Despite funding shortfall, banks still make profits

Even though the valley’s startups are getting less money, some banks are still profiting from those uninvested funds.

Although venture capital funds continue to be flush with money, startup funding nationwide in 2002 was less than $20 billion dollars, down from $34.6 billion in 2001.

Analysts say no matter how money is spent or not spent, some bank out there is either holding it as a deposit or earning money from it.

“A favorite adage of Dick Kovacevich [CEO of Wells Fargo Bank] is, ‘Money never goes away, it just changes form.'” says Craig Woker, banking analyst with Morningstar research.

When it comes to venture capital funds, size can be deceiving since the firm probably doesn’t draw the full amount from investors in one sum.

When a VC fund raises capital, it rarely gets cash upfront. Instead the VC gets contractual commitments from investors — limited partners comprised typically of university endowments, insurance companies and state pension funds.

“VCs call upon their limited partners to draw down [funds],” says Stephane Dupont, a Bay Area-based group leader at Ernst & Young’s venture capital advisory group.

“The limited partners are either institutional investors or they are wealthy individuals. These people will prefer to have regular, but not frequent, calls for capital,” Dupont says.

Until those calls are made, those VC partner funds are usually kept in a semi-liquid form, which can easily be converted into cash — usually as some form of bank deposit.

The bank, in turn, leverages those unspent VC deposits to finance loans or other business ventures.

“Some bank is getting the money as a deposit, even if startups don’t get funded,” Morningstar’s Woker says. “The money has to be somewhere. It’s either at the venture capital firms themselves or else their partners are holding the money.”