Investment banks could be Silicon Valley’s new best friend

Could Silicon Valley be the next playground for investment bankers with imagination?

The opportunity that is being created in the secondary markets to involve large investment banks with later stage companies is intriguing and potentially adds an “extra layer of opportunity” for many startups to grow into their full potential, venture capitalist Ryan Swagar, managing partner at Venture51, told VentureBeat today.

Traditionally large-scale, bulge bracket banks stay on the sidelines for tech investments until they are sure they understand the business model and can make a profit.

But new federal rules about how they can make money without ties to hedge funds or their proprietary trading desks have put pressure on them to find new sources of income.

“It also potentially creates another avenue of liquidity for founders and early investors,” added Swagar. “If executed correctly, and carefully, the big banks and secondary markets could create more opportunity and add additional capital to the tech ecosystem.”

Venture51 has a total fund size of $20 million, and it said it intends to invest $50,000 to $500,000 each to a group of handpicked early-stage companies over the next five years.

It currently has an active portfolio of more than seven companies across technology, Internet, media, consumer and business services, including EcoMom, Life360, WebMynd, DailyWorth, eToro, Graphic.ly and InboxQ.

But with so many companies scrambling to get in on the next hot thing in tech, too often VCs skim over their due diligence and forget that improving access is a significant key to any startup’s success, said Swagar.

Venture51’s first fund investment was in well-known angel investor Howard Lindzon’s Social Leverage portfolio, which includes a variety of seed-stage companies and has a history of picking winning exits.

As such, it says VCs, larger banks and hedge funds should be keeping a close eye on the valuation of all startups — even if the current climate seems to be sustaining reasonable, right-sized valuations, depending on where the company actually is in its life-cycle.

Brandon Zeuner, another managing partner at Venture51, said that right now, “We lean towards agreeing with Reid Hoffman and Ben Horowitz, [that] ‘It’s a boom and not a bubble.’”

Both partners said VCs should be intently watching for innovation in the [San Francisco] Bay Area, New York, Los Angeles, and emerging tech hubs like Seattle, Vancouver, Philadelphia, Atlanta, Ga., Chicago, Boulder, Colo., and Austin, Texas.
“We have to remind ourselves that most startups today have a product, not just an idea, which is solving real problems, with validated customers, a logical business model and a clear path to revenue,” said Zeuner. “Some are already generating revenue. These are the pre- requisites for most investors, for them to even take a look these days, versus the 1.0 bubble days.”