Wall Street banks are horning in on a tried-and-true Silicon Valley business.
And they're doing it at a crucial time.
Investors and executives say Silicon Valley fundraising for start-ups is stalling, right at a time when many need cash to support operations. Few are eager to do a down round — accept investor capital at a lower valuation — leaving them in need of a little leverage to get by. It means doing a deal for venture debt. Enter banks like Goldman Sachs, which are eager to underwrite debt for pre-IPO companies.
"As start-ups stay private longer, there's a broader need for venture debt to support operations," said one source who invests with big, pre-IPO companies. "It's on the rise, with companies that can get it."
Lately, there are a number of boldface-name start-ups that can: Uber, Airbnb and Spotify, and those are just the ones that raised $1 billion or more so far this year alone.
Various factors go into the growing trend toward venture debt: For Silicon Valley companies weighing an IPO, the extra cash lets them hold off on decision-making and focus on growth. The market hasn't exactly been friendly to companies looking to make public market debuts, and taking on VC money may be more difficult: At a time when venture capitalists have been raising more funds, their investing in start-ups began to decline earlier this year.