Social Networks and Investment banks, a new model of funding?

By March 03, 2011
Social Networks and Investment banks, a new model of funding?

Social Networks are a trending topic nowadays. Every day there is categorical hyperbole in the news - an initial public offering, stratospheric valuation or a humongous rise of capital. Till now, the roles were clear: on one side we had the social network with millions of users but no revenue, and on the other a powerful venture capitalist seeking to multiply their investment. Lately this second role has shifted to a newcomer: the investment banks.

Goldman Sachs started this trend by investing in Facebook recently, staking $500 million on the popular social network a few months ago. Now it is JP Morgan's turn, which is rumored to be investing nearly $450 million to get ten percent of Twitter through its $1.2 billion Digital Growth Fund.

Why this shift? VCs are being squeezed from all directions. First from entrepreneurs, who do not need millions to start a company as they did years ago. They prefer to appeal to Business Angels to get the $100K-200K they need to start, in exchange for a smaller amount of shares than VCs used to ask for. Second, investment banks want to control the future IPOs of promising start-ups and avoid the danger that another Investment firm can come at the very last minute with a better offer and walk away with the deal.

This new scenario has a lot of pros, but also some cons. What if, as many analysts are starting to point, we are in the middle of a giant Social Network Bubble? Well, if the VC is the main investor, some rich guys will be less rich. But if the investment firms are the ones leading the investments, it could be much worse.

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