Tech Job Watch Mar 03 2011

Facebook, Twitter, Zynga Bubbles Minting Millionaires

By john shinal

Big valuations for hot Internet companies are making some employees, executives and early investors rich -- even if they never do the same for investors who buy into eventual IPOs.

Based on public filings and reports of private investments, the combined worth of equity in Facebook, Twitter, LinkedIn, Groupon, Pandora Media and Zynga Game Network is more than $90 billion.

Their reported aggregate valuation has nearly tripled in less than a year and continues to grow, leading some to call the investment climate a new Internet bubble.

Just today, David Faber reported at CNBC.com that Facebook's valuation has gone up yet again -- to $65 billion -- via new funding from General Atlantic, a Greenwich, Conn.-based investment firm, which took a 0.1% stake in the social media company. General Atlantic declined to comment.

"Whenever you have new value being created, you're going to have a bubble," said Tim O'Reilly, founder and president of O'Reilly Media and a veteran observer of Silicon Valley. "Investors don't know how to value it."

Even if the market crashes and investments in the second wave of Web companies never pan out for individual investors, those with big stakes in the startups are staring at big future gains and, in some cases, already cashing out. The New York Post reported that one Facebook founder is trying to sell 10 million shares. Facebook declined to comment.



Facebook

In January, Facebook said it raised $1.5 billion of investment that valued the company at $50 billion. The latest round came from Russian investment firm DST (formerly Digital Sky Technologies), Goldman Sachs and Goldman's non-U.S. clients.

The valuation was more than twice the $24 billion the company was reportedly worth in July, 2010, in private market trading. Since then, global users of the world's largest social networking service increased to 600 million from 500 million.

With today's reported valuation of $65 billion, co-founder and CEO Mark Zuckerberg's 24% stake is worth more than $15 billion, by far the largest stake in the company. Several other early employees and investors also have multibillion-dollar stakes in Facebook.

DST, of Russia, and the Silicon Valley venture capital firm Accel Partners each own 10% of the company, with each stake now worth $6.5 billion.

Facebook co-founders Dustin Moskovitz and Eduardo Saverin own stakes of 6% and 5%, respectively worth $3.9 billion and $3.25 billion. Sean Parker, an early investor and former executive of the original Napster music service, owns 4%, worth $2.6 billion. Peter Thiel, who founded PayPal and now runs a hedge fund, owns 3%, or $1.95 billion.

Trading in Facebook shares reportedly is active in private markets such as SecondMarket, suggesting that at least some early Facebook investors are cashing out. The U.S. Securities and Exchange Commission is now probing trading on the SecondMarket platform.

Several reports have pegged Facebook's 2010 revenue at $1.97 billion.

The company, based in Palo Alto, Calif., declined to comment for this story.



Twitter

In December, Twitter reportedly raised $200 million, valuing the company at $3.7 billion. Investors included the marquee Silicon Valley venture capital firm Kleiner Perkins.

The valuation is more than triple the amount that investors paid in a funding round just a year earlier. Recent discussions have pegged the company's worth at up to $8 billion, making the stakes of Twitter co-founders Biz Stone, Jack Dorsey and Evan Williams likely worth several hundred million dollars apiece.

That's not bad considering that Stone, in an onstage interview at a Federated Media conference in February, said of Twitter: "we're just in the early phases of being a real business."

The San Francisco-based company is not profitable and had 2010 revenue of $45 million, The Wall Street Journal reported.

Among other Twitter shareholders are several prominent tech investors including Ron Conway and Marc Andreesen and venture capital firms Union Square Ventures and Charles River Ventures.

Twitter didn't respond to a request for comment.



Groupon

Groupon, the online coupon site based in Chicago, said in January it raised a $950 million from private investors. The company has had discussions with investment bankers about an IPO that could value it as high as $15 billion, according to one report.

The majority of the new funding Groupon just raised didn't go to company operations, however. Instead, $573 million, or 60%, was paid to existing shareholders selling their stakes, according to an SEC filing in January.

It was the second time in less than a year that Groupon insiders were selling, as a filing for the company's previous round, in April, 2010, said part of the amount raised was used to "facilitate liquidity for employees and early investors."

That means founder and CEO Andrew Mason or other employees, as well as the company's early venture capital investors, including New Enterprise Associates and Accel Partners, may not need an IPO to get rich on their Groupon stakes.

Other top executives include vice president of business development Sean Smyth, who joined Groupon in Sept., 2009, and vice president of product development Suneel Gupta, who joined in Jan., 2010. Gupta is the brother of CNN medical correspondent Dr. Sanjay Gupta.

Groupon's previous round of $135 million, raised in April, was led by Digital Sky Technologies and also included Battery Ventures. The round was said to value the company at $1.35 billion.

Groupon is said to be profitable and its revenue skyrocketed 22-fold to $760 million in 2010, according to a report in the Wall Street Journal.

The company didn't reply to an email seeking comment.



Zynga Game Network

Zynga, a maker of social games played mostly on Facebook, is reportedly in talks to raise a $250 million funding round that values the San Francisco-based company at between $7 billion and $9 billion.

That's a huge leap in valuation for a three-year-old startup that in April, 2010, filed papers to issue new stock that valued the company at $4 billion. In December, 2009, Zynga raised $150 million from Digital Sky Technologies in a transaction that reportedly valued it between $1.5 billion and $3 billion.

In July, 2010, Zynga took $147 million in investment from Softbank, a Japan-based Internet investment company, as part of an agreement to create a joint venture called Zynga Japan.

At the more recent valuation, founder and CEO Mark Pincus's stake could be worth at least $1 billion, given that founding CEOs with no co-founders typically own at least 10% of their startup if the company is profitable early on, as Zynga reportedly has been.

The company generated $400 million in profit last year on revenue of $850 million, the Journal reported.

Zynga declined to comment for this story.



LinkedIn

Last month, the professional networking service LinkedIn, based in Mountain View, Calif., filed papers for an initial public offering of stock. But wealthy investors have been trading its shares for some time in private markets.

In January, LinkedIn shares sold on one such market, called SharesPost, at a price that valued the company at $3 billion, according to Business Insider.

Founder and CEO Reid Hoffman and his wife own a 21.4% stake in the company, according to its IPO filing. At a $3 billion valuation, the stake is worth more than $600 million.

Venture firm Sequoia Capital owns 18.9%, worth about $560 million, and Greylock Partners, a Silicon Valley-based venture-capital firm where Hoffman is also a partner, owns 15.8%, worth $474 million.

Chief executive Jeffrey Weiner, 40, holds 4.1%, worth $123 million, and chief financial officer Steve Sordello, 41, holds 1.1% worth $33 million.

During the nine months ended September 30, 2010, LinkedIn's net revenue doubled to $161 million from $80.6 during the same period in 2009. Net income for the first nine months of 2010 came in at $10 million. However, the filing said the firm doesn't expect to be profitable on an annual basis in 2011.

LinkedIn, through a spokesperson, declined comment for this story.



Pandora Media

Venture capital firms Crosslink Capital and Walden Venture Capital stand to reap the biggest financial windfalls from a planned IPO of Pandora Media, the personalized Internet music service founded by musician and film score composer Tim Westergren in 2000.

Given that Pandora is seeking to raise $100 million from its IPO, and that companies typically sell between 10% and 20% of their equity in such an offering, the company will likely be valued between $500 million and $1 billion.

When measured by revenue, the Oakland, Calif.-based company is much smaller than other startup Internet firms seeking cash now. Its revenue tripled to $90 million for the first nine months of last year, when it posted a net loss of $18.6 million.

Crosslink general partner Jim Feuille, who made his firm's investment in Pandora, said at a recent gathering of investors and startup CEOs in San Francisco that his firm had invested $33 million in the company over a period of five-and-a-half years.

Crosslink has a stake of 23.03% in Pandora, according to its IPO filing, while Walden Venture Capital owns 18.59%. Walden partner Larry Marcus first invested in the online music service in the spring of 2004 -- after Westergren had tried and failed in pitches to 348 investors during the prior four years.

Labrador Ventures holds 8.5% of Pandora, while Greylock Partners owns 14.13%. The Hearst Corp. owns 5.75% of the company.

Pandora president and CEO Joseph Kennedy, who joined the company in 2004, owns 2.71%. Westergren owns 2.39%, which is less than typical for most founding CEOs. Westergren said he was liberal in passing out equity to employees who worked for more than two years without pay in order to keep the company afloat.

Pandora didn't respond to a request for comment.

Write to John Shinal



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