Two weeks ago, it was announced that Goldman Sachs (NYSE: GS) and Russian firm Digital Sky Technologies would be investing $500 million in social networking sensation Facebook.
Investments by Goldman are rather common, and the amount was a tiny fraction of the company’s nearly $90 billion market cap, but a buzz was created because the stake effectively valued Facebook at a whopping $50 billion. Not bad for a firm that was founded only six years ago.
The social networking space is a buzz overall right now. Google (Nasdaq: GOOG) reportedly offered deal-of-the-day advertiser Groupon $6 billion in a takeover bid. Groupon’s management team decided to stay independent and just closed a round of funding to help the company remain on its own. Twitter, LinkedIn, and Zynga are also estimated to be worth billions, based on recent fundraising efforts and activity for their privately-held stock shares. Like Facebook, these firms are game-changers in cyberspace and are profoundly changing the way individuals communicate with each other and how advertisers try to reach consumers.
Many investors are now wondering if they should try to get in on the action and invest in these firms. The good news is that the Internet is making this possible for a larger group of investors. For starters, because these firms are private, they don’t have to release financial statements to the public. But online communication is making it possible to more easily find what information is available.
For Facebook in particular, by heading to the “about” section on its website, investors can learn that the company was founded in 2004, is based in Palo Alto, Calif., received $500,000 in its first round of funding and $40.2 million in two subsequent rounds. It boasts more than 500 million active users and is “one of the most-trafficked sites in the world.” Finally, Mark Zuckerberg is the co-founder and CEO, who investors have gotten to know quite well through a partially-fictionalized movie and related interviews since the film has been released. Public estimates of Facebook’s sales last year are at about $2 billion, and the firm is supposedly profitable, though, as the Goldman investment illustrates, the company still needs outside capital to grow its business.
Goldman’s investment effectively values Facebook at 25 times sales. This is easily a very rich multiple, but fast-growing tech firms such as Amazon (Nasdaq: AMZN), EMC (NYSE: EMC), and Cisco (Nasdaq: CSCO) were also valued richly when they founded and for most part have made money for early investors.
How to get in…
There are a few options for getting in on the Facebook action. The easiest would be to be a valued Goldman client, as the company is said to be starting an investment fund that will let clients invest about $1.5 billion in Facebook. (Although most of us don’t meet the substantial net worth requirements for Goldman’s Private Wealth division, rumored to be about $30 million.)
Online websites are also being created that link start-ups and other young companies that are linking growth capital with willing investors. SecondMarket is perhaps the most well-known, and appears to offer shares of Facebook, which may be available from either the company itself or other investors that already hold the shares. With access on Second Market’s website, there is a way to express an interest in investing in Facebook, and then start the negotiating process. Xpert Financial is also in the process of starting a trading platform for private companies and is estimated to go live in the next few months.
The one thing to note is that investing in private firms is primarily reserved for wealthy investors that qualify as accredited investors and institutions that hold status as “qualified institutional buyers” or QIB for short. Another caveat is that private companies with more than 500 investors have to register with the Securities and Exchange Commission (SEC). The fund Goldman is starting could end up requiring Facebook to file public financial statements, which it may not want to do. In other words, being private is pretty restrictive and by its very nature limits the number of investors that can become owners in these firms.
Action to Take —> With all this in mind, it should be noted that unless you have a substantial amount of money you are willing to risk, it would not be wise for individual investors to enter in this space. A more straightforward option for smaller investors is to invest in a venture capital fund, though this can also have certain restrictions. As such, investing in mutual funds and exchange-traded funds (ETFs) that invest in younger firms that have just gone public (and have similarities to younger start-up funds) could be the best option.
Overall, your best bet may be to let experts choose these types of investments for you.