GS Goldman Sachs Group Inc

By Liz Hoffman and Peter Rudegeair 

When Spotify Technology SA went public in April, Goldman Sachs Group Inc. was sitting on a stake in the music-streaming startup worth more than $350 million, a sevenfold return on a 2012 investment.

Those gains weren't the handiwork of any of the hundreds of Goldman professionals whose day jobs are to invest in companies. They came instead from the firm's bankers, who have been quietly moonlighting as venture capitalists.

These corporate consiglieres, who advise on mergers and underwrite securities, oversee a venture-capital portfolio worth several hundred million dollars, according to people familiar with the matter.

Plenty of big banks invest in promising startups, but they typically do so through their strategy groups or asset-management arms. Goldman has those, too, but they are distinct from the portfolio maintained by its investment bankers, who are investing on the bank's behalf.

The bankers were early backers of now-household names including Uber Technologies Inc., online storage vault Dropbox Inc. and payments company Square Inc. Recent investments, according to the people, include Ripple Foods Inc., which makes milk from peas, and Beyond Meat, which makes, as its name implies, meatless burgers.

As startup valuations have soared, seemingly everyone wants to be a venture capitalist. Celebrities including Kobe Bryant and Jared Leto have invested in private companies. A member of the Dutch royal family cashed in a stake in payments firm Adyen NV when it went public last week.

Goldman's investment bankers are hoping to cement their ties to emerging companies that might later hire the bank for an IPO or sale. (The bank calls it "relationship equity.")

"We are proud to provide creative solutions, excellent execution and in certain unique situations, small, passive capital investments to further our client's goals," Dan Dees, Goldman's top technology banker, said in a statement.

The upside -- if it can pick winners and avoid duds -- is profits that can far outstrip the fees Goldman might get from those deals. Goldman made about $15 million advising Spotify on its IPO, people familiar with the matter said, versus hundreds of millions of dollars in paper gains on its shares.

The strategy is a throwback to the old merchant-banking playbook, when banks regularly put capital to work alongside clients. That model has largely fallen out of favor with large banks -- a retreat hastened by the crisis and new regulations that followed -- but is still practiced by a handful of smaller boutique banks, including Byron Trott's BDT Capital Partners LLC and Skip McGee's Intrepid Financial Partners LLC.

Goldman's dual roles could pose conflicts as its bankers advise startups on deals that could result in big profits or losses on the stakes owned by the investment bank. What's more, Goldman has raised billions of dollars from outside investors for its private-equity funds and risks being accused of cherry-picking the best deals for itself.

Sarah Friar, Square's chief financial officer and a former Goldman research analyst, said the bank's investment in Square "showed they wanted to build a relationship more long-term in nature."

As for the potential conflicts, she said Square does much of its deal work internally, without hiring bankers, and is "not short of advice" from other sources.

Still, venture investing is risky, especially now as the exuberance that propelled valuations sky-high shows signs of cooling.

Viddy Inc., a startup touted as "the Instagram for video," raised money from Goldman in 2012 but shut down its smartphone app two years later. Investments in ZocDoc Inc., an online appointment and ratings system for doctors, and e-commerce firm Beachmint Inc. haven't performed as expected, people familiar with the matter said.

And Goldman has been burned before. In 1999, the firm invested $100 million in online grocer Webvan Group Inc., a deal endorsed by Hank Paulson, who had been a senior investment banker and later became Goldman's chief executive, people familiar with the matter said. Webvan went bankrupt two years later as the dot-com bubble burst.

The recent effort traces back to the lean years after the financial crisis, when IPOs dried up. Eager to stay close to promising startups, Goldman focused on introducing them to venture capitalists. As its bankers brokered fundraising rounds, they began putting the firm's money in, too.

They invested $25 million in Dropbox in 2011 and $5 million in Square in 2012, according to securities filings and people familiar with the matter. Goldman later made loans to both companies and was lead underwriter on their IPOs.

When Square went public in 2015, its lower-than-expected IPO price triggered a provision in Square's shareholder agreements that required the company to give its investors, including Goldman, additional shares. Goldman was among the banks that helped set the IPO price.

Goldman invested in Uber at a roughly $200 million valuation in 2011, the people said. The deal -- a huge winner, as Uber's valuation has soared past $50 billion -- benefited from a stroke of luck: When Goldman executives sought approval from then-CFO David Viniar, he had recently received a call from his daughter in San Francisco about a hot new app that summoned cars on demand.

Goldman's bankers have been branching out in their investing. What was once known internally as the Internet Fund is now the Growth Investment Fund, and executives have been tasked with sourcing investment opportunities in consumer products, financial services, energy and health care. Recent investments include Beyond Meats and Ripple, as well as credit-card startup Marqeta Inc., said people familiar with the matter.

(END) Dow Jones Newswires

June 17, 2018 07:14 ET (11:14 GMT)

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