Twitter Financing Raises Its Value to $3.7 Billion


Twitter has raised a big new round of venture capital, $200 million, valuing the company at $3.7 billion.

The financing brings the total raised by the three-year-old company to $360 million. It was last valued at $1 billion when it raised money in September 2009.

A new investor, Kleiner Perkins Caufield & Byers, contributed $150 million, and existing investors, which include Union Square Ventures, Benchmark Capital and Spark Capital, invested $50 million.

The fresh capital comes as Twitter tries to prove that in addition to being an Internet phenomenon with 175 million registered users, it can also be a serious business. It has recently introduced several types of advertisements, courted big businesses and promoted Dick Costolo, its business-minded former chief operating officer, to chief executive.

In an unusual move, a Kleiner Perkins partner did not join Twitter’s board, but the company did add two new board members: Mike McCue, a co-founder of TellMe and current chief executive of Flipboard, which transforms Twitter feeds into a more attractive format; and David Rosenblatt, former chief executive of DoubleClick, the advertising company now owned by Google.

The Twitter investment is a big win for Kleiner Perkins, a firm that made its name in the 1990s investing in Web companies like Google and, but was late to get into the social networking trend. Recently, it has been trying to join in, with investments in companies like the game maker Zynga and a new fund for social networking start-ups.

“As part of the Twitter team, we look forward to helping build the next great Internet treasure,” Kleiner Perkins said in a statement.

News of the investment was first reported by the blog All Things D. Matt Graves, a Twitter spokesman, confirmed the details, and Mr. Costolo wrote about the funding in a company blog post.

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The Deal Is On: Groupon Closes $950 Million Round

The social buying site Groupon has closed a $950 million round of financing, the company confirmed in a statement on Monday. Claire Cain Miller of The New York Times notes on Bits that this is the largest amount of money ever raised by a start-up.

Late last month, the Chicago-based start-up disclosed in a filing that it had already secured about $500 million. According to people familiar with that deal, who spoke on condition of anonymity because were not authorized to speak publicly, major institutional investors like Fidelity Investments,T. Rowe Price and Morgan Stanley participated in the round.

Groupon said Andreessen Horowitz, Battery Ventures, Greylock Partners, Kleiner Perkins Caufield & Byers, Group, Maverick Capital, Silver Lake Partners and Technology Crossover Ventures were also investors in this round.

“We’re thrilled that Groupon has earned the confidence of some of the world’s most respected investment firms,” Groupon’s founder and chief executive, Andrew Mason, said in a statement. “With their support, we will continue on our mission to change the way people shop locally and serve the world’s local businesses.”

In December, Groupon rejected a reported $6 billion takeover bid from Google.

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Groupon didn’t take the deal from google. They just closed a nine-hundred and fifty dollar round. Such an awesome start-up company, hopefully the next year will be as beneficial for them.

Russians’ Large Stake in Facebook Grows Larger


MOSCOW — What do the Russians want from Facebook?

And what, for that matter do they want from other hot, and currently private, American companies like Zynga, Groupon and Twitter?

For people with money in the Russian investment company DST Global, the focus is social networking.

The private company, which is generally known here as DST, may seem but a footnote in the move by Goldman Sachs to invest $450 million in Facebook.

But DST’s additional $50 million now raises it and its sister company’s combined investment in Facebook to more than $500 million. As a result of their earlier investments, they now own about 10 percent of the company, making the DST siblings among Facebook’s biggest owners.

When DST, previously known as Digital Sky Technologies,first started putting money into Facebook in 2009, some analysts chalked it up to an effort by novice Russian investors to burnish their technology credentials and gain entree to Silicon Valley. But DST, which is bankrolled by a coal and steel mogul with Kremlin ties, has placed some ambitious, and so far successful, bets.

It now owns about 5 percent of the popular online gaming company Zynga and about 5 percent of the prominent shopping-coupon company Groupon. And it is said to be interested in investing in another privately held phenomenon, Twitter.

A DST representative did not answer phone calls about the deal on Monday, which was a holiday in Russia.

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Goldman-Facebook Deal Raises Debate on Investor Pool


After news broke of the investment by Goldman Sachs in the social networking siteFacebook, a harsh spotlight was cast on a nearly 50-year-old law that limits the number of shareholders in a private company.

In 1964, regulators started requiring companies with more than 499 shareholders to publicly report their financial results. It is a rule that has been debated from the outset — and the issues raised now are the same ones raised then.

The Securities and Exchange Commission is examining the frenzied buying and selling of Facebook shares and other private technology companies in the secondary market.

To some, the structure of the Goldman deal merely looks like a way to circumvent the law. Through a special purpose vehicle, the firm could potentially pool money from thousands of wealthy clients and still be considered one investor because the entity would be managed by Goldman.

Section 12 (g) of the Securities Exchange Act of 1934 came about in the 1960s as over-the-counter trading in shares of privately held companies began to heat up and regulators worried that investors were not getting enough information.

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Square Locks In $240 Million Valuation


Square, a mobile payments company, announced Monday that it had raised $27.5 million in a new round of financing led by Sequoia Capital.

The deal, which includes several private and strategic investors— like Khosla Ventures and Jeremy Stoppelman, Yelp’s chief executive — values the start-up at $240 million, according to a person close to the deal who spoke on condition of anonymity because he was not authorized to speak publicly. A Sequoia partner, Roelof Botha, a former chief financial officer for PayPal, will join Square’s board.

The start-up, co-founded by Jack Dorsey, Twitter’s chairman and co-founder, has seen its valuation soar in a short period of time. In late 2009, Khosla Ventures led a $10 million investment in Square, at a more modest $45 million valuation.

Square spars with companies like Intuit and VeriFone, in the increasingly competitive market of mobile payments. The company offers a free reader that plugs into mobile devices, turning compatible cellphones into credit card scanners. Although the attachment and software are free, users pay a small percentage of each transaction to Square. The service is geared toward smaller merchants who are looking to avoid regular credit card processing fees.

Since offering its service in October, the company has added 30,000 to 50,000 new merchants a month, according to Keith Rabois, Square’s chief operating officer. While Square processes millions of dollars worth of transactions each week, Mr. Rabois predicts adoption will pick up sharply this year. “We would like to end the year processing billions of dollars of transactions on an annual basis, with millions of businesses in the U.S.,” he said.

Square is the latest in series of technology start-ups that have been able to secure large investment rounds. Groupon announced Monday that it had locked up $950 million from a large group of investors. This month, Facebook raised a total of $500 million from Goldman Sachs and DST Global; Goldman is also raising $1.5 billion from its client for a separate special purpose vehicle to invest in Facebook shares. And Mr. Dorsey’s other company, Twitter, raised $200 million at a $3.7 billion valuation in mid-December.

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The Deal Is On: Groupon Closes $950 Million Round

The social buying site Groupon has closed a $950 million round of financing, the company confirmed in a statement on Monday. Claire Cain Miller of The New York Times notes on Bits that this is the largest amount of money ever raised by a start-up.

Late last month, the Chicago-based start-up disclosed in a filing that it had already secured about $500 million. According to people familiar with that deal, who spoke on condition of anonymity because were not authorized to speak publicly, major institutional investors like Fidelity Investments,T. Rowe Price and Morgan Stanley participated in the round.

Groupon said Andreessen Horowitz, Battery Ventures, Greylock Partners, Kleiner Perkins Caufield & Byers, Group, Maverick Capital, Silver Lake Partners and Technology Crossover Ventures were also investors in this round.

“We’re thrilled that Groupon has earned the confidence of some of the world’s most respected investment firms,” Groupon’s founder and chief executive, Andrew Mason, said in a statement. “With their support, we will continue on our mission to change the way people shop locally and serve the world’s local businesses.”

In December, Groupon rejected a reported $6 billion takeover bid from Google.

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Venture Capitalists’ Desperate Search


Is getting people to upload goofy pictures of cats and bad English signs a better business than venture capital? Cheezburger Network, the profitable publisher of “I Can Has Cheezburger?” and other absurd Web sites, recently raised $30 million to expand. That venture capitalists are skirmishing to finance oddball ideas that don’t need their cash is a good illustration of the industry’s problems.

Venture capital’s best returns historically have come from the information technology industry — in companies like Sun Microsystems and Oracle. The trouble is, traditional hot sectors like computer production and traditional software have matured. And the hottest area of growth — consumer Internet firms — doesn’t need much capital to thrive.

Companies like Cheezburger, founded by Ben Huh, need comparatively little cash to get off the ground. Input costs, whether they are servers or Internet bandwidth, continue to fall. The software needed to run Web sites is often available free. And finding customers online can be done in an instant if an idea catches on.

It is simple to start a company using savings or angel seed funds and to finance subsequent growth through internally generated cash flow. That is what Cheezburger did. Of course, venture capital can help supercharge growth: Cheezburger plans to hire extra programmers and introduce other improvements.

The upshot of not needing cash is that entrepreneurs can command huge prices for their babies, as Facebook has done by selling stock to Goldman Sachs at a $50 billion valuation. Others can take money off the table, as Groupon’s founders plan to do with part of the $950 million they recently raised. Though those deals may turn out O.K., it’s hard to see venture capital consistently earning outsize returns if business owners are in the driver’s seat in capital-raising negotiations.

This dynamic partly explains the poor returns of the average venture capital fund. A Cambridge Associates index shows venture capital has returned just 4.25 percent in the five years to Sept. 30, 2010, and negative 4.64 percent over the last decade. Considering the risk associated with start-ups and the need to lock up capital, it is no wonder new commitments to venture capital funds have declined four years in a row. You can has too many moneys chasing too few cheezburgers.

Lifting the Veil

Cargill has validated the rules that govern Wall Street. By selling its majority stake in Mosaic, Cargill, the world’s largest private company, has lifted the veil a bit.

Newly available figures put Cargill’s value at about $55 billion. That is about the same as had been estimated before the Mosaic transaction, using multiples of its publicly traded agribusiness rival, Archer Daniels Midland.

Like many closely held companies, Cargill guards its privacy. But even 145-year-old family-controlled firms sometimes need to turn paper into cash. That is why Cargill has proposed to spin off its $24 billion stake in Mosaic, a producer of potash and phosphates. The event will provide the liquidity desired by the charitable trust set up by the late granddaughter of Cargill’s founder.

The transaction requires multiple financial contortions. These are created to make it tax-free for Cargill shareholders. The company is almost certainly holding Mosaic at a low cost basis, making the tax savings worth as much as $9 billion. To achieve this result requires a recapitalization, a debt exchange, a spinoff and share sales. It will require the wizardry of tax lawyers.

By contrast, valuing Cargill is simple. The charitable trust owns 17 percent of the company. For its portion of Cargill, the trust will receive 110 million shares of Mosaic. Assume that for this exchange, the trust is surrendering its whole stake in Cargill. Those 110 million shares, at Mosaic’s undisturbed price, are worth $9.4 billion. Scaling up from the trust’s stake in Cargill implies the company is worth about $55 billion.

That number sounds familiar. Before the spinoff was announced, one of the only reasonable ways to value Cargill was by comparing it to A.D.M. In the last 12 months, Cargill posted $114 billion of revenue and $4 billion of net income. Applying A.D.M.’s price-to-earnings multiple on Cargill led to a suggested market capitalization of $49 billion. Bankers undoubtedly used some more sophisticated measures like discounted cash flow to value Cargill. But they probably didn’t veer too far from what these cruder metrics spit out. It doesn’t always require a an M.B.A., to solve financial mysteries.

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Early Facebook Investor Is Bullish on New York


Long before Goldman Sachs sunk hundreds of millions of dollars into Facebook at a soaring $50 billion valuation, an Accel partner, Jim Breyer, made a controversial bet on a Harvard dropout.

In April 2005, he spearheaded Accel’s $12.7 million investment in the fledgling social network, at a near $100 million valuation. He also took a stake for himself. That early move has turned into one of the best bets for Accel, a Palo Alto, Calif.-based venture capital firm, which is also a backer of social buying site Groupon.

Now Mr. Breyer is turning his attention to New York, where the company is opening a new office at 41 East 11th in downtown Manhattan. Although Accel is no stranger to New York — the firm has made more than 15 investments here in the last three years — Mr. Breyer said the firm is making more deals around the region.

In an interview on Wednesday with DealBook, Mr. Breyer said the pace was definitely picking up for New York’s technology start-up scene, referred to as Silicon Alley. He drew comparisons to the vibrant growth in China, where Accel has made more than $1.5 billion in investments. Mr. Breyer, who serves on the board of dean’s advisers at Harvard Business School, also says more top graduates are migrating to New York — not to work for Wall Street — but to become entrepreneurs.

“The entertainment, media and consumer companies we see in New York today are as interesting as any geography in the world,” he said.

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A Dim View of Betting on Start-Ups


“There’s too much money chasing too few deals.”

Sean Parker, the entrepreneur behind Napster and Facebook now turned investor, was talking about the state of the venture capital industry last week over coffee. At 30, Mr. Parker, who was recently portrayed by Justin Timberlake in “The Social Network,” has been thinking a lot about innovation — or the lack of it — in the United States.

And he’s come to a depressing conclusion about the money industry that he says used to be “the engine of innovation” for this country.

“The risk-reward doesn’t work out in favor of putting money into venture capital anymore,” he said, even though he himself is a partner in a venture capital firm that owns stakes in Facebook and SpaceX, the private spaceflight company run by Elon Musk, a co-founder of PayPal.

Mr. Parker, a night owl who had awakened before his usual rising time of noon to meet with me, said the problem plaguing the venture business represented  a “systemic risk” to the country that he believed meant “innovation could gradually grind to a halt or at least become less effective.”

Mr. Parker may tend toward hyperbole, but ever since the bursting of the dot-com bubble, there has been a steady drumbeat of “venture capital is dead.” In the last year, however, that drumbeat has gotten louder as it has become clear that many of the best-known venture firms in Silicon Valley and elsewhere have returned a pittance to their investors.

According to the Cambridge Associates U.S. Venture Capital Index, venture capital returned a paltry 8.4 percent to investors in the last decade, starting in 1999. Ernst & Young reported last month that venture capital investing had fallen off a cliff this year, down 47 percent in the first half of the year compared with the period a year earlier.

“You’ll see big old established firms that everybody thought were here to stay probably splintering,” Mr. Parker said. That’s in part because he is convinced that the industry’s biggest backers — institutional investors — are going to seek a haven elsewhere. “I can’t name names but certain large university endowments have lost as much as half of their value,” Mr. Parker said.

For every Facebook, there are dozens of start-ups that never make it. That is the model — it is all about swinging for the fences. Even Facebook, still private, having not pursued an initial public offering, has yet to see the big payoff for its largest investors.

One of the problems often cited for depressing the venture capital world is the perception of a tight market for I.P.O.’s. Bill Gurley, a partner at Benchmark Capital, which was an early investor in eBay and, says he believes exaggerated expectations are the problem.

“We may also have a perturbed notion of what a healthy I.P.O. market looks like,” he wrote last week on his blog. “The I.P.O. market of 1999 was a myth, a facade, a once-in-a-lifetime mirage that you will never see again.”

That the market for initial offerings is dead may also be a myth, however. It may just be Silicon Valley. Only 11 of the 42 high-tech, venture-backed offerings since 2008 came from Silicon Valley. As Mr. Gurley pointed out, “In other words, 74 percent of these I.P.O.’s hail from outside of the S.V. echo chamber.”

Silicon Valley’s latest, greatest hopes — clean tech and green tech — also seem to be failing despite big investments from the likes of John Doerr of Kleiner Perkins Caufield & Byers and Vinod Khosla, a former Kleiner partner.

“It is not clear anyone will make money on their green-tech investing. It looks like it was a bubble, “ Mr. Parker said.

But worst of all, from the standpoint of innovation, entrepreneurs may be changing the way they are thinking — they are becoming less ambitious.

“Ten years ago, venture capitalists would ask the question: Do you want to build a company and flip it or do you want to build a company and I.P.O. it? It’s a trick question. The correct answer was always, ‘I want to build an incredibly valuable stand-alone business and maybe we get bought, maybe we go public but we’re going to build an incredibly valuable company,’ ” Mr. Parker said. “Now it’s actually not clear that that’s the right answer. There’s a lot of venture firms that are clearly interested in building something and selling it either to Facebook, Google, Microsoft.”

That’s not to say that Mr. Parker is all doom and gloom. His firm may actually have another venture capital-backed winner on its hands in Spotify, an online music service that some analysts suggest could one day challenge Apple’s iTunes.

But before you get too excited about great leaps in innovation in the United States, consider this: Mr. Parker didn’t discover Spotify in his backyard. It was founded in Stockholm.

Given his own status as a rock star entrepreneur, just how did Mr. Parker feel about Justin Timberlake’s portrayal of him in the “The Social Network?”

Pausing for a moment, Mr. Parker reflected: “It’s hard to complain about being played by a sex symbol.”

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DEALBOOK; Facebook’s Google Effect


”I hope the only people harmed are speculators.”

Roger McNamee, the venture capital investor, was discussing the new race in Silicon Valley to buy up shares of hot private Internet companies in the wake of Facebook’s $2 billion fund-raising last week that valued the company at $50 billion.

Mr. McNamee, a co-founder of the private equity firm Elevation Partners, whose best known principal is the musician Bono, knows a thing or two about the shadowy markets where private start-ups like Facebook trade hands.

But Mr. McNamee is starting to worry about a spate of copycat offerings that may come along in the coming months from dozens of Internet companies spurred by overzealous investors.

”If history is any guide, both sides will eventually overplay their hand on this, eventually leading to problems,” he said, resigned that the boom in private fund-raising may end badly.

Venture capital investments used to be made only by venture capitalists – professionals with an appetite for risk. But today, with billion-dollar rounds of fund-raising for the likes of Facebook and Groupon, money is flowing into these businesses from big institutional investors to wealthy individual clients of Goldman Sachs to plain old retail investors.

(Groupon, for example, raised $950 million on Monday; the company put out a hilariously headlined press release: ”Groupon Raises, Like, a Billion Dollars.”)

Then there are more indirect ways to buy into the hot private stocks. Some financial firms are creating vehicles, giving wealthy individuals a chance to get in on the action in secondary markets, where Facebook, Groupon, Zynga and other tech start-ups are trading at a frenetic pace.

Last week, a group of technology executives started a closed-end mutual fund that will try to buy shares directly from companies or on private exchanges. Think of the soon-to-be publicly traded NeXt BDC fund as away for mom and pop to acquire shares of Facebook without being a wealthy client of Goldman Sachs.

According to Mr. McNamee, investors are handing over money by the boatload because of a deep-seated insecurity of missing the next big thing. Call it the Google Effect.

”Almost every institutional investor screwed up Google’s I.P.O by not buying aggressively. No one wants to repeat that mistake with Facebook,” said Mr. McNamee, referring to the fact that Google’s original price at its public offering was a measly $85 a share; the company’s shares closed on Monday at $614.21.

Memories might be long about the Google I.P.O., but that does not mean that investors should take the plunge. Those heaving money at companies like Facebook are doing so with only a modicum of information about the companies’ performance. In the case of Facebook, investors were told only about the company’s revenue and profit for the last two years – hardly the kind of granular detail that most investors, even rich ones, typically require.

”Let’s call a spade a spade,” said Barry Schuler, managing director of the venture capital firm Draper Fisher Jurvetson. ”This is a faux I.P.O., no matter how you slice it,” he said of last week’s private Facebook offering.

Investors ”are just going on Goldman’s word and Facebook buzz, and they’re bypassing all the regulation that a public company has to comply with.” He added, ”A lot of people are stepping back and saying, ‘Isn’t this the kind of behavior that created the last two meltdowns?’ ”

Not all Wall Street denizens are worried. ”It’s high stakes. But I don’t think it should be outlawed,” said Alan J. Patricof, a longtime venture capitalist who was an early investor in Apple. ”There’s a large amount of individual investors that would like to participate in this. It may be a new really late stage form of venture capital.”

For companies, raising money in the private market over pursuing an I.P.O. makes eminent sense. ”An I.P.O. is like a bomb,” Mr. Mr. McNamee said, ticking off a list of downsides of going public: extra scrutiny, compliance costs and schadenfreude from rivals.

”It creates a big crater, whereas these private offerings are like a laser beam. They allow issuers to raise large amounts of capital with a minimal regulatory or governance burden.”

And for investors, ”the benefit of these deals is the ability to buy a substantial block of stock, something that is not possible in the I.P.O. market,” Mr. McNamee said.

These late-stage offerings also allow liquidity for company executives and early investors, allowing them to take a bit of risk off the table. Groupon, for example, might allow its board to cash out as much as $344.5 million as a result of its latest fund-raising effort.

All that may be good for top company executives and employees, but is it good for long-term investors? Are companies going to take bigger risks or less once they’ve already partially cashed out ahead of a potential I.P.O.?

Peter Thiel, a venture capitalist who is a board member of Facebook, said at a last fall’s TechCrunch conference that one of his investment criteria for early stage companies was this: ”The lower the C.E.O. salary, the more likely it is to succeed.”

He may now have to change his investment thesis.

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