Friends with money

Goldman Sachs’ $450 million investment in Facebook could ultimately be a game-changing event for venture capital.

In early January it was reported that Goldman would offer up to $1.5 billion in shares of Facebook – a deal that would value the social networking giant at $50 billion – to its wealthiest investors. Though not a public company, Facebook is able to trade on the secondary market through investors purchasing stakes from current and former employees.

To some, the deal is an auspicious sign for secondary transaction volume in 2011. “I think that every important private technology company is going to access secondary liquidity in one way or another [in 2011],” one partner at a venture capital firm tells PEI. “There’s going to be a lot of liquidity in otherwise private companies, and that’s going to be a great thing for the venture ecosystem.”

Chris Douvos, managing director at The Investment Fund for Foundations, notes the potential for the Facebook deal to focus more of investors’ attention on venture capital.

“Among a lot of institutional investors, venture is the least loved asset class today,” Douvos says.

“When we see stuff like Facebook, stuff like Twitter, stuff like Groupon, there’s an element of bringing sexy back to venture,” Douvos says. “To the extent that Facebook has become the poster child for great emerging growth firms, maybe that has some spillover effect that benefits the dozens and dozens of other start-ups that show promise and starts to bring a shine back to venture capital.”

Others remain unconvinced that a mega investment in Facebook will be any kind of game changer for venture capital.

“If you look at venture for the past 10 years, there have been very, very few investments that swung for the fences and made it,” says Kelly DePonte, partner at Probitas Partners. “I don’t think this is really a transformative event for venture.”

In April 2010, the 10-year returns for venture capital dipped into negative figures, according to Thomson Reuters’ US Private Equity Performance Index.

Roughly two weeks after news of Goldman’s investment in Facebook broke, the firm on 17 January announced it would exclude its US clients from the private offering.

The decision to rescind the offer was attributed to “intense media coverage” that “might not be consistent with the proper completion of a US private placement under US law,” the firm said in a statement. Banks seeking to raise money via a private placement in the US are not allowed to be seen to publicly market the offering. The appearance of detailed media coverage, therefore, risks falling foul of regulation designed to prevent “marketing to US investors.”

Goldman added that it “regrets the consequences of this decision, but believes this is the most prudent path to take.”

It is likely that the firm will still find enough foreign investors to purchase all of its shares in Facebook – the Wall Street Journal reported that some $7 billion of orders had been placed as of 17 January – but the bait and switch could end up costing Goldman some of its US clients as friends.