Square 1 Bank
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Grasshopper’s Judith Erwin leaps into innovation banking
In the years following the financial crisis, de novo bank activity in the US slowed to a trickle. But as memories fade, the economy expands and the potential of tech-powered financial services marches forward, entrepreneurs have once again been asking the question, “Should I start a bank?”
And by bank, I’m not referring to a neobank, which sits on top of a bank, or a fintech startup that offers an interesting banking-like service of one kind or another. I mean a bank bank.
One of those entrepreneurs is Judith Erwin, a well-known business banking executive who was part of the founding team at Square 1 Bank, which was bought in 2015. Fast forward a few years and Erwin is back, this time as CEO of the cleverly named Grasshopper Bank in New York.
With over $130 million in capital raised from investors including Patriot Financial and T. Rowe Price Associates, Grasshopper has a notable amount of heft for a banking newbie. But as Erwin and her team seek to build share in the innovation banking market, she knows that she’ll need the capital as she navigates a hotly contested niche that has benefited from a robust start-up and venture capital environment.
Gregg Schoenberg: Good to see you, Judith. To jump right in, in my opinion, you were a key part of one of the most successful de novo banks in quite some time. You were responsible for VC relationships there, right?
…My background is one where people give me broken things, I fix them and give them back.
Judith Erwin: The VC relationships and the products and services managing the balance sheet around deposits. Those were my two primary roles, but my background is one where people give me broken things, I fix them and give them back.
Schoenberg: Square 1 was purchased for about 22 times earnings and 260% of tangible book, correct?
Erwin: Sounds accurate.
Schoenberg: Plus, the bank had a phenomenal earnings trajectory. Meanwhile, PacWest, which acquired you, was a “perfectly nice bank.” Would that be a fair characterization?
Erwin: Yes.
Schoenberg: Is part of the motivation to start Grasshopper to continue on a journey that maybe ended a little bit prematurely last time?
Erwin: That’s a great insight, and I did feel like we had sold too soon. It was a great deal for the investors — which included me — and so I understood it. But absolutely, a lot of what we’re working to do here are things I had hoped to do at Square 1.
Image via Getty Images / Classen Rafael / EyeEm
Schoenberg: You’re obviously aware of the 800-pound gorilla in the room in the form of Silicon Valley Bank . You’ve also got the megabanks that play in the segment, as well as Signature Bank, First Republic, Bridge Bank and others.
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Which type of funding is actually best for your business?
Jared Hecht is the co-founder and CEO of Fundera, an online marketplace for small business financial solutions including small business loans. Prior to Fundera, Hecht co-founded group messaging app, GroupMe.
When starting a tech company, there seems to be a playbook that most entrepreneurs follow. While some may start with a bit of bootstrapping, most will dive straight into raising seed money through investors. In many cases, this is a great path. It’s a path I’ve taken twice myself, first with GroupMe, and then again with Fundera.
Ironically, though, my second venture-backed company is a business focused on helping entrepreneurs find debt financing—a process I’ve gone through only once myself. But after five years of building and scaling this business, it’s made me take a step back and consider the question of when and where debt financing might be a better option for a business than equity financing, and vice versa.
I view these financing vehicles differently now than I did half a decade ago, and think it’s time we start to think a bit wider and diversely about how we finance our growing endeavors.
After all, when entrepreneurs take venture capital, they usually sign up to provide a 10x return on an investor’s capital. This expectation ultimately influences how they operate their business in the short-term. Maybe they’re not always ready for that expectation.
Or maybe they know they need to focus on building a good business before a great one. In this case, debt may be the better vehicle, where the only expectation is to pay it back.
Whether it’s money to get your business off the ground, capital to fuel additional growth, or cash to cover a gap, and whether you’re guiding the growth of a burgeoning startup, a smaller business, or even consulting firm helping other entrepreneurs, you should think critically about how you finance your business.
Here’s what to consider.
The power of debt
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