JPMorgan, Credit Suisse Ramp Up Push to Fund Startups
When SurveyMonkey Inc. Chief Executive Officer Dave Goldberg wanted to buy out investors from his Internet company and attract new ones who wouldn’t balk at his aim to stay private, he steered clear of traditional startup financiers in the venture-capital community.
Instead, Goldberg turned to an entirely different adviser: JPMorgan Chase & Co. (JPM)
Jimmy Lee, vice chairman of the investment bank who normally works on multibillion dollar deals, traveled from New York to SurveyMonkey’s headquarters in Palo Alto, California, to brainstorm Goldberg’s options. Goldberg later hired JPMorgan to lead a $350 million syndicated loan for the online survey provider as part of an $800 million recapitalization the closely held company completed last year.
“Considering what a small company we are, SurveyMonkey isn’t something Jimmy would usually spend time on,” Goldberg, who is married to Facebook Inc. (FB) Chief Operating Officer Sheryl Sandberg, said in an interview. The recapitalization, which also involved selling $444 million in equity to Goldberg, Tiger Global Management LLC and Google Inc. (GOOG), valued SurveyMonkey at $1.35 billion.
Wall Street investment banks -- from JPMorgan to Bank of America Corp. and Credit Suisse Group AG (CS) -- are increasingly catering to closely held technology startups, especially in Silicon Valley. While firms led by Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) have long cultivated relationships with venture capitalists and entrepreneurs to later earn fees managing initial public offerings and advising on acquisitions, many banks have expanded the roster of services in recent years.
The push includes beefing up technology teams, organizing invitation-only conferences for entrepreneurs, starting coverage areas for venture capital and using balance sheets to finance startups or extend credit.
The efforts come as more startups stay private for longer and reach a bigger scale, raising the prospect of a larger payoff down the road for banks when the hottest companies ultimately go public or get sold.
“Technology is the fastest growing and most far reaching sector in the world,” Lee said in an interview. “It’s therefore a priority for any global investment banking business.”
In a sign of how seriously the banks are taking startups, JPMorgan in the past four years has relocated veteran bankers Mike Millman, Kurt Simon and Rod Reed to Silicon Valley. Jeremy Geller moved in February to head the firm’s private banking in Northern California, a business where headcount has since grown 30 percent.
Credit Suisse has since 2011 moved Anthony Armstrong, its co-head of Americas M&A, and David Wah, its global co-head of technology, media and telecom group, from New York to San Francisco. The bank also hired Chris Gaertner and Imran Khan after losing star George Boutros in 2010 to boutique adviser Qatalyst Group Ltd.
Goldman Sachs earlier this month named Dan Dees co-head of its global technology group alongside Anthony Noto, who had led Twitter Inc. (TWTR)’s IPO late last year. The securities firm moved current co-head George Lee to chairman of the group and made him chief information officer for the investment banking division.
The potential rewards are vast. Heading into 2014, the pipeline of U.S. technology IPOs contained 590 venture capital and private equity-backed startups that have raised $55.35 billion, according to a Dec. 12 study from CB Insights. More than half of the companies are based in California and 25 were valued at more than $1 billion, the study found.
Last year, there were 131 deals in the U.S. in which a technology or Internet company sold equity on the public market or in a private placement for a total of $28.8 billion, compared with 80 equity deals worth $25.42 billion in 2012, according to data compiled by Bloomberg.
Silicon Valley entrepreneurs and venture capitalists say the increased attention from investment bankers is tangible. Goldberg said that it was far easier to recapitalize in 2013 than to line up a mere $37 million in debt financing from Bank of America in 2009.
Some of the challenge five years ago was that the recession made banks unwilling to lend. It also related to another, more fundamental obstacle: many banks didn’t get the way startups work, Goldberg said.
“After the financial crisis, the credit market was very tough,” Goldberg said. “Traditional banks also had a hard time understanding our subscribers-based business model.”
Wall Street firms have since made a bigger effort to woo technology entrepreneurs and serve their corporate and personal financial needs.
“Banks were quiet for a while in Silicon Valley,” Geoff Yang, general partner of Redpoint Ventures, a venture-capital firm based in Menlo Park, California, said in an interview. “They are now courting venture capitalists and entrepreneurs like in the old days.”
Investment banks are even reaching out to some of the youngest Internet startups. Deena Varshavskaya founded San Francisco-based social shopping startup Wanelo Inc. in 2010 and landed $14 million in venture funding over the last two years.
Even though her company was barely two years old, Varshavskaya said she was invited to speak at Goldman Sachs’s dotCommerce conference in New York last June. Goldman Sachs later named her one of the “100 most intriguing entrepreneurs” of 2013 at the firm’s Builders and Innovators Conference in Tucson, Arizona, where Hillary Clinton and Elon Musk were among the speakers.
Varshavskaya, 33, also gave a presentation at Goldman Sachs’s Internet Private Company conference in Las Vegas in November and she will speak next month at its Technology and Internet conference in San Francisco.
“They bring together high-quality innovators and community building, which is an important foundation for our future growth,” said Varshavskaya, who adds that the relationship with Goldman Sachs’s bankers “will be useful in the future.”
Morgan Stanley and Goldman Sachs have long been the go-to investment banks in Silicon Valley. To be more competitive, Goldman Sachs started the private company conference in Las Vegas three years ago and its Builders and Innovators conference two years ago. It also ramped up direct investments in Web startups including Dropbox Inc. and Uber Technologies Inc.
Last year, Morgan Stanley topped the league table of underwriters of technology and Internet IPOs measured by dollar value, according to data compiled by Bloomberg. Goldman Sachs was first by number of technology and Internet IPOs underwritten and earned fees, according to the data.
Morgan Stanley’s technology team, led by Michael Grimes, Paul Chamberlain and Colin Stewart, the firm’s vice chairman of global capital markets, has had one of the longest-lasting footprints in Silicon Valley, opening an office in 1994 and staying through the aftermath of the dot-com bust last decade when numerous Internet startups flopped. To build relationships with startups, the firm has organized conferences, including a chief technology officer summit where it gathers hundreds of potential clients.
Other Wall Street firms have also beefed up their Silicon Valley presence. Bank of America organizes a Tech & OPS conference for venture capitalists in November and a Private Company conference in May. Last year, it hired Buz Walters from Goldman Sachs to head the bank’s venture-capital group.
“Many technology companies that go public tend to become well-known global brand names,” Walters said in an interview. “That’s why banks make an effort to work on their deals.”
Smaller banks are also making a play for startups. Qatalyst, which former Credit Suisse banker Frank Quattrone started in San Francisco in 2008, has become the go-to bank for technology companies seeking to sell themselves to large acquirers like Hewlett-Packard Co. It competes with Allen & Co., the New York-based boutique bank famous for its invitation-only Sun Valley, Idaho conference every July that attracts technology and media moguls including Goldberg and his wife.
At JPMorgan, the bank has gone beyond boosting its technology team by starting a digital growth fund in 2011 that invested in Twitter and wearable device maker Jawbone.
The efforts have resulted in deals, including JPMorgan leading Facebook’s secondary offering of $3.85 billion of shares last month. JPMorgan ranked third in the league table of technology IPO underwriters last year, according to data compiled by Bloomberg.
“We put leadership out here to connect the West Coast to the firm to serve clients’ corporate and personal financial needs,” said Noah Wintroub, head of JPMorgan’s Internet and digital media group in San Francisco. “The word spread.”
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