Lenders are starting to fill technology niche

Pity Deven McGlenn when he goes to see bankers.

McGlenn is the chief executive officer of NeoClone, a promising Madison biotech company with a cheaper, faster way to produce proteins that can diagnose diseases and perhaps one day even treat them.

But before he can ask for a loan, McGlenn has a lot of explaining to do - such as, just what is a monoclonal antibody? And why should a bank take a risk on NeoClone, which expects to be losing money for at least another year?

So it's a surprising and promising sign for the local economy that some bankers are looking to lend to companies like NeoClone. From a Silicon Valley bank to a debt fund that loans out money from area banks, lenders are stepping up alongside traditional investors to fill tech companies' need for capital and help them create the jobs of the future in Madison.

"They've been absolutely key to our growth," McGlenn said of lenders at Associated Bank and Madison Development Corp. "We would not be the company we are without their support, without a doubt."

One sign of a shift is the small Emerging Markets Group that Associated Bank formalized in July around vice president Michael Caruso, who spent 12 years working as a banker and startup company executive in the Silicon Valley area before coming to Madison and Associated several years ago.

David Stein, president for the South Central Region for the Green Bay-based Associated, said the Madison group is trying to meet the unique needs of technology startups. Some companies, for instance, may go months barely making payroll and then suddenly have an infusion of millions of dollars in investor money, which must be wisely managed, sometimes by executives more experienced in science than business.

"There's a phenomenal number of great ideas and incredible science out there and the test for the folks who are running these companies is to try to get them where they are viable businesses," Stein said. "We believe we can help."

Associated is one of seven Madison-area banks that teamed up with the city of Fitchburg and a subsidiary of Madison Gas and Electric Co. to commit a total of $2 million last year to the Venture Debt Fund run by Madison Development Corp.

Frank Staniszewski, president of Madison Development, said that the fund makes three-year, $200,000 loans to companies like NeoClone at what today would be a 9 percent to 12 percent annual interest rate. The fund has made three loans - all are current in payments - and has plans to make one or two more this year, he said.

Like other loans to tech startups, the money is meant to complement investments from venture capitalists and other sources.

"The headlines are full of how little venture capital there is in the community, so if we can stretch that by $2 million, it's not trivial," said Staniszewski, who hopes eventually to start another debt fund. "We're helping banks get more comfortable with these kinds of knowledge-based businesses . . . so hopefully this will get more banks making loans."

In NeoClone's case, the company has received $350,000 in loans from Associated Bank along with a $200,000 Venture Debt loan and angel investor money, McGlenn said.

NeoClone's technology can take weeks and months off the time it takes to make monoclonal antibodies, proteins that are useful in lab research and clinical tests because they bind specifically to other proteins associated with diseases like breast cancer or multiple sclerosis, McGlenn said. With nine full-time workers and $600,000 in sales this year, McGlenn hopes to double those numbers in 2006 and be profitable by the end of that year.

"We've actually looked to debt to grow our business," he said, pointing to interest rates that have been relatively low in recent years. "Even as of today, that money is cheap."

Technology startups pose special risks for banks, said Greg Dombrowski, Madison market president for Johnson Bank, another contributor to the Venture Debt Fund. For one, technology businesses are hard to understand, the equipment and assets they offer as collateral on a loan may be hard to sell, and the startups themselves may have sales but no profits, he said.

To cope with those risks, lenders like the Venture Debt fund, Associated and Johnson Bank are using an innovative model. When the banks and the fund lend to a tech startup, they may take the right to buy a small number of shares in the company at a certain future price, Staniszewski said.

These warrants work like stock options and give the bank or Venture Debt Fund a chance to benefit if a startup company hits it big and is purchased or goes public, Staniszewski said. That potential payoff lets banks do a little riskier deals.

The model for this lending is a West Coast bank that's been working in Wisconsin.

Silicon Valley Bank may be headquartered in Santa Clara, Calif., and its nearest office to Madison may be in Chicago. But that hasn't stopped the technology-focused business bank from serving customers here, said Bob Blee, head of the Chicago office.

Silicon Valley Bank has about 15 clients in Wisconsin with about half of those in Madison, including EraGen Biosciences, and has served about 40 state clients since 1998, Blee said.

"We love the state of Wisconsin and particularly Madison from an (intellectual property) standpoint," Blee said. "It's a great market. There is an underserved need from the young companies and the technology environment there in general."

Blee said Silicon Valley's focus on tech companies allows the bank to make unique loans, such as basing a small company's loan on the financial strength of large companies who owe the smaller firm money for products ordered.

"Having come from a traditional bank, the whole concept of lending to companies that are losing money was a little hard to grasp at first. But now I can sleep well at night," Blee said.

Tech businesses remain a relatively small part of business banking in Madison, with Associated's lending to startups, for instance, in the single-digit millions of dollars, Caruso said.

Doug Timmerman, chairman and chief executive of the parent of AnchorBank, another contributor to the venture debt fund, says his bank treats tech businesses like any other commercial client. "We don't feel that it's necessary to concentrate on it. We get our share."

But the potential for growth remains an alluring aspect of the tech sector, bankers like Caruso and Dombrowski said.

"We're interested in it because we believe that there's a transformation that's going to take place in this economy and high-tech businesses are going to play a part in that," Dombrowski said.

What are people saying about mortgages today:

Rates on 30-year mortgages edged down last week to a seven-month low. Mortgage-giant Freddie Mac reported Thursday that 30-year, fixed-rate mortgages fell to 6.3 percent, down slightly from 6.31 percent two weeks ago. It put rates at the lowest level since they were at 6.24 percent the first week of March.

Bank of Hawaii, Central Pacific Bank, Territorial Savings Bank and Wells Fargo Home Mortgages all cut their 30-year mortgage rates to 5.75 percent this week.

Most people think of a mortgage as a means to an end. After all, you buy a house, not a home loan. But a mortgage is much more than the path to homeownership. It is a financial instrument that must be managed, just like any other financial investment.