Facebook’s backers gear up for prestige boost
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 fundof- 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 photosharing 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. Josh James, the former chief executive officer of the software company Omniture, is just the sort of entrepreneur that most any venture capital firm wants to back - he had sold Omniture to Adobe Systems for $1.8 billion in 2009. He had his choice of funders when he was building his new software company, Domo, and went with Benchmark Capital last year in part because of Benchmark Capital partner Matt Cohler’s close ties to Facebook. James said he has sealed a deal to hire more than one employee by telling them that likely they eventually would get to present to Cohler, and he has closed several sales because the Facebook connection makes it clear to customers that Domo is up on the latest technology. “It gives them confidence,” he said. Earlier this year, Domo raised $20 million more from Institutional Venture Partners. At education network Edmodo, which took $15 million in funding from Greylock and Benchmark last year, the Facebook connection “brings credibility to us, too,” CEO Nic Borg said. Borg said he believes several education companies developed applications to run on Edmodo’s platform that they might not otherwise have done so. At business software company Couchbase, CEO Bob Wiederhold says the upside lies in large part on the introductions that Accel’s Kevin Efrusy, an investor in his company since 2010, can make. That includes to Bobby Johnson, director of engineering at Facebook and now an advisory board member at Couchbase. “He can help surround the company with good people,” Wiederhold said, referring to Efrusy.