Facebook and the Parallel Surge in (Early- and Late-Stage) Valuations

The last quarter of 2010 has ushered in a new era of vibrant activity at the very beginning and very end of the startup life-cycle.

Later-stage companies like Groupon, Twitter and Facebook have come back to the trough all within the last several weeks to raise between $200 and $500 million each in what some have dubbed “Private IPOs.” The New York Times is now reporting that Goldman Sachs Group Inc. may help Facebook raise as much as $1.5 billion at a $50 billion valuation. At the other end, seed-stage startups are raising round sizes of $1 million or more that would have been unthinkable three years ago for pre-product companies.

The two booms are interconnected. They feed off each other. Among early- or seed-stage companies, the power of platforms like Facebook’s have made the expected value of any given engineer much more unpredictable. The engineer hired by a startup at a salary of between $90 to 150,000 and 1.5 percent or less in equity could make several times that much by building a Facebook-powered web or mobile experience on their own.

This was not as easy to do four years ago, before the platform launched. Overnight successes like Instagram, which raced to 1 million iPhone users in two months fueled by Facebook and Twitter’s social graphs, are pushing angels to take gambles on two or three-person teams even before they have built products.

Meanwhile, the middle investment stages matter less as the most attractive consumer Internet companies like Twitter or Groupon seem to either rush through or bypass them.

Among later-stage rounds, nimble firms like Russia’s Digital Sky Technologies can barge in with $100 to 200 million in financing without demanding the same rights that other more traditional firms require. At the same time, the tepid global economic recovery and low interest rates are pushing investors toward emerging markets and privately-held companies, even if there isn’t as much transparency.

Investors are now banding together to create special funds to buy shares of privately-held, technology companies as traditional blue-chip stocks can’t promise the same returns.

Now, investment banks like Goldman are taking note of tech companies that are deferring their IPOs for longer to avoid the shortsightedness and regulatory burdens of public markets. For comparison’s sake, Google had raised just over $25 million from Sequoia Capital, Kleiner Perkins Caufield & Byers and angels before going public while Amazon had raised about $8.3 million. Facebook will have raised north of $1 billion in equity investments.

Right now, the companies that fit into this later-stage category like Facebook are clear IPO candidates that are profitable. But over time, as less-skilled and knowledgeable investors pour in through special funds and as valuations soar with more liquidity in secondary markets, momentum could easily get ahead of itself. That is, if it hasn’t already.

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