Goldman in Ventureland

The inside story of how—and why—Goldman Sachs became a tech-investing powerhouse

Illustration: eboy/Bloomberg Markets
This story appears in the September issue of Bloomberg Markets magazine.
This story appears in the September issue of Bloomberg Markets magazine.

“They weren’t coming just to get wasted,” says Mel Cavaricci—aka DJ Mel—recalling the crowd milling in front of his sound table at a party in March.

It was at the height of the annual South by Southwest (SXSW) conference, held in Austin, Texas. The event, which started as a music festival, more recently has become famous for propelling the likes of Twitter, Foursquare, Meerkat, and other fast-growing startups. Tech and media companies throw liquor-soaked bashes to celebrate themselves, promote products, and woo hard-to-hire software developers. Music service Spotify hosted a week-long concert series. MRY, a digital marketing firm, hosted a party featuring rapper Busta Rhymes and dancers with big Day-Glo sticks.

This year, Cavaricci had been hired to spin for a company he’d never seen around SXSW before: Goldman Sachs. The party was different from his usual gigs; it was hard for the deejay—a veteran of many SXSW raves—to figure out what to play. “From the looks of the crowd, they didn’t want to hear EDM,” he says. So instead of electronic dance music, he picked oldies. One in particular, Edwin Starr’s 1970s classic Easin’ In, seemed to fit: “There’s a man coming into town ... Like a cat that’s stalking its prey, he don’t wanna let it get away ....” 

Goldman Sachs, arguably the most powerful bank in the world, quietly, without fanfare, is making a play to become one of the most influential investors in technology startups. According to research firm CB Insights, the Wall Street bank has participated in 132 fund-raising rounds in private technology companies since 2009, with 77 of those deals made in the past 2.5 years alone.

Its activities rival those of the top venture capital firms in Silicon Valley. Goldman has backed Uber Technologies, Pinterest, Dropbox, and 12 other so-called unicorns, that once-rare breed of startup valued at $1 billion or more. Goldman ranks in the top 10 of CB Insights’ unicorn backers—ahead of such Silicon Valley heavyweights as Peter Thiel’s Founders Fund and New Enterprise Associates. And unlike many of Silicon Valley’s top financiers, Goldman’s reach is truly global: It’s in startups ranging from an online pet store in China to a food delivery site headquartered in Germany, to a Korean app developer.


What’s driving Goldman into venture territory? This is where the action (and the big money) is. At last count, there were 119 startups valued at more than $1 billion—almost all created within the past few years. Consider Uber, whose private valuation in just six years has soared from zero to $50 billion based on reports that it’s trying to raise more money.

That kind of skyrocketing growth is hard for Wall Street veterans to resist. Blackstone co-founder Steve Schwarzman, 68, recently confessed that if he were 30 years younger, he’d move to California. “There’s so much disruption and so much amazing value creation,” he said at a conference in late May. Ruth Porat left her post as chief financial officer of Morgan Stanley earlier this year to become Google’s CFO. Sarah Friar, a Goldman alum, is now CFO of Square, the payments company started by Twitter co-founder Jack Dorsey. Ex–Goldman banker Anthony Noto is Twitter’s CFO.

Wall Street used to wait for startups to go public before investing in them. These days, however, entrepreneurs don’t need the public markets like they used to; private capital is plentiful. Uber has raised some $6 billion in equity and debt, and it hasn’t announced any plans to go public. “By the time you IPO as a company with a $60 billion market cap, you are really in the stratosphere,” says Joshua Spencer, manager of T. Rowe Price’s Global Technology Fund. “The opportunity to invest has passed; the explosive growth is often behind them.”

This market moves fast: When Airbnb raised money in April 2014, the company was valued at $10 billion; a year later, that valuation had more than doubled to $25 billion, when it raised another $1.5 billion. Included in the latest round were East Coast investors, most of whom would never have invested at such an early stage in the last tech boom: Fidelity Investments, T. Rowe Price, and Tiger Global Management—all now prolific operators in Silicon Valley.

For Goldman, however, this isn’t just about chasing returns. Startup investing isn’t a game changer for a firm with a $95 billion market cap and $860 billion in total assets on its balance sheet. “The return-on-equity impact isn’t going to be that intense,” says Jeffery Harte, an analyst who covers financial institutions at Sandler O’Neill & Partners. But, he says, “being on the cutting edge of technology has become more important then ever.”

Goldman’s approach to startup finance is complex and expansive, much like Goldman itself. Deals can originate with investment bankers; the securities division, which can make strategic investments; or private banking. While some groups invest client money, others use the firm’s own, and still others provide traditional investment banking services. Goldman’s first deal with Uber, in 2011, was an equity bet; its second, in January, was debt.

Goldman’s venture gambit comes at a time when it is fashionable to chase entrepreneurs and talk up one’s tech savvy. “We are a technology company,” CEO Lloyd Blankfein said in a May podcast on the firm’s website. Blankfein hosted Goldman’s annual shareholders meeting in San Francisco this spring to show the firm is part of the scene. “You better spend a lot of time there,” he said, “and we do.”

Goldman’s aim isn’t just to invest in tech companies but also to learn from them and even emulate them. The firm and its clients—big corporations, private-wealth customers, asset managers—are struggling to navigate the new markets technology is creating. Banking and finance, in particular, expect to be hit with big upheavals. Startups such as peer-to-peer banker LendingClub and Wealthfront, a financial advisory platform, are aiming to pick off just about every part of the industry. We “try to disrupt ourselves,” Blankfein said.

Still, the startup world is very different from the public markets Goldman has dominated for so long. And the firm has been burned in techland before: It took Webvan and EToys public in 1999 only to see both blow up within two years.

Tech founders reject—outwardly at least—the qualities that Goldman’s name evokes: secrecy, opacity, hierarchy. To win its place, the firm is starting to change. “We have shifted our thinking in that the role we need to play is not just a role that you can measure in the four walls of Goldman Sachs,” Don Duet, co-head of the firm’s technology division, says in an interview. “The disruption technology is going to create, and already has, in our industry is going to be profound. We have to make sure we are not left behind.”

All this sounds great, but transforming this 146-year-old institution will take more than just talk. And so to win its place, Goldman is starting to open itself up in ways that once would have been unimaginable. It’s letting in outsiders, forging new partnerships, and showing its vulnerabilities—even learning to become less secretive.

One morning in January, Goldman tweeted a picture of Marty Chavez, its chief information officer, on the firm’s New York trading floor. What’s remarkable about the shot isn’t that the executive is wearing a hoodie or has Beats by Dre headphones wrapped around his neck. The strange part is who else is in the picture: a crew of software engineers—all in the same exact hoodies—from Kensho, a data analytics startup. Chavez had invited its engineers to spend two weeks on the Goldman trading floor and “hack” one of the most-guarded technology platforms in the world.

In November, Goldman’s principal strategic investment group led a $15 million round in Kensho. That group, part of sales and trading, aims to invest in companies that have “direct benefit to clients,” a spokeswoman says.

For a startup such as Kensho (the name comes from a Buddhist term in Japanese for seeing nature) to get access to Goldman’s trading software is huge. The company essentially is trying to build a machine that could one day displace a swath of Wall Street. Its software aims to reduce human decision making in trading and investing by instantaneously analyzing slews of data that move markets—the weather, political elections, wars, natural disasters. Kensho is trying to woo banks like Goldman as potential customers.

While the group from Kensho never had access to any customer or sensitive data—Goldman says it tightly follows policies set by regulators governing these issues—it did get an extraordinary look inside the Goldman machine. The developers came away with ideas for how to integrate its system with Goldman’s and potentially its clients and competitors.

Why would Goldman let these outsiders in? It needs them. The great innovations of our time aren’t emerging out of a Henry Cobb glass tower overlooking the Hudson River. They’re coming out of companies such as Kensho. Goldman needs to learn from them—to understand how they work, how they think, and how they plan to dismantle just about every industry Goldman makes money in, including its own.

When the software engineers from Kensho first arrived on the trading floor, they weren’t sure of how the rank and file at Goldman would receive them. But it became clear that word had come from on high—Chavez in particular—to give them the access they needed. “Marty gave us a lot of air cover,” says Adam Broun, chief operating officer of Kensho.

Chavez is a bridge of sorts between the firm and the young startups it pursues. He’s built a reputation among the tech elite as a guy who gets it. “Marty is a pure believer in all this stuff,” says Aaron Levie, the 29-year-old CEO of Box, a cloud storage provider that went public earlier this year. It helps that Chavez is a hacker himself. Growing up in New Mexico, he learned how to program computers. At 15, Chavez worked on writing code for neutron bomb simulations for the Air Force Research Laboratory at Kirtland Air Force Base in Albuquerque, New Mexico. He attended Harvard, completing degrees in biochemical and computer sciences, and earned a Ph.D. in medical information sciences from Stanford. He co-founded two of his own software companies and did stints at Goldman and Credit Suisse. He’d planned to retire after selling his last business when Goldman asked him to return to the firm. He went back in 2005 and become a partner in 2006 and CIO in 2013.

Chavez has helped make the technology department a power center of the firm, and he’s pushed Goldman to aggressively pursue top tech talent. The firm’s technology division now employs more than 9,000 people, nearly one-third of its workforce. (In comparison, JP Morgan Chase in a 2013 letter to shareholders reported 30,000 tech employees, approximately 12 percent of its workforce.) By head count, tech is now the biggest division inside Goldman; it has more software engineers and developers than bankers and traders, and they can even play a role in shaping Goldman’s business.

Last fall, Goldman’s software engineers came across a new open source platform from a company named Docker. It was so effective in helping them build and develop applications for Goldman’s system that its engineers began using it more and more. It wasn’t long before their bosses took notice. “The excitement around Docker, I’ve not seen anything like that since Java came along,” says Goldman’s Duet, referring to the programming language Sun Microsystems released in 1995.

Duet began playing around with the software, too. He soon connected with Docker CEO Ben Golub about ways the firm could help the startup tailor its platform for the financial services industry, which has more complicated regulatory and compliance issues than many other Docker customers. “We’ve had some in-depth sessions about how they would use Docker in the more sensitive parts of their business,” says Golub.

In April, when it came time to pick his investors for a $95 million round that valued the company at $1 billion—and launched it to unicorn status—Golub chose Goldman. The bank joined a group that also includes Greylock Partners, Benchmark, and other top VCs. When asked how Goldman made the cut, Golub explains, “It was really attractive for us to work with people like [those at] Goldman.” He says he thinks of the bank as “not only a financial institution but also a technology company.”


Travis Kalanick, CEO of Uber, which Goldman is financing with equity and debt
Travis Kalanick, CEO of Uber, which Goldman is financing with equity and debt
Photograph: David Paul Morris/Bloomberg

“They called me out of the blue,” recalls Avinoam Nowogrodski, founder and CEO of Clarizen, an enterprise software platform. In late 2013, he recalls getting a call from Goldman’s private capital investing group. Nowogrodski was about to start fundraising, and the Goldman team wanted in. “They told us, ‘Don’t go to the round; we’ll do it all,’” recalls Nowogrodski. The entrepreneur told Goldman he wanted to talk to other investors before deciding.

Among founders, Goldman doesn’t carry the same clout as it does on Wall Street. Entrepreneurs aren’t swayed by big checks; often they want investors who’ve walked in their shoes, who’ve taken an untested idea and built it into a successful business. That’s why Netscape entrepreneur Marc Andreessen and PayPal and Linked­In co-founder Reid Hoffman are among the most sought-after VCs in Silicon Valley. And even entrepreneurs-turned-VCs have to hustle. “In this world, the men and women who run the company are the ones who decide who they want as investors,” says Jerry Yang, a co-founder of Yahoo! who now backs startups. “The rest of us, as investors, have to earn those rights to be a part of a round.”

To help woo startups, the most successful venture capitalists are willing to roll up their sleeves and really help build a company, not just take a board seat. Greylock has assembled a large recruiting network—famous around Silicon Valley—and helps its entrepreneurs hire top tech talent. Andreessen Horowitz offers a menu of services to entrepreneurs, including introductions to corporate executives who could be customers. “I could have never gotten all those meetings on my own,” says one founder, Orion Hindawi, chief technology officer of Tanium, a security software developer, who credits Andreessen Horowitz for introducing him to dozens of potential corporate clients and helping him source millions of dollars in new business so far this year. (Bloomberg LP is an investor in Andreessen Horowitz.)

Entrepreneurs say Goldman’s pitch in some ways mimics Andreessen Horowitz’s, offering small companies a range of resources. “They have a whole menu of choices,” says Larry Augustin, CEO of SugarCRM, an enterprise software company backed by Goldman’s private capital investing group. He says the firm has introduced him to a team dedicated to helping startups with everything from basic administrative troubleshooting to broad strategic insights. For example, Augustin says, Goldman helped him benchmark his customer acquisition costs against those of his competitors’. Another entrepreneur says Goldman provided assistance crunching numbers and assessing potential acquisitions. This kind of expertise, two guys in a garage could never re-create.

The firm has also established a group called Emerging Entrepreneur Coverage that’s headed up by Managing Director Miyuki Matsumoto. On her personal website, she describes her job as “identifying and developing relationships with promising, early-stage entrepreneurs.”

Many entrepreneurs say that Goldman’s biggest draw is its access to the international capital markets. Startups today must move faster into global markets than ever before. Founders used to be able to wait to think about international expansion; today, they have to think globally from the outset, partly because locals will quickly copy the best ideas. (An outfit called Rocket Internet has incubated Zappos, EBay, and Square clones in Europe, for example.) From Day One, “you have to think, ‘How do I get big enough so I can compete on a global scale and knock off all these competitors who pop up?’” says Alfred Lin, a partner at Sequoia Capital who was chief operating officer at Zappos.

Goldman has a network of clients around the globe who can help unseasoned entrepreneurs find their footing in new markets. Its wealth-management clients and corporate customers are some of the most influential business leaders in the world. They can broker introductions, explain regulations, and be a local booster in tough markets such as China and India.

“They have a lot of connections in the markets we want to be in,” Clarizen’s Nowogrodski explains. To tap into these, he ultimately chose Goldman as the lead investor in a financing round that ended up raising $35 million. And he put Goldman Vice President Hillel Moerman on his board.

When Travis Kalanick, CEO of Uber, was getting ready to expand into new markets, he brought Goldman in as an investor. “We are going global with big funding,” he blogged after inking his first deal with Goldman in 2011, back when the transportation company was still valued in millions. While he didn’t call Goldman out by name, he said the fundraising round was “the cornerstone for the next phase of the company, making Uber a global transportation and logistics brand.” Since then, the company has launched in China, India, Europe, and beyond. (Goldman, meanwhile, doubled down on Uber, orchestrating a $1.6 billion convertible debt deal in January; the ride-share app was then valued at $40 billion.)

For anyone who lived through the dot-com bust of the early 2000s, it’s hard not to wonder: Are we in another tech bubble? “I don’t have amnesia,” Blankfein said in his May podcast, responding to a question about the heady valuations of technology companies. Now as Uber’s valuation rivals General Motors’ and Airbnb’s surpasses Marriott’s, investors are starting to feel uneasy.

“I do think you’ll see some dead unicorns this year,” legendary venture capitalist Bill Gurley told an audience at SXSW in March.

Still, Blankfein recalled, many investors scoffed at’s tippy valuation in the early 2000s. “Turn the clock forward another dozen years and look at the success and the reach and the importance and the influence of Amazon,” he said.

If anything, Goldman is stepping up its bets on tech. Last year, it participated in 33 deals. In the first half of this year, it participated in another 22 deals—including Spotify’s $8 billion round in June. Goldman is also incubating its own startups: The firm has announced plans to launch an online lending service, and it has led the development of Symphony, a secure Twitter-like service for traders and bankers that could compete with Bloomberg’s IB chat platform. It’s also eyeing startups throughout Asia, a market that most U.S. venture firms have barely penetrated. Goldman’s private equity group in Asia in January led a $56 million round in Singapore-based Antuit, a big-data storage platform.

Earlier this year, Blankfein traveled to Beijing to speak to students at Tsinghua University. As he spoke, the veteran Wall Streeter became especially animated when talking about how technology is increasing opportunities for his young audience. He told them, “If only I were 40 years younger.” If he were, perhaps Goldman would be investing in his startup.

This story appears in the September issue of Bloomberg Markets magazine.

Goldman Sachs Makes Play to Be Tech-Investing Powerhouse