Following the dot-com craze and subsequent Tech Wreck, the venture capital (VC) industry had a rough ten-year stretch where many companies posted annual returns of less than 10%, or well below the levels needed to justify the fact that VC investments have high failure rates, charge what can be hefty management fees, and can take many years to turn a profit. In fact, only 3% of the $2 trillion invested in start-up and early stage companies made it to where a company went public and returned huge returns for VC investors. (Make a career out of chasing down the "next big thing". Check out Seek An Adventure In Venture Capital.)
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After a relatively quiet decade, the latest social media firms have reinvigorated many leading industry players and set capital in motion to try and take advantage of what is projected to be a steady stream of initial public offerings from the likes of Facebook, Twitter, LinkedIn and Groupon. Here are five of the largest social media investors and the current companies they are investing in.
1. Digital Sky Technologies
Digital Sky Technologies, or DST for short, is a Russian-based investment firm that was founded in 2005 by billionaire Yuri Milner. The firm has reportedly been an active investor in Facebook, Groupon and Zynga, as well as a number of Chinese internet firms. The Facebook investment was said to be a joint venture between DST and Goldman for a total of $500 million, which at the time valued the entire firm at $50 billion. The relationship is based on the fact that current DST partners had worked at Goldman, while Goldman was reportedly an early investor in DST.
DST made an earlier investment in Facebook in 2009 and current rumors are that it will invest in Spotify. It is said to be interested in investing more than $1 billion in social media firms in the next five years.
2. Elevation Partners
Founded around the time of DST in 2004, Elevation Partners is a private equity firm that provides large capital investments to help companies grow and "partner with management to enhance growth and profitability through a combination of strategic capital and operational insight."
Its portfolio of companies currently lists Facebook, where it holds a 1% stake purchased for $90 million. In April 2010, Elevation also invested in Yelp to the tune of approximately $95 million in preferred stock and shares from employees and other shareholders at the time. It currently runs a portfolio with an estimated $1.9 billion in assets under management.
3. Sequoia Capital
Sequoia Capital is one of the oldest and most successful venture capital firms. Founded in 1972, it has invested in and helped turn Apple, Google, YouTube, Cisco, Yahoo, Electronic Arts and PayPal into leading global firms in their respective space. Its current portfolio is vast and contains many social media investments, including LinkedIn, Tumblr and YouTube, as well as up-and-coming firms such as Airbnb, Blippy and Churn Labs.
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4. Kleiner Perkins Caufield & Byers
Kleiner Perkins Caufield & Byers (KPCB) was also founded in 1972 and has a couple of billion dollars under management. It focuses on developing close relationships with the firms to which it provides capital, and boasts of 150 IPOs in a broad portfolio of companies during its lifetime. Meg Whitman, former eBay CEO, just signed on with the firm as a strategic advisor.
KPCB recently announced it was starting a $250 million social media fund. In an interesting twist, social media firm Facebook is backing the fund, as are Amazon, Zynga, Comcast, Liberty Media and Allen & Co. It lists recent investments in Cafebots, Flipboard, Jive and Lockerz, which all qualify as early startups in the social media space.
5. Andreessen Horowitz
Andreessen Horowitz is one of the newest VC firms, having opened up shop in the middle of 2009. Andreessen Horowitz was a cofounder of Netscape and he partnered with Ben Horowitz to develop Opsware, which was sold to Hewlett-Packard for an estimated $1.6 billion.
Andreessen Horowitz is reported to have started with $300 million and to have raised an additional $650 million in late 2010. An initial investment in Skype was quickly followed by providing growth capital to Zynga, Digg, Foursquare and a more recent investment in Twitter to go along with other current investments in Facebook and Groupon.
The Bottom Line
It remains to be seen if the social-networking craze turns out many profitable firms that succeed after going public and make big gains for initial VC investors and later investors in the public realm. There are concerns that too much capital is chasing these ideas, but there is little doubt that at least a small handful of firms will end up making big returns for the earlier investors. (For related reading, check out 3 Ways Social Media Can Wreck Your Career.)
Disclosure: At the time of writing Ryan C. Fuhrmann was long shares of Cisco and HP but did not own shares in any other company mentioned in this article.