Facebook IPO has halo effect for venture capitalists

Sun May 13, 2012 8:18am EDT
 
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By Sarah McBride

SAN FRANCISCO (Reuters) - For the handful of venture capitalists who backed Facebook 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.

"The person, often the firm too, gets that patina," said 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. "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.

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.

'GIVES THEM CONFIDENCE'   Continued...

 
A man stands outside of the St. Regis hotel holding a pamphlet of information on investing in the upcoming IPO of Facebook in New York May 10, 2012. REUTERS/Lucas Jackson