For the handful of venture capitalists who backed Facebook (FB.O) in its early days, a huge financial payoff is not the only thing they may be celebrating when the company goes public later this week.
In a business in which the best investment opportunities flow to a small number of firms with big reputations, the prestige boost that Accel Partners, Greylock Partners and Meritech Capital have gained from their Facebook investments dating back to 2005 and 2006 could pay dividends for years to come.
Lisa Edgar, who tracks a range of venture investors in her work evaluating venture-capital firms for fund-of-funds firm Top Tier Capital Partners said.
"The person, often the firm too, gets that patina. It perpetuates. There's this deal-flow and network effect."
The dynamic is straightforward, but powerful. Entrepreneurs see a firm, or an individual partner, that not only made a great call but now has a special relationship with a company that could help their nascent business. That means that the venture capital firm gets first dibs on some of the most promising deals, which vastly increases their odds of success.
Facebook Numbers Based on IPO Filing (Click Image To Enlarge)
And their link to Facebook means in some cases an easy introduction, or even a deal down the road, for the venture capitalists' portfolio firms. Take Facebook's $1 billion acquisition last month of photo-sharing service Instagram - just after Greylock funded it.
Other venture capitalists also start paying more attention to what the successful firm is doing, and although they would be loath to admit it, they may become more inclined to back those same companies at richer valuations in later rounds of financing.
The limited partners who provide the funding for venture capitalists in turn see both the big financial return from the initial investment and the fringe benefits to other portfolio companies, and become more inclined to support the successful venture capital firm in the future.
Facebook's Process From IPO Filing Date Through First Day of Trading (Click Image To Enlarge)
'GIVES THEM CONFIDENCE'
Josh James, the former chief executive officer of the software company Omniture, is just the sort of entrepreneur that most any venture capital firm wants to back - he had sold Omniture to Adobe Systems (ADBE.O) for $1.8 billion in 2009.
He had his choice of funders when he was building his new software company, Domo, and went with Benchmark Capital last year in part because of Benchmark Capital partner Matt Cohler's close ties to Facebook.
James said he has sealed a deal to hire more than one employee by telling them that likely they eventually would get to present to Cohler, and he has closed several sales because the Facebook connection makes it clear to customers that Domo is up on the latest technology.
He said.
"It gives them confidence."
Earlier this year, Domo raised $20 million more from Institutional Venture Partners.
At education network Edmodo, which took $15 million in funding from Greylock and Benchmark last year, the Facebook connection "brings credibility to us, too," CEO Nic Borg said.
Borg said he believes several education companies developed applications to run on Edmodo's platform that they might not otherwise have done so.
At business software company Couchbase, CEO Bob Wiederhold says the upside lies in large part on the introductions that Accel's Kevin Efrusy, an investor in his company since 2010, can make. That includes to Bobby Johnson, director of engineering at Facebook and now an advisory board member at Couchbase.
"He can help surround the company with good people," Wiederhold said, referring to Efrusy.
THE BIG COMEBACK
Facebook's earliest backers are sitting on a veritable fortune. Meritech's and Greylock's slices of Facebook will be worth more than $1 billion each.
But Accel Partners, which initially invested $12.7 million in Facebook at a $98 million valuation back in 2005, the year after it was founded, is clearly the big winner. Come the IPO, the current stake of Accel and its affiliates will be worth $6.3 billion, assuming a mid-point stock price of $31.50. It plans to sell a portion of that stake worth about $1.2 billion, according to the IPO prospectus.
List of Facebook Stackholders With Percent of IPO Shares Held (Click Image To Enlarge)
Accel won in more than one way. It had been struggling in the wake of the dot-com bust that began in 2000, and the firm's fund that in 2005 first started investing in Facebook and other companies turned Accel's reputation around. Its latest funds, including last year's Accel XI, have been heavily oversubscribed by investors.
The deal was also a career-maker for Accel's Efrusy, who was not even a partner when he made the case for a big investment in Facebook at what was considered a very high valuation at the time. Efrusy went on to back social-discount company Groupon (GRPN.O) early on, in 2009, well before its IPO raised $700 million last year.
Top Facebook Billionaires After IPO (Click Image To Enlarge)
For Greylock Partners' David Sze and Meritech Capital's Paul Madera, both of whom jumped into Facebook as part of a $27.5 million round in 2006 that valued the company at $500 million, the deal was not their first big success.
Sze was an early investor in LinkedIn (LNKD.N), which raised $352.8 million in an IPO last year, and Madera backed enterprise-software giant Salesforce.com before it went public in 2004.
Cohler invested sweat equity by leaving a job at LinkedIn in early 2005 to become Facebook's seventh employee before becoming a venture capitalist. At his new employer, Benchmark Capital, which does not invest in Facebook, he led a $7 million investment last year in Instagram.
Despite their extraordinary success, none of the early Facebook investors appears ready to rest on the laurels.
Greylock's Sze said.
"You have to be humble about whether you can do it again, and that's what keeps you hungry."
Kleiner Perkins' Chi-Hua Chien said.
"If you look at the cycle, every four to six years another company of (Facebook's) caliber gets created."
Chi-Hua Chien is currently a partner at Kleiner Perkins and a former associate at Accel who first brought Facebook to the Accel team's attention. He rattled off a list of names including: Amazon AMNZ.O, in 1994; Google (GOOG.O), in 1998; and Facebook, in 2004.
The outsized importance of the occasional monster deals means that venture capital firms sometimes find it worthwhile to get in - even late in the game.
Andreessen Horowitz, a high-profile new firm, drew some snickers when it bought Facebook shares in 2010 at a very high valuation. But that investment stands to show a tidy profit, and with partner Marc Andreessen sitting on the Facebook board, it is not hard to see the benefit for the firm..
(Editing By Jonathan Weber and Will Dunham)
COMMENTARY:
Here are some of the most interesting bits of information in Facebook’s IPO filing:
- Zynga accounted for approximately 12% of Facebook revenue
- Net income rose 65 percent to $1 billion in 2011, off revenue of $3.71 billion (85% from advertising)
- Sheryl Sandberg’s 2011 Facebook compensation: $30.9 million
- Facebook CFO David Ebersman’s 2011 total compensation was $18.65 million
- Advertising accounted for 85% of Facebook revenue in 2011
- Mark Zuckerberg’s compensation in 2011 was $1.49 million
- 845 million active users on Facebook (901 million as of February 29, 2012)
- Total capitalization as of Dec 31, 2011: $4,899 million
- Full time employees increased from 2,127 as of December 31, 2010 to 3,200 as of December 31, 2011
- Mark Zuckerberg holds stock with total voting power before IPO of 56.9%
- Facebook major ownership: Mark Zuckerberg : 28%, Accel (invested in 2005) :11.4% Co-founder Dustin Moskovitz 7.6% DST: 5.4% Peter Thiel: 2.5%
- Mark’s letter in the middle of the IPO filing
- Mark Zuckerberg’s annual salary will fall to one dollar starting 1/1/2013
- Facebook had 483 million daily active users on average in December 2011, an increase of 48% as compared to 327 million in December 2010
- 425 million monthly active users of Facebook’s mobile products in December 2011
- An average of 2.7 billion likes and comments per day were generated by users during the three months ending December 31, 2011
- Facebook cites Google+, Cyworld in Korea, Mixi in Japan, Orkut in Brazil and India, vKontakte in Russia as competitors
- Also cited by Facebook as competitors: Renren, Sina, and Tencent if they “are able to access the market in China in the future”
Peter Lauria points out that 85% of revenue dependent on advertising makes it more reliant than CBS, the most ad-dependent old-media firm.
Another interesting section addresses risks:
Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
- users increasingly engage with competing products;
- we fail to introduce new and improved products or if we introduce new products or services that are not favorably received;
- we are unable to successfully balance our efforts to provide a compelling user experience with the decisions we make with respect to the frequency, prominence, and size of ads and other commercial content that we display;
- we are unable to continue to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
- there are changes in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
- we are unable to manage and prioritize information to ensure users are presented with content that is interesting, useful, and relevant to them;
- there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
- technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience;
- we adopt policies or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;
- we fail to provide adequate customer service to users, developers, or advertisers;
- we, our Platform developers, or other companies in our industry are the subject of adverse media reports or other negative publicity; or our current or future products, such as the Facebook Platform, reduce user activity on Facebook by making it easier for our users to interact and share on third-party websites.
Facebook will offer 180,000,000 shares in its IPO and other stockholders will additionally sell 157,415,352 shares. This chart shows who these shareholders are and how much the shares they're planning to sell are worth given the price range of $28 to $35 per share.
Value of shares to be sold in Facebook's IPO (Click Image To Enlarge)
Courtesy of an article dated May 14, 2012 appearing in The Huffington Post (By Sarah McBride - Reuters) and an article dated February 1, 2012 appearing in Reuters blog
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