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FOUNDERS & FRIENDS PODCAST

With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Avidbank Focuses on Startup Banking Services

Posted on: 07/07/2024

Sam Bhaumick

Sam Bhaumick

Executive Vice President- Venture Lending - Avidbank


Sam Bhaumick of Avidbank - Podcast Summary

Sam Bhaumick, EVP of Venture Lending at Avidbank, explains how Avidbank offers venture debt and cash management services to startups.

Sam Bhaumick of Avidbank - Podcast Transcript

Scott: Welcome to Friends with Friends podcast with Scott Orn at Kruze Consulting, and today my very special guest is Sam Bhaumik of Avidbank. Welcome, Sam.
Sam: Hey, Scott. How’s it going? Good to see you.
Scott: Pretty good. Pretty good. We were just reminiscing about children’s sports and all the things we do as fathers, so it’s some of the best times.
Sam: [inaudible 00:00:24].
Scott: We’ll hit the mic. Yeah, totally. Well, maybe retrace your career and tell us how you landed at Avid. And we’ve known of each other for a very long time because we have a lot of mutual friends and mutual former colleagues, but it’s great to …
Sam: Yeah, well, sadly, I’ve been in venture lending for close to 40 years. I started my career at Silicon Valley Bank as an intern in 1986.
Scott: Wow.
Sam: And parlayed that into my first job in banking. I was literally the first person that was hired out of school at Silicon Valley Bank.
Scott: That’s incredible.
Sam: And had a pretty interesting career. Since then, I’ve had the privilege of starting and growing a number of different venture lending practices, starting at Silicon Valley Bank, going to Imperial Bank and then Comerica Bank. I did a little bit of time at the New York Stock Exchange just to do something a little bit different and work with some publicly traded companies and found out that there is interesting companies and interesting folks outside of the Silicon Valley. That was an amazing realization. So, I started here at Avidbank in 2019 after running the venture lending practice for SquareOne Bank for close to 10 years.
Scott: Oh, wow. I didn’t know that.
Sam: Which you may know was acquired by Pacific Western Bank, and I came here to start and build a venture lending practice that’s focused on early to growth-stage companies. We do that on a national basis and work with companies that are basically series A through series C. We are providing full service banking and then certainly working capital financing and venture debt. Our average size deals are sort of in the $1 to 5 million range, and we can certainly do more up to $25 million, but on average, it’s in that $5 million range for sure.
Scott: And on that one to five, is it kind of traditional venture debt where it’s like a senior lien and use it for whatever you want kind of thing? Or is it more AR or is it combo? How do you think about it?
Sam: Yeah. So, we can do both. We certainly love providing sort of classic venture debt on the heels of a new equity round, series A equity round. And, usually, those loans are term loans. They have no covenants, usually they’re senior debt and there’s not a lot of rules about how you’re going to use that debt. Our clients use them for cash runway extension, they use it for equipment financing, and there’s not a lot of rules there. It’s a lot of flexibility. And we also can provide working capital financing usually in the form of a line of credit. It’s usually got a formula based on accounts receivable or monthly recurring revenue depending on the revenue model of the company.
Scott: And you said something there that was really interesting, which is on the heels of a Series A or around. Maybe you can kind of explain that because oftentimes I find myself explaining to entrepreneurs that they need to put something in place when they raise money, not when they’re out of money. Can you talk about from a lender’s perspective, when the right time to put a deal in place, and why that is?
Sam: Yeah. Well, it’s pretty popular to think about adding or supplementing your equity dollars with some form of debt capital on the heels of an equity round. Most equity rounds provide a runway of about 12 to 18 months for most early-stage companies. And if they can supplement that equity with say, another six to eight months of runway on a fairly non-dilutive basis, that’s pretty attractive. They may not choose to use that debt, which by the way, we don’t require the company to draw down the debt, but if they do have it in their hip pocket to take advantage of an additional growth possibility to extend into further R&D or just to put more fuel on the fire, if you will, if things are going well. Where venture debt doesn’t work as well is if the company or the entrepreneur intends to use it as sort of a bridge financing or sort of last dollars in or a bridge loan, however you want to think of it. But the last dollars in is not a good use for venture debt because there is a senior lien on all the assets of the company and adding additional debt into a bad situation usually doesn’t work out well.
Scott: Yeah. I mean, your business model is not to take equity risk. Your business model is to be safer money. That’s why the cost of capital is so much lower. When people are asking you to do a bridge loan, that’s equity risk. Even the VCs don’t like to do bridge loans.
Sam: That’s right.
Scott: They kind of begrudgingly do bridge loans. So, asking a lender to do that who doesn’t have a relationship with a bank is a total non-starter. And I kind of coach people to put the line in place with the forward commitment. Is that kind of how you think about it around when they close the round? How do you structure the forward commitments in relationship to when they close the money and how much runway they have?
Sam: So we certainly like to engage with the company before they’ve raised their equity and we establish a relationship. We are a bank, and so we certainly can provide them banking services and establish that relationship. Once they do close a series A from an institutional investor, whether it be a VC or a private equity firm, then we can usually put together a term sheet for venture debt. There isn’t a formula necessarily that’s associated with it. I don’t like to think of it that way, but just as a rule of thumb, most entrepreneurs are able to raise venture debt in the amount of 25% to say 40% of the equity round that they’ve raised. That’s just a loose rule of thumb. But there are so many other factors. For instance who are the VC syndicates or the investor syndicates, is the entrepreneur a serial entrepreneur, have they done this before, what is the competitive landscape, what does the market look like? How far along are they in their go-to-market strategy? Do they have customers or don’t? So, there’s a variety of different factors.
Scott: Yeah, I’m smiling here because that’s the exact number band I use, 25 to 40% because everyone asked that question. And then you also made a great point about, hey, they might not even use it because sometimes the companies are just on fire and they get preempted by another, like the series A money, fuel on the fire, they’re kicking butt, and then a series B investor takes them to Starbucks. And next thing you know, there’s another term sheet for a series B. That’s one of the things I like about debt is it’s like as a startup, you’re creating a lot of optionality for yourself by having that relationship with a lender. And is that how you got … Yeah, go ahead. I’m sorry.
Sam: Definitely the case. And it definitely gives you negotiating power. In your scenario, if you’re sitting in Starbucks with your potential series B investor, you don’t need to rush towards that term sheet or the valuation that they are suggesting because you’ve got another six or more months of runway in your pocket. So, it does provide you quite a bit of negotiating power, which results in less dilution for you as a founder.
Scott: Yeah, that’s such an awesome point because it’s not just the outside VC’s negotiating power, but oftentimes you’ll see inside VCs preempt around too, because their whole business model is predicated on getting as much money into the good companies in their portfolio as possible. And so oftentimes they’ll be like, Hey, wouldn’t it be nice if you had another $5 million? And entrepreneurs usually are like, yeah, it would be nice, or another $10 million, whatever. But having that option in the form of less dilutive money can be really, really powerful. And sometimes even I’ve seen lenders welcome that inside round, then maybe extend the terms another three months or something like that.
Sam: Totally.
Scott: Something that’s a win-win for everybody. So that’s really cool. You actually explained this really, really well. This is great. Those 40 years have really paid off, Sam. You really know what you’re talking about.
Sam: Well, the gray hair is well-earned. I’ve seen it all.
Scott: And so you guys are not just a lender, but you’re a bank. You hold companies’ cash. And before we start jumping in here, we’re not a registered investment advisor, so we don’t give advice on securities to buy or things like that. But I think we can talk in broad strokes about cash management. How is your cash management operation at Avid setup and how do you market that?
Sam: Yeah, we’re super proud actually of our cash management, our treasury management capabilities here at Avidbank. We’ve brought on a lot of folks that we’ve worked with over the years from various banks, SquareOne, the old Signature Bank, and so forth. And so, we have what I like to think of as a world-class treasury management group. And really what we’re doing here is providing our clients with a really a hands-on approach to their cash management, treasury management strategy, getting them into products that offer full FDIC insurance if that’s what’s concerning them or if that’s what’s important to them. We can offer them products where we can maximize yield but still preserve security. And these are products that are not often available in these types of forms to early-stage companies. So, our rates are pretty attractive here at Avidbank, but with a hands-on approach as well.
Scott: Yeah, that’s so valuable because I think we still see … I think Kruze clients today are managing something like $4 billion. And we still see a lot of companies keeping a huge amount of cash in their checking account, which doesn’t really have a yield. Or maybe it’s a 50 basis points or something very, very tight. And so having a bank that has that cash management capabilities is actually really, really valuable. And you’d be surprised, we run the numbers for a lot of companies and they can hire another one or two people oftentimes per year just if they’re holding their cash in the right places and getting the right yield. And you also touched on safety, liquidity, access, that stuff is super important. It’s nice to have that in a banking partner.
Sam: Yeah, I think it’s a great point that you make. The yield is super important and can result in, as you said, another headcount, another product development, what have you. And so many times the entrepreneurs are very focused just on, look, I’ve got cash burn, I’ve got to have liquidity and security. Keeping it in a money market, excuse me, in a checking account or what have you, it’s non-interest-bearing. It’s an easy thing to do. But one of the things we can do is help the entrepreneurs who oftentimes don’t have deep experience in treasury management and so forth in designing a program that really makes the best sense, that offers the best of all worlds.
Scott: What are some features of that? I have some things in mind around maybe laddering money or keeping a portion in a money market fund and a portion in a money market account. But when you’re thinking about designing a program like that, what are the key ingredients for you?
Sam: Well, most of our clients here are focused on keeping their dollars in an interest-bearing money market account, whether it be in the bank or off balance sheet, and then moving money as they needed back and forth between accounts. I will say, Scott, the vast majority of our clients do keep their dollars in our bank in a money market account. And the reason for that is the hands-on service that they’re getting. But then more importantly, the rate. So, we are offering pretty competitive rates, and while there is still a fair amount of PTSD out there from last year and the whole Silicon Valley Bank debacle, we stay true to our mission here and our values. And I think most of our clients are feeling very comfortable about keeping money at our bank. We do offer full FDIC insurance for most of those accounts. So, they’re really … Fear factor pendulum, as I call it, has sort of swung back a bit.
Scott: Those that don’t know that the FDIC insurance on bigger dollar amounts is just, I don’t know what you guys call it, but insured cash sweeps or things like that-
Sam: Correct.
Scott: Which are really powerful. The money basically gets syndicated out overnight and it’s protected. That’s a great thing. Isn’t it?
Sam: [inaudible 00:14:00]. Yeah, I mean the funny thing about the insured cash sweep product is that that’s been around for close to 50 years, but nobody ever really thought of it or ever really used it. Certainly not within the venture ecosystem. It just wasn’t something that anybody really thought of. But thank goodness it was around because it certainly placated a lot of fears for many people.
Scott: Yeah, that’s amazing. And you also make the point about having a relationship that they can actually design something for the entrepreneur because I think you’re right. Oftentimes the entrepreneurs are amazing engineers or salespeople or great operators, but they didn’t intern at JP Morgan. They don’t know exactly what’s what in the cash management world. So having someone that can sit down with you and walk you through it is really, really powerful.
Sam: Well, I think it’s an advantage that we have here at Avidbank, and no disrespect to some of the large balance sheet banks out there who are all … They’re all incredible and have some great services, but one of the things they can’t do is spend time with an early entrepreneur. It’s just not worth it to them. And it’s our bread and butter. So, we’re very focused on it.
Scott: We see that. We see that with the mega banks. They have value props too, but it’s hard to talk to a human being. They usually don’t know much about startups at all if they … It’s a different model, but that’s where they play in the space. And you guys, that’s why I like your guys’ niche. You’re just like the typical entrepreneur’s bank, like $1 to 5 million debt deals all day long. Great cash management offering, actually have a relationship for folks that don’t know the relationship’s pretty important. There’s a lot of times where you need to call your banker and either ask for a favor or just get something done in a one-hour period because a wire needs to go out or something got screwed up or payroll is about to run and you realized you didn’t transfer money or whatever it is. So, it can save you a lot of headache being able to pick up the phone and actually call somebody.
Sam: Well, all we do all day every day is work with early-stage companies. And I’ve often thought that they’re a lot like toddlers. They get up, they go, they almost always trip and fall, but then they get up. The thing is that they could immediately pivot and change direction and then keep going. So, we have to be nimble and be able to react like that, and we’re uniquely qualified to do that.
Scott: And extending that analogy, I find that the best entrepreneurs are very fast learners. I see it over and over … We have 800 and something clients right now, and I see it every time I talk to these people. Sometimes the greenest most kind of naive or uneducated in startup ways, people you’re shocked at a year later how they’re total pros because they’re voracious learners and they’re quick studies. And that’s really what makes the best entrepreneurs. It’s not like being a great engineer or whatever, it is the capacity to learn and make decisions and evaluate your decisions and figure out where you went wrong and fixing it quickly. That’s what makes people really, really great entrepreneurs.
Sam: Well, and that’s exciting about our business. We’re working with innovators, working with folks that can, as you say, can learn on the fly and pivot when they need to. And that keeps us on our toes. But that’s exciting about it.
Scott: Same with us, same way. Well, Sam, it’s awesome having you over. Can you tell everyone how to reach out maybe your LinkedIn, Avid’s website if they want to get in touch and start working with you?
Sam: Yeah, absolutely. Well, you can certainly go onto our website and you can find out more about the venture lending division here at Avidbank. We’re at www.avidbank.com. I’ll even give you my personal email, which is sbhaumik@avidbank.com. It’s B-H-A-U-M-I-K. And those are the best ways to get ahold of us. And you can check us out on LinkedIn as well.
Scott: Awesome. Great having you. Tons of wisdom here. Really appreciate it and looking forward to working even more closely with you and highlight … For those that don’t know, Sam has a great reputation in industry. So, I highly recommend Sam Bhaumik.
Sam: Wow.
Scott: So thank you, Sam. Appreciate it.
Sam: Well, thank you. Thanks for the opportunity, Scott.
Scott: Have a great one. Take care.
Sam: All right, take care.

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