How Goldman Sachs Became a Tech-Investing Powerhouse(bloomberg.com)
bloomberg.com
How Goldman Sachs Became a Tech-Investing Powerhouse
http://www.bloomberg.com/news/features/2015-07-28/how-goldman-sachs-became-a-tech-investing-powerhouse
7 comments
> They are also trying to lead the charge in allowing people to invest in private companies through investment vehicles that look similar to funds( ie pooled capital that they raise and invest for share holders).
Is there a term for this type of fund? "Private equity mutual fund" maybe?
Is there a term for this type of fund? "Private equity mutual fund" maybe?
SPVs. Special Purpose Vehicle is what they're called.
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I'm interested to hear your rationale for investing in Twitter (fundamentals, userbase numbers, good feeling?), and your overall strategy. Clearly you're long on the company, but why?
Sorry, didn't mean to give the feeling I like the company, as I have the opposite feeling towards them.
It's like the company had a huge push to go public and then everyone was so tired that they just stopped working once they got public.
I understand that it's a company full of great people and I don't want to shit on someone's hard work but when they went public the deal they struck was
- the markets gave them a huge valuation and in return the market expected big things from them.
So what great new things has twitter done since going public to earn their huge valuation? I think even the most ardent twitter supporters would have to agree that they have disappointed as a company since going public.
As an aside, I don't think this post IPO lull is limited to twitter, with longer cycles before going public I expect alot of companies to show this type of burnout after going public.
Good companies will get this and give their employee's a way of getting liquidity from their options before IPO. I think this will become a new recruiting tool for the best companies.
Something along the lines of if we don't go public in 7 years from the companies founding then we'll provide a liquidity event for employee's who have been here longer than 4 years.
GS will play a roll in this I'm imagining.
It's like the company had a huge push to go public and then everyone was so tired that they just stopped working once they got public.
I understand that it's a company full of great people and I don't want to shit on someone's hard work but when they went public the deal they struck was
- the markets gave them a huge valuation and in return the market expected big things from them.
So what great new things has twitter done since going public to earn their huge valuation? I think even the most ardent twitter supporters would have to agree that they have disappointed as a company since going public.
As an aside, I don't think this post IPO lull is limited to twitter, with longer cycles before going public I expect alot of companies to show this type of burnout after going public.
Good companies will get this and give their employee's a way of getting liquidity from their options before IPO. I think this will become a new recruiting tool for the best companies.
Something along the lines of if we don't go public in 7 years from the companies founding then we'll provide a liquidity event for employee's who have been here longer than 4 years.
GS will play a roll in this I'm imagining.
Ah I see, I thought you were urging Twitter on because you hold a portion of your portfolio in TWTR. I'm baffled as to how the market valued Twitter at $45 per share up from an IPO price of $26, implying $3bn in yearly revenue. I'd also love to figure out who "the market" is behind Twitter - institutional vs. casual.
On your last point - a private liquidity event, AKA raising an investment round and offering employees the option to sell back equity? Or, could the company step out of the way completely and let banks buy equity directly from employees? (I've never worked for a company in this situation so I have no idea what the laws would allow)
On your last point - a private liquidity event, AKA raising an investment round and offering employees the option to sell back equity? Or, could the company step out of the way completely and let banks buy equity directly from employees? (I've never worked for a company in this situation so I have no idea what the laws would allow)
According to google finance 60% of twitter is owned by institutional investors. Compare that to 67% for Facebook.
https://www.google.com/finance?q=NYSE%3ATWTR&ei=z5q3VdHiDon3...
https://www.google.com/finance?q=NYSE%3ATWTR&ei=z5q3VdHiDon3...
sama has suggested letting options stay valid for 10 years http://blog.samaltman.com/employee-equity
> They are also trying to lead the charge in allowing people to invest in private companies through investment vehicles that look similar to funds( ie pooled capital that they raise and invest for share holders).
I was just reading in another thread about how a new hypothetical tech crash wouldn't be as bad as the dot com crash for precisely the reason that all these new, 'over-valued' companies are private rather than public. In this context, isn't this kind of investment vehicle dangerous?
(I don't pretend to understand this kind of thing and would be glad to be made a little wiser.)
I was just reading in another thread about how a new hypothetical tech crash wouldn't be as bad as the dot com crash for precisely the reason that all these new, 'over-valued' companies are private rather than public. In this context, isn't this kind of investment vehicle dangerous?
(I don't pretend to understand this kind of thing and would be glad to be made a little wiser.)
The customers for this from the GS side are what are referred to as high net worth individuals and family trusts. They aren't your friend across the street taking out a second mortgage on his home so he can play the private markets. There is an assumption that you're an accredited investor, and while I don't know the GS requirements for getting in on deals like this, I can only imagine it's far in excess of the accreditation requirements (which is relatively straightforward to achieve -- $1M in liquid assets or 2 years of income over $200K / $300K if filing jointly).
There may be some reason to be concerned otherwise -- pensions and endowments are often customers for this sort of thing -- but they have risk managers that hopefully know what they're doing. Which may not give you warm fuzzies, given recent history, but in general these are not the people losing their shirts and affecting the economy as a whole.
There may be some reason to be concerned otherwise -- pensions and endowments are often customers for this sort of thing -- but they have risk managers that hopefully know what they're doing. Which may not give you warm fuzzies, given recent history, but in general these are not the people losing their shirts and affecting the economy as a whole.
Almost! People are worried about another tech bubble bursting because of things like overvaluation of companies and the frequency of unicorns (private companies valued over $1bn) appearing on the scene (which gives perhaps an illusion that VCs are funding left, right and center).
But you could say that the huge growth we're seeing in investment in tech now is different to 15 years ago because:
- most VCs are funding significant amounts of their capital in later-stage startups and companies that have shown a lot of promise ("private IPOs"), rather than the other way around
- there are more startups now than 15 years ago but the same (or lower) amount of total capital invested, whereas before a smaller number of startups were funded from a huge pot
- generally tech companies nowadays, even those unicorns a few years old, have solid financials and managed to turn a profit. This wasn't entirely the case 15 years ago.
There was a Andreessen Horowitz presentation on this very topic going around a few weeks back - it's worth a read if I can dig it up (or you could be relentlessly resourceful ;)).
But you could say that the huge growth we're seeing in investment in tech now is different to 15 years ago because:
- most VCs are funding significant amounts of their capital in later-stage startups and companies that have shown a lot of promise ("private IPOs"), rather than the other way around
- there are more startups now than 15 years ago but the same (or lower) amount of total capital invested, whereas before a smaller number of startups were funded from a huge pot
- generally tech companies nowadays, even those unicorns a few years old, have solid financials and managed to turn a profit. This wasn't entirely the case 15 years ago.
There was a Andreessen Horowitz presentation on this very topic going around a few weeks back - it's worth a read if I can dig it up (or you could be relentlessly resourceful ;)).
You do realize that one of the classic signs of a bubble is people explaining "...this time it's different".
Haha. It's difficult to say for sure but those are just the main contrast points. Things could very well turn out badly.
Goldman Sachs is a complex place, with lots of competing interests inside. I see a few things going on here...
1 - Goldman Sachs wants to be able to offer it's investors access to tech companies. This used to be access to IPOs, and now it's access to pre-IPO.
2 - Goldman Sachs is trading for their own position too.
3 - Goldman Sachs is an IT company at heart. Their IT department is bigger than their Fixed Income department. They write their own databases and programming languages from scratch. (I'm not saying whether this is a good idea or not.) They want to be attached to the bleeding edge of Silicon Valley technology, and money is their way in.
None of this is nefarious or evil.
1 - Goldman Sachs wants to be able to offer it's investors access to tech companies. This used to be access to IPOs, and now it's access to pre-IPO.
2 - Goldman Sachs is trading for their own position too.
3 - Goldman Sachs is an IT company at heart. Their IT department is bigger than their Fixed Income department. They write their own databases and programming languages from scratch. (I'm not saying whether this is a good idea or not.) They want to be attached to the bleeding edge of Silicon Valley technology, and money is their way in.
None of this is nefarious or evil.
Now might be a good time to remember about how Goldman Sachs "helped" Dragon. See NYTimes article: "Goldman Sachs and the $580 Million Black Hole" http://www.nytimes.com/2012/07/15/business/goldman-sachs-and...
The one thing I remember about Goldman Sachs is that they have their own collections library for Java.
They do, and it's pretty cool: https://github.com/goldmansachs/gs-collections
I can confirm it's awesomeness and high performance!
What's interesting is they say GS have more developers and programmers than bankers and traders...
This is a logical progression. The Wall Street and Silicon Valley cultures are converging.
A significant part of what made a company like Goldman Sachs competitive on Wall Street used to be primarily about "Who you know" (as opposed to "What you know" or "What you can do"). That's changed over the last few decades as the financial markets became less about relationships and more about technology (although relationships still reign in certain areas). Since the dot-com bubble burst, more and more people have been crossing back and forth between investment banks (or hedge funds) and startups. It started with engineers because technology is key to both types of companies, and now it's shifting to financiers because pre-IPO "startups" need those relationships.
Silicon Valley used to be the exact opposite of Wall Street (i.e. totally about "What you know" or "What you can do") but over the last decade, it has been evolving towards a "Who you know"-ocracy. It's no longer enough to have a great product/technology - you need to build your network and get the warm intro, so successful entrepreneurs no longer automatically reject the value of "Who you know", and they're now comfortable exploiting a financiers' connections and relationships to help grow their company by raising money privately.
A significant part of what made a company like Goldman Sachs competitive on Wall Street used to be primarily about "Who you know" (as opposed to "What you know" or "What you can do"). That's changed over the last few decades as the financial markets became less about relationships and more about technology (although relationships still reign in certain areas). Since the dot-com bubble burst, more and more people have been crossing back and forth between investment banks (or hedge funds) and startups. It started with engineers because technology is key to both types of companies, and now it's shifting to financiers because pre-IPO "startups" need those relationships.
Silicon Valley used to be the exact opposite of Wall Street (i.e. totally about "What you know" or "What you can do") but over the last decade, it has been evolving towards a "Who you know"-ocracy. It's no longer enough to have a great product/technology - you need to build your network and get the warm intro, so successful entrepreneurs no longer automatically reject the value of "Who you know", and they're now comfortable exploiting a financiers' connections and relationships to help grow their company by raising money privately.
Silicon Valley used to be the exact opposite of Wall Street (i.e. totally about "What you know" or "What you can do") but over the last decade, it has been evolving towards a "Who you know"-ocracy.
I respectfully think this is unlikely to be a true reflection of reality. Testable proposition: you survey 50 partners with investing authority at an arbitrary sampling of top Valley VC firm in 1998 and in 2015. Do you believe that the 1998 vintage will include more partners who either a) have ever had an operational role at a technology company other than a VC firm or b) could successfully pass FizzBuzz?
My understanding is that one of the worst-kept secrets in Silicon Valley is that a VC and a banker are distinguishable in exactly one way: bankers don't wear khaki. They come from the same social backgrounds. They study the same things at the same schools. They have strikingly similar career arcs. Their core skill set is identical: convincing wealthy people and institutions to overpay them for financial services.
The newfangled Silicon Valley innovation is that there might actually be a technologist in the room when the adults are talking about money these days.
I respectfully think this is unlikely to be a true reflection of reality. Testable proposition: you survey 50 partners with investing authority at an arbitrary sampling of top Valley VC firm in 1998 and in 2015. Do you believe that the 1998 vintage will include more partners who either a) have ever had an operational role at a technology company other than a VC firm or b) could successfully pass FizzBuzz?
My understanding is that one of the worst-kept secrets in Silicon Valley is that a VC and a banker are distinguishable in exactly one way: bankers don't wear khaki. They come from the same social backgrounds. They study the same things at the same schools. They have strikingly similar career arcs. Their core skill set is identical: convincing wealthy people and institutions to overpay them for financial services.
The newfangled Silicon Valley innovation is that there might actually be a technologist in the room when the adults are talking about money these days.
Many of the best VCs are easily distinguishable from Wall St bankers in another critical way: they're very competent when it comes to technology. Understanding it, seeing where it's going, and knowing where it has been. They also often have a very different background vs bankers: degrees in engineering and computer science.
See: Marc Andreessen, Ben Horowitz, Peter Thiel, Doug Leone, Vinod Khosla, Paul Graham, Bill Gurley, Jenny Lee, John Doerr, and countless other examples - these people get technology in a way your typical banker never will.
See: Marc Andreessen, Ben Horowitz, Peter Thiel, Doug Leone, Vinod Khosla, Paul Graham, Bill Gurley, Jenny Lee, John Doerr, and countless other examples - these people get technology in a way your typical banker never will.
That's certainly the mythology behind Valley venture capital, but we needn't stipulate that it's true for Patrick's argument to remain plausible.
Certainly, it seems like an extraordinarily implausible claim that VC in 1998 was better than it is now. I raised mid-7 figures, institutionally, in '99. VC in '99 was atrocious.
Certainly, it seems like an extraordinarily implausible claim that VC in 1998 was better than it is now. I raised mid-7 figures, institutionally, in '99. VC in '99 was atrocious.
"These people get technology in a way your typical banker never will".
I think that's very wrong. A lot of very clever, ambitious people go into high finance, and these people are perfectly capable of "getting it". They may not become expert programmers over night, but they are certainly capable of figuring out how an industry may look with a new startup on the scene.
I think that's very wrong. A lot of very clever, ambitious people go into high finance, and these people are perfectly capable of "getting it". They may not become expert programmers over night, but they are certainly capable of figuring out how an industry may look with a new startup on the scene.
There VCs with operational experience are in the distinct minority. That said, your suit-wearing history major banker from Goldman is a pretty sharp guy and I think people around here underestimate how easily they can grok technology.
I don't know...I think they're still very different. "Who you know" can apply to any situation (particularly Wall Street) where having a contact in a network will allow you access into that network.
But at least in Silicon Valley, if you can prove you're valuable to others (Silicon Valley "members"/hackers/users of your product or service) then that's still the best way to stay competitive. And it doesn't matter who you know because if someone else has an inherently better product/company out there that's competing with you and gaining users, they'll win. With Wall Street, I agree, competition is predicated on the friends and contacts you have.
That's just my 2 cents though - unless I misunderstood your point.
But at least in Silicon Valley, if you can prove you're valuable to others (Silicon Valley "members"/hackers/users of your product or service) then that's still the best way to stay competitive. And it doesn't matter who you know because if someone else has an inherently better product/company out there that's competing with you and gaining users, they'll win. With Wall Street, I agree, competition is predicated on the friends and contacts you have.
That's just my 2 cents though - unless I misunderstood your point.
Why does Goldman Sachs still exist? Shouldn't they be in prison or something? How do they still have customers after they were so proud of screwing their own customers?
I feel you. For those who don't, here are a few relevant readings:
http://www.rollingstone.com/politics/news/the-great-american...
http://economistsview.typepad.com/economistsview/2009/10/how...
That said, it's not Goldman's fault as much as it is the US gov's fault... It's failure to regulate that financial industry is humongous.
http://www.rollingstone.com/politics/news/the-great-american...
http://economistsview.typepad.com/economistsview/2009/10/how...
That said, it's not Goldman's fault as much as it is the US gov's fault... It's failure to regulate that financial industry is humongous.
We should not forget about GS, Greece and the EU....
GS is still the one doing the actions. These actions are done by people who are perfectly capable of telling right from wrong.
It's a collection of companies. An investment bank, a wealth management firm, a bank, a trader backed by its own assets, a trader for other people through an online and offline brokerages, a mutual fund operator, an IPO underwriter, a real estate owner and operator, a storage facility for commodities.
Each side of business has its own customers who have their own set of motivations.
Each side of business has its own customers who have their own set of motivations.
Why should they be in prison for screwing their customers? Is that illegal?
How to become a tech investing powerhouse: start by being an investing powerhouse. Seems like it was theirs to lose. And they nearly have several times.
I'm surprised and impressed that they were in Uber's B round. It isn't uncommon for firms to invest in late stages of huge successes so they can list the firm as an investment; but B round is actually taking risk.
Same. At the point they invested IIRC Uber was only doing 12m/year. Very impressive investment.
Can anyone explain what's going on in that chart at the Uber b round [0]? It states their valuation at 50m and says Goldman invested 37m - how would that ever happen? Also Angellist says that round was 32m and Goldman were 1 of 4 parties in it. [1]
[0] http://assets.bwbx.io/images/irAfvE0DI.rE/v1/488x-1.jpg [1] https://angel.co/uber
[0] http://assets.bwbx.io/images/irAfvE0DI.rE/v1/488x-1.jpg [1] https://angel.co/uber
Travis confirmed that the Series B was a $37M raise, you're right to be confused about the valuation in that chart though. Fortune reported recently that the post-value from that round was $330M.
http://fortune.com/2014/06/06/these-are-the-venture-firms-ce...
http://fortune.com/2014/06/06/these-are-the-venture-firms-ce...
The article mentions that some of the deals GS has done with Uber have been a mixture of equity and debt
It could be debt.
I really don't know much about these things so you might well be right - but it's labelled an equity deal and they explicitly point out that the series e was debt.
Also would it be typical to do 30m+in debt for a 50m company (typical is probably the wrong word given Ubers trajectory)?
Also would it be typical to do 30m+in debt for a 50m company (typical is probably the wrong word given Ubers trajectory)?
Having said that, all they are doing is providing the same Investment banking services to companies that they always have, just now, they are offering it to private companies.
Think of it as a cover your ass approach, if companies decide not to go public, GS still gets a piece of the action, and if they do go public then its an easy pick for GS to lead their public IPO's as both sides already know each other.
They are also trying to lead the charge in allowing people to invest in private companies through investment vehicles that look similar to funds( ie pooled capital that they raise and invest for share holders).
With companies staying private for so long some people, and I'm starting to become one, now think that the day of the publicly traded growth company are coming to an end and that companies will go public once they have matured into value stocks.
This is evidenced by the markets are loosing patience with companies like Groupon, Zinga, Yelp and my personal whipping boy Twitter. Come on twitter, get your act together, you wont' be around much longer if you continue on like this.