bank is also playing into the trend of smaller tech-focused lenders getting acquired. Bridge was bought by Western Alliance last year, and Square 1, another small competitor, was purchased by PacWest.

Myers said the exit of some banks shouldn't have much of an impact on the market because the remaining players, with the help of bigger balance sheets, "have the ability to pick up additional activity that's more than sufficient."

SVB has also been steadily bulking up. Loans to venture-backed companies climbed 19 percent to $1.1 billion in the year ended in September over the prior 12 months, the Santa Clara, California-based bank said.

There are also a number of nonbank lenders in the market, including Western Technology Investment, TriplePoint Capital and Hercules Capital. But those companies tend to offer higher-priced debt than banks at less favorable terms to borrowers.

Still, venture capitalist Jeff Richards, managing partner at GGV Capital, said there's a core set of venture debt providers that aren't going anywhere, and it's important that they remain active. Richards said about three-quarters of GGV companies rely on those issuers for some level of debt.

"When the market turns, those guys stay in the market because they have super-strong relations with VCs and founders," Richards said. "The tourists go home."

— CNBC's Josh Lipton contributed to this report.