Facebook Inc.’s (FB:US) initial public offering is poised to create some 850 new millionaires, spawning a new class of angel investors looking to help other startups build on the popularity of the biggest social network.
While not all of the young and rich will plunge a portion of their wealth into emerging Web and mobile companies, investing has proved to be popular among early Facebook alumni. Instagram Inc., Spotify Ltd. and Flipboard Inc. are all backed by that group.
Even in an already frothy market, their capital and advice are in high demand because entrepreneurs need all the help they can get when it comes to reaching Facebook’s 900 million users, said Aydin Senkut, an early Google Inc. executive and the founder of Felicis Ventures. Assuming Facebook holds its initial valuation for six months after the IPO, about $9 billion of restricted stock and options will be vested and available to sell by current and former employees.
“The most important thing is the experience and connections they’re bringing to the table,” said Senkut, who left Google to form his Palo Alto, California-based firm in 2005. “In terms of the money, certainly it will be beneficial, but we already have a lot of money.”
It starts with the money. Facebook, based in Menlo Park, California, raised $16 billion in its IPO last week, valuing the social-networking site at $104 billion. That’s the biggest on record for an Internet company at its debut, and more than four times Google’s value when the search engine went public in 2004.
Facebook rose 0.6 percent to $38.23 at the close in New York on May 18, its first day (FB:US) of trading.
Millionaires in Waiting
Of Facebook’s 3,700 employees (FB:US), about 600 will become millionaires, according to PrivCo, a research firm that specializes in private companies’ financial data. An additional 250 former employees are millionaires or soon will be, the New York-based firm estimates.
Those looking to grab an early piece of the next billion- dollar company will be jumping into an increasingly competitive market. Venture investing in the U.S. surged 25 percent last year to $29.1 billion, with $11.9 billion of that in Silicon Valley, according to the National Venture Capital Association. That doesn’t include many of the seed deals that are not registered with the association.
“Add to that a whole bunch of new individuals coming in with a whole bunch of wealth that they’ll deploy into the entrepreneurial community and it will make it even more competitive,” said Ted Schlein, a partner at Menlo Park-based Kleiner Perkins Caufield & Byers. His venture-capital firm raised a $525 million fund last week.
The most prominent former Facebook executives turned investors include Sean Parker, Dustin Moskovitz, Dave Morin, Matt Cohler, Adam D’Angelo and Chamath Palihapitiya.
Parker, Facebook’s first president, invested in music- sharing site Spotify, while Moskovitz left to start software maker Asana Inc. and invested in mobile application makers Path Inc. and Flipboard.
D’Angelo started Quora Inc. and, along with Cohler of Benchmark Capital, invested in Instagram, the photo-sharing app that Facebook agreed to buy for $1 billion. In March, Parker, Moskovitz and Morin, the founder of Path, invested together in software company NationBuilder.
“Facebook is the ‘it’ company that everyone wants to make sure they can capitalize on,” said Sonja Hoel Perkins, a partner at Menlo Ventures in Menlo Park. Areas where Facebook employees can help are “integration with Facebook, making sure the social aspects of their business are working or knowing the relevant people,” she said.
Plenty of Capital
For hot startups like those in the Y Combinator incubator program, there’s no shortage of available capital. In addition to the $18,000 on average that Y Combinator invests, each company has access to $150,000 from the Start Fund, a group that includes Andreessen Horowitz, Ron Conway and Yuri Milner. Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.
Beyond that, investors are lining up to get in on the first institutional fundraising round.
“It’s really good for people like us,” said Ajay Mehta, co-founder of Palo Alto-based social-network site FamilyLeaf, one of 65 companies that went through the three-month Y Combinator course earlier this year. “People that wouldn’t have previously invested now are, so it makes founders less desperate.”
Hear It Local, a San Francisco startup focused on the music industry, raised $250,000 from a group of 10 angel investors in the last year and is preparing to raise more funding. The company is deciding between an early-stage firm and some high- profile angels, said co-founder Matt Lombardi. Part of that financing will go to help build a new Facebook app, he said.
“I don’t think that in the past decade there’s been so much fierce interest from tech angels before,” said Lombardi. “It’s relatively easy to get outside funding right now.”
That all makes investors like George Zachary nervous. Zachary, who runs the seed funding program at Charles River Ventures in Menlo Park and was an early Twitter Inc. investor, said the influx of cash means too many mediocre companies are getting funded.
The excess drives up the costs of engineers because everyone is chasing the same finite talent pool, he said. At the same time, dozens of startups are going after niche markets with a lot of hype and little revenue.
“You have recruiting problems because of more money in the market,” Zachary said. “You have other problems because now you have 20 competitors instead of maybe two, and there are still only going to be one or two breakouts in the field.”
Technical talent in the San Francisco Bay area is expensive. Software application developers in Silicon Valley earned on average $117,150 as of May 2011, compared with the median national annual salary of $92,080, according to the Bureau of Labor Statistics.
Facebook spells out the hiring challenge in its prospectus, highlighting the battle for engineers and salespeople primarily in the San Francisco area. The company said its ability to offer equity incentives may not be as effective as in the past when it was an emerging startup. Add to that the difficulty of retaining millionaires who are set for life.
“We have a number of current employees whose equity ownership in our company gives them a substantial amount of personal wealth,” Facebook said in the prospectus. “This wealth could affect their decisions about whether or not they continue to work for us.”
As opposed to, say, becoming an angel investor.
To contact the reporters on this story: Ari Levy in San Francisco at email@example.com; Lee Spears in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Tom Giles at email@example.com; Jennifer Sondag at firstname.lastname@example.org