J. P. Morgan

J.P. Morgan's plan to help startups stay private longer

September 12, 2013: 10:15 AM ET

J.P. Morgan develops debt product for high-flying startups that aren't yet ready for IPOs.

Jimmy Lee, vice chairman of J.P. Morgan Chase

Jimmy Lee, vice chairman of J.P. Morgan Chase

FORTUNE -- "Come to Silicon Valley."

That was the message that J.P. Morgan Chase's (JPM) head of Internet and digital media banking, Noah Wintroub, kept sending James Lee, the bank's vice chairman who hadn't visited since before the 2008 financial crisis. He wanted Lee to see that Facebook (FB) was just the tip of the opportunity iceberg, with dozens of maturing tech startups that could benefit from the bank's creativity and balance sheet.

So Lee hopped a plane earlier this year, and was amazed by what he saw.

"Historically these companies finance themselves via venture capital and maybe a little bit of bank debt," Lee explains, in an exclusive interview with Fortune. "But at some stage they don't want more bank debt and they don't want additional dilution. So their only real option was to go public, which they may not yet feel ready to do."

So Lee sat down and began to develop what he refers to as a "high-tech version of mezzanine finance." It's a trademarked debt product called an SPL, which stands for "Stay Private Longer." Each security is customized to the specific issuer, but generally is a combination of a cash-pay coupon and a payment-in-kind (PIK) note, usually with an emphasis on the latter (since few private tech companies can afford high cash-pay coupons).

RELATED: Jawbone raises more than $100 million

The first company to use one was SurveyMonkey, as part of its $800 million debt and equity recap earlier this year. The second is consumer electronics startup Jawbone, which has quietly raised $93 million. The Jawbone deal includes $43 million from Silver Lake (via its Waterman platform) and Fortress Investment Group (FIG), plus up to $50 million in asset-backed financing from JPMorgan and Wells Fargo.

To be sure, this is small money for J.P. Morgan -- whether it be syndication fees or actual investment. But the ultimate payoff could be huge.

J.P. Morgan effectively has an inside track for the IPO business of both SurveyMonkey and Jawbone, not to mention for future debt and acquisition requirements. Other Wall Street bankers may have had meetings with those companies' CEOs, but none have done actual business with them (at least not for these companies). And while there are a number of venture debt and mezzanine debt providers in Silicon Valley, few have broader underwriting capabilities.

Not surprisingly, J.P. Morgan expects SurveyMonkey and Jawbone to just be the first of many companies to employ the SPL.

"J.P. Morgan created a unique instrument designed to fill a near-term capital hole that we had," explains Jawbone CEO Hosain Rahman, whose company previously raised more than $200 million in traditional venture capital. "J.P. Morgan has a big war chest to put into companies, so today it is tens of millions and someday it may scale up to billions."

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