Venture capital is one of the primary means for start-up companies to get the funding (and many times, management expertise) to grow into a financially sound and successful business. While venture capital returns have been disappointing since the dotcom bubble burst, there have still been a handful of private companies that have made it big. Still, the online industry is one such area that has proven lucrative for entrepreneurs with vision and venture capital with the funds to back ambitious business plans. Below is a quick overview of five such firms that have captured a wide following and impressive user base in cyberspace today.
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By most measures, Facebook is a very young firm, as it was founded in 2004. It is currently based in Palo Alto, California and has quickly become, in its own words, "a social utility that helps people communicate more efficiently with their friends, family and coworkers". The details of its founding by Mark Zuckerberg are subject to much speculation, and is the subject of the recent movie "The Social Network", that is said to contain as much Hollywood fiction as historical fact. The website boasts more than 500 million users and would qualify as one of the largest populations in the world if it were its own nation.
Outside funding started with a $500,000 angel investment in the summer of 2004 from Peter Thiel, co-founder of PayPal. The entire company is estimated to have started turning a profit in 2009. While sales and earnings details are not widely available, one source estimated Facebook would post more than $1 billion in revenue during 2010. Recent firm values are said to exceed $40 billion, as investors are bullish on Facebook's ability to makes sales from advertising, and as it seeks ways to profit from one of the largest user bases in the world.
Twitter is an even younger firm that was launched in 2006. It was started in San Francisco by Jack Dorsey, while Biz Stone and Evan Williams are also listed as founders. The website is said to have taken off at the South by Southwest Interactive trade show in 2007. Twitter boasts 175 million registered users and estimates that 95 million "tweets" are written every day.
Twitter has received an estimated $161 million in venture and related funding so far, according to secondmarket.com. This started with some initial seed capital, likely by the founders, and was followed by $5 million in funding in 2007 and increasing amounts that led to a $100 million investment in September, 2009. There is little mention of Twitter's sales or profits since it was started. A recent valuation has guessed at a level of $4 billion for the entire firm, which suggests the current group of private owners expect it to eventually find a way to make hefty earnings from its massive user base and growing popularity. (To learn more, see Tweeting: The Next New "Profession".)
LinkedIn is the old man of these three firms as it was founded in 2002 by Reid Hoffman. The website is a primary means for professional networking and recently boasted that it now has over 80 million users.
LinkedIn has received an estimated $103 million in funding since inception, according to secondmarket.com. Financial details are even more scant than compared to Facebook or Twitter, as are estimated values for the entire firm. A round of fundraising a couple of years ago put the entire firm value at over $1 billion. At the time, Facebook was estimated to be worth $15 billion, so the value of LinkedIn is likely even higher today. As with the other social networking sites, advertising is the primary revenue driver, though users can also pay for plans that help them network more efficiently and better market themselves and their businesses. (For more, see 4 New Job-Search Trends.)
Groupon was launched in late 2008, shortly after being founded as a previous website, The Point, in late 2007. Groupon sends sales deals via email and its website to consumers in more than 300 markets and 35 countries. It makes its money by getting a cut of the sales its clients make.
Groupon has been in the news over speculation that Google is interested in acquiring it for around $6 billion. Recent reports are that it rejected the current takeover offer and plans on going it alone. Groupon has an estimated 35 million users and recent sales estimates are at $1 billion annually. It has received an estimated $170 million in development funding to date. (To learn more, check out 4 Coupon Sites Worth Checking Out.)
Zynga was founded in San Francisco in early 2007 by Mark Pincus as a gaming firm that creates and offers social games online. The games are usually free for consumers to play, but may require users to purchase "energy" characteristics to continue, and, like the above players, Zynga makes money by charging advertisers or "partners". Its FarmVille game on Facebook has grown extremely popular, and Zynga has received an estimated $519 million in development funding according to secondmarket.com. The company is reportedly valued at more than $5 billion. (For more, check out Play Video Games; Become A Millionaire.)
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The Bottom Line
At some point in the near future it is very likely that these companies will have initial public offerings (IPOs) and be available to a much wider base of interested shareholders. It is also likely to make many of the early venture capitalists and other investors huge returns on their original investments. The longer-term success of these firms depends on if they can find consistent ways to earn profits as advertisers look to capitalize off of impressive levels of loyal users. But for now, millions of individuals are benefiting as users and love the ability to network for work, pleasure, or both.
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