CORRECTED-BREAKINGVIEWS-Dr. Goldman eases venture capital’s midlife crisis

By Karen Kwok

LONDON, Oct 14 (Reuters Breakingviews) - Sand Hill Road is building a bigger exit ramp onto Wall Street. Industry Ventures, which holds $7 billion of largely secondhand technology investments, agreed to be acquired by Goldman Sachs GS.N in a deal worth as much as $1 billion. The price tag looks steep, but investment bankers have what it takes to manage the struggles in venture capital.

The acquisition unveiled on Monday includes $665 million in cash and equity upfront and another $300 million of performance-based earnouts through 2030. Excluding the contingent considerations, Goldman is valuing Industry Ventures at 10% of fee-paying assets under management. StepStone, by comparison, paid about 8% for the $9.5 billion of comparable assets at Greenspring Associates in 2021.

There may be some method to Goldman's premium valuation. Buying existing seed and late-stage growth investments functions much like public-market deals: they require capital, deal-making expertise and market access, all of which the investment bank led by David Solomon has. Owning a venture capital firm gives Goldman a way to generate steady fees, extend services to its rich clients and tap into an area that’s only getting busier.

Industry Ventures began as a secondaries investor 25 years ago, but has since diversified into backing startups directly. This gives Goldman a broader foothold in increasingly coveted private markets through a firm it knows well. The bank's asset management arm has invested in its funds for a long time and its Petershill Partners bought a minority stake in 2019.

More significantly, the deal takes advantage of some market distortions. A drought of initial public offerings and conventional sales has forced venture capitalists to offload portfolios of aging investments. The artificial intelligence boom is squeezing the other end, too, with the exuberance making it harder to get into earlier fundraisings. Such valuations are at record highs, with primary rounds in the second quarter up 20% over the past year, according to a report from Carta, which helps startups manage their equity stakes.

This alternative quest for cash is accelerating. The secondary market will grow to more than $74 billion this year from $19 billion in 2015, Industry Ventures itself reckons, while data provider PM Insights estimates it already hit $75 billion in the third quarter. All these dynamics boost the case for Goldman's decision and increase the chances for heavier financial traffic between Silicon Valley and lower Manhattan.

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CONTEXT NEWS

Goldman Sachs said on October 13 that it had agreed to buy Industry Ventures, a firm that manages a $7 billion portfolio of direct and secondhand U.S. venture capital investments ranging from seed stage to late-stage growth.

Under the terms of the deal, Goldman will pay $665 million in cash and equity at closing, which is expected in the first quarter of 2026, and another $300 million based on Industry Ventures' performance through 2030.