October 25, 2020

DealBook: Wall Street Jostles to Help Silicon Valley Manage Newfound Wealth

From left, Jason Bogardus, senior vice president; Mark Douglas, managing director of wealth management; Greg Vaughan, managing director; and Robert Dixon, managing director of wealth managment, at Morgan Stanley's offices in Menlo Park, Calif.Peter DaSilva for The New York TimesFrom left, Jason Bogardus, senior vice president; Mark Douglas, managing director of wealth management; Greg Vaughan, managing director; and Robert Dixon, managing director of wealth management, at Morgan Stanley’s offices in Menlo Park, Calif.

PALO ALTO, Calif. — Sam Odio expected a few congratulatory e-mails when he sold Divvyshot, his online photo-sharing service, to Facebook last April for millions of dollars.

Instead, his in-box was flooded with pitches from Goldman Sachs, Morgan Stanley and other Wall Street firms looking to manage his newfound wealth. Goldman has the inside track, having courted him with an exclusive factory tour of Tesla, the electric sports-car maker, and tickets to a screening of the final Harry Potter film.

“They sure know the way to a geek’s heart,” said Mr. Odio, 27.

Wall Street, as always, is going where the money is — and right now that is Silicon Valley. The latest Internet boom means there are more newly minted millionaires, and even billionaires, than at any time since the technology bubble a decade ago.

Many are brilliant young entrepreneurs and computer engineers. But for all their knowledge, the technology executives, many of whom are fresh out of college, are relatively clueless when it comes to estate planning.

“Betting the ranch on building a widget for the Facebook platform is very different than managing a long-term nest egg,” said Jay Backstrand, a vice president at JPMorgan Chase’s private bank.

Wall Street is more than happy to help — for a fee. Banks charge roughly 1 percent for overseeing a wealthy investor’s portfolio. Though that may not sound like a lot, it adds up when billions of dollars are involved.

Financial firms are salivating over the wealth being created. Facebook is readying an initial public offering that will most likely value it near $100 billion. Employees and directors at Zynga own more than a third of the online game company, which went public in December at $7 billion. The list of prospects is long: Groupon is worth $12.2 billion; LinkedIn, $6.8 billion; and Pandora, $1.9 billion.

Greg Vaughan speaking with a client at Morgan Stanley's private wealth management offices in Menlo Park, Calif.Peter DaSilva for The New York TimesGreg Vaughan speaking with a client at Morgan Stanley’s private wealth management offices in Menlo Park, Calif.

Banks are casting a wide net for potential clients. At Facebook, Wall Street brokers are wooing executives, rank-and-file employees and administrative staff members. Morgan Stanley has a dual strategy, with one team of advisers responsible for senior executives at large technology start-ups and another for lower-level employees. Chris Dupuy, who leads Merrill Lynch’s wealth management team in the Pacific Northwest, recruits from the C-Suite to the “corporate cafeteria.”

“Someone’s going to capture this wealth,” said Derek Fowler, a wealth adviser at Morgan Stanley. “We just want to make sure we’re out there.”

Banks are aggressively expanding in Northern California, even as they retrench globally. JPMorgan opened a 10,000-square-foot office in Palo Alto, Calif., a hub of venture capital activity. Goldman, which is eliminating some 1,000 jobs worldwide, plans to increase staff in San Francisco by 30 percent over the next year. UBS has more than doubled its wealth management staff in the area since 2008. “It’s very competitive,” said Joseph A. Camarda, who relocated from Philadelphia to lead Goldman’s wealth management group in San Francisco. “I think every firm has an A-list team out here.”

This feeding frenzy is familiar to those who experienced the last Internet boom. In the late 1990s, Wall Street descended on Silicon Valley, luring clients from marquee names like Yahoo and eBay. But after scouting clients from start-ups that flopped when the bubble burst in 2000, some banks pulled back.

This time, banks seem more aggressive. With start-ups growing faster than ever before because of developments in computing technology, it is critical to build relationships early. The emergence of secondary exchanges has allowed employees to sell shares before companies go public. Google, Facebook and other Internet giants are snapping up start-ups to spur growth, turning founders into overnight millionaires.

Geoff Lewis, the co-founder and chief executive of TopGuest, a mobile application acquired by ezRez Software in December, said he was surprised by the banks’ persistence. He was contacted by Goldman, UBS and Merrill within hours of the deal’s announcement.

“One bank, when I didn’t respond, asked if I’d like to attend a Sharks game with one of their managing directors to get to know them better,” Mr. Lewis said. He passed.

Advisers often tap existing clients for prospects and also scour industry sites, like TechCrunch or AllThingsD. The professional social network LinkedIn is an indispensable tool, with its database of start-up employees.

Personal connections matter, too. Andy Ellwood, an executive at Gowalla. a mobile application, received several e-mails when the service was sold to Facebook in December. But Goldman had already been in touch for months, after a broker met Mr. Ellwood’s girlfriend at a book club.

“In the middle of a lot of things going on, I didn’t want to deal with an overly aggressive sales person,” he said. “It was nice to know that there’s a friendly adviser, just a phone call away.”

But Silicon Valley’s culture of flip-flops and T-shirts represents a challenge to Wall Street’s staid, button-down brokers. Mutual funds and other investments don’t typically appeal to entrepreneurs, who often use spare funds to finance other start-ups.

Travis Kalanick, a co-founder of Uber, an on-demand car service, hired a broker a few years ago. But he grew skeptical after the adviser suggested a complicated investment that would make money only if a stock index fell within a narrow range.

“I felt like I was walking into a casino, where the dealer knew more than I did,” said Mr. Kalanick, who eventually left the brokerage firm.

Banks have been slow to adopt the latest technological innovations, which could make for a tougher sell in Silicon Valley. Neither Morgan Stanley nor Goldman has an iPad application for clients to manage their portfolio. Last year, a Merrill adviser met with a start-up employee in her 20s who brought along her parents. They discussed going to grad school or buying a home.

But Wall Street is trying to adapt its strategy.

Merrill executives are seeking advice from company employees under 30 on how to shape pitches. Barclays is pairing older wealth managers with young associates, who tend to be more familiar with social media.

“There are insights that one generation has — about technology, social media, networking — that another one may not fully appreciate,” said Mitch Cox, head of the Americas for Barclays’ private wealth management arm.

With a younger clientele, informational sessions focus on the basics, including buying a first home, paying off debt or building a portfolio.

Merrill offers “boot camps,” that explain fundamentals like mutual funds and dividends. The firm is building such a program for Facebook employees timed to the I.P.O., according to people briefed on the plans.

“It’s a big business opportunity,” said Greg Vaughan, a managing director at Morgan Stanley’s Menlo Park office. “There’s a lot of wealth being created out here.”

Evelyn M. Rusli reported from Palo Alto, Calif., and Ben Protess from New York.

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DealBook: Is It a New Tech Bubble? Let’s See if It Pops

Banks pouring money into technology funds, wealthy clients and institutions clamoring to get pieces of start-ups, expectations of stock market debuts building — as Wall Street’s machinery kicks into second gear, some investors with memories of the Internet bust a decade earlier are wondering whether this sudden burst of activity spells danger for the industry once again.

With all this exuberance, valuations are soaring. Investments in Facebook and Zynga have more than quintupled the implied worth of each company in the last two years. The social shopping site Groupon is said to be considering an initial public offering that would value the company at $25 billion. Less than a year ago, the company was valued at $1.4 billion.

“I worry that investors think every social company will be as good as Facebook,” said Roger McNamee, a managing director of Elevation Partners and an investor in Facebook, who co-founded the private equity fund Silver Lake Partners in 1999 at the height of the boom. “You have an attractive set of companies right now, but it would be surprising if the next wave of social companies had as much impact as the first.”

Funds set up by Goldman and JPMorgan Chase have invested in Internet start-ups like Facebook and Twitter or in funds with stakes in those start-ups. Even the mutual fund giants Fidelity Investments and T. Rowe Price have stepped up their efforts, placing large bets on companies like Groupon and Zynga.

Thomas Weisel, founder of an investment bank called the Thomas Weisel Partners Group that prospered in the first Internet boom, says he is “astounded” by the amount of money now flooding the markets.

“I think it’s much greater today,” he said. “The pools of capital that are looking at these Internet companies are far greater today than what you had in 2000.”

Yet there are notable differences between the turn-of-the-century dot-com boom and now. For one, the stock market is not glutted with offerings. In 1999, there were 308 technology I.P.O.’s, making up about half of that year’s offerings, according to data from Morgan Stanley. In 2010, there were just 20 technology I.P.O.’s, based on Thomson Reuters data.

More important, the tech start-ups that have attracted so much interest from investors have real businesses — not just eyeballs and clicks. Companies like Facebook have fast-growing revenue. Groupon, which has been profitable since June 2009, is on track to take in billions in revenue this year. And since 1999, when 248 million people were online (less than 5 percent of the world’s population), broadband Internet and personal computing have become mainstream. About one in three people are online, or roughly two billion users, according to data from Internet World Stats, a Web site that compiles such numbers.

“In those days, you had tiny, little companies going public that hardly had a business plan,” Stefan Nagel, associate finance professor at Stanford University, said. “And now you’re talking about only a few companies — companies that are already global and with revenue.”

With such a small, elite group, the potential fallout if things go badly would be limited, some investors say. “Yes, we have a frenzy again,” said Lise Buyer, a principal of the Class V Group, an advisory firm for companies considering initial public offerings. “But the frenzy is on a very select group of companies. Facebook is clearly Secretariat, but there are a few other championship horses they are looking to bet on.”

For Wall Street, the initial attraction to Internet start-ups in the 1990s was the opportunity to earn fees from taking the companies to market. At its peak in 1999, the industry made $1.3 billion in underwriting fees, according to data from Thomson Reuters.

But as enthusiasm surged, many firms also rushed to make investments for their clients and themselves through special-purpose funds and direct investments. And in many cases the banks got burned just as ordinary investors did.

“The investment pools that we did back in 2000 did extremely poorly, because many of those companies went from filing an I.P.O. to bankruptcy courts in a matter of months,” said Mr. Weisel, whose firm was acquired by Stifel Financial last year.

In 1998, Goldman Sachs Capital Partners, the bank’s private equity arm, began a new, $2.8 billion fund largely geared toward Internet stocks. Before that fund, the group had made fewer than three dozen investments in the technology and communications sectors from 1992 to mid-1998, according to Goldman Sachs documents about the fund.

But between 1999 and 2000, the new fund made 56 technology-related investments, of about $27 million on average. In aggregate, the fund made $1.7 billion in technology investments — and lost about 40 percent of that after the bubble burst. (The group, which manages the money of pensions, sovereign wealth funds and other prominent clients, declined the opportunity to invest in Facebook early this year.)

Philip A. Cooper, who in 1999 was head of a separate Goldman Sachs group that managed fund of funds and other investments, recalled that investors were clamoring, “We want more tech, we want more.” Bowing to pressure, he created a $900 million technology-centric fund in 1999, and within eight weeks he had nearly $2 billion in orders. Despite the frenzy, he kept the cap at $900 million.

“There was a lot of demand, but we couldn’t see any way we could prudently put that much capital to work,” said Mr. Cooper, who has since left Goldman.

Other Wall Street firms, including JPMorgan Chase and Morgan Stanley, also made a number of small to midsize investments during the period. In 1999, for instance, Morgan Stanley joined Goldman Sachs and others in a $280 million investment in CarsDirect.com, which scrapped its initial plans to go public when the market deteriorated.

“We thought we were going to double our money in just a couple of weeks,” said Howard Lindzon, a hedge fund manager of Lindzon Capital Partners and former CarsDirect.com investor. “No one did any due diligence.” Mr. Lindzon lost more than $200,000 on his investment.

Also in 1999, Chase Capital Partners (which would later become part of JPMorgan Chase) invested in Kozmo.com — an online delivery service that raised hundreds of millions in venture funding. JPMorgan Chase, which just recently raised $1.2 billion for a new technology fund, at the time called Kozmo.com “an essential resource to consumers.” At its height, the company’s sprawling network of orange bike messengers employed more than a thousand people. Less than two years later, it ceased operations.

An online grocer, Webvan, was one of the most highly anticipated I.P.O.’s of the dot-com era. The business had raised nearly $1 billion in start-up capital from institutions like Softbank of Japan, Sequoia Capital and Goldman Sachs. Goldman, its lead underwriter, invested about $100 million.

On its first day, investors cheered as Webvan’s market value soared, rising 65 percent to about $8 billion at the close. Less than two years later, Webvan was bankrupt.

About the same time, Internet-centric mutual funds burst onto the scene. From just a handful in early 1999, there were more than 40 by the following year. One fund, the Merrill Lynch Internet Strategies fund, made its debut in late March 2000 — near the market’s peak — with $1.1 billion in assets. About one year later, the fund, with returns down about 70 percent, was closed and folded into another fund.

“We all piled into things that were considered hot and sexy,” said Paul Meeks, who was the fund’s portfolio manager. Mr. Meeks started six tech funds for Merrill Lynch from 1998 to 2000.

Today, the collective amount of money that Wall Street banks are pumping into Internet start-ups, on top of the surging cash piles from venture capital groups, hedge funds and private equity, is a major concern for some investors.

Over the last five months, many venture capital players have raised giant amounts of capital. One Facebook investor, Accel Partners, is about to raise $2 billion for investments in China and the United States, while Bessemer Venture Partners is said to be closing in on $1.5 billion for a new fund. Greylock Partners, Sequoia Capital, Andreessen Horowitz and Kleiner Perkins Caufield Byers have collectively raised more than $3 billion in the last six months.

Mr. Weisel, who has also been tracking hedge fund activity, finds the numbers dizzying. Countless hedge funds are investing in private placements — “dozens and dozens of hedge funds are doing the same thing,” he said.

As cash continues to pile up, the fear is that all this money cannot be put to work responsibly. With only a few perceived “winners,” some investors must be choosing losers or paying too much, Mr. Meeks said.

“When you see the valuations being bandied about — I do think, boy, these better be really special companies.”

Peter Lattman contributed reporting.

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