The sound of Goldman Sachs plunking down a $450 million investment in Facebook at a $50 billion valuation might have come as surprise, but it didn't come out of nowhere. In fact, a closer look at the money swirling from Wall Street firms like Morgan Stanley and Goldman Sachs to Silicon Valley shows an increasingly cozy, symbiotic relationship — with Digital Sky Technologies co-founder Yuri Milner, who co-invested in the Goldman-Facebook deal, enviably poised in the middle. DST has been investing early and aggressively in some of the biggest names in the tech
bubble boom like Facebook (DST first invested in May 2009), Zynga (the company that makes Farmville and Cityville for Facebook), and Groupon (the dudes that just turned down Google's $6 billion). That helped establish Milner's firm as a barometer of which start-ups will blow up — hopefully metaphorically — in tech. He also tried, but failed, to be lead investors in Twitter's latest round too. “They’ve been super-aggressive in getting in some of these hyper-growth Internet companies,” Peter Falvey, a managing director at Morgan Keegan told Bloomberg. “So far, they’ve proven to be very savvy. If DST is putting money in a company now, later more people may want to put money into it as well.”
But DST's aggressive investments didn't always look as sound. "A year ago, people thought these guys were nuts, investing at a crazy valuation,” said Tom Taulli, an independent researcher on IPOs. “They took some risks, and they are paying off.” And how do we know it's paying off? At least in part because Milner's old friend Goldman Sachs just helped support the idea that Facebook really is worth $50 billion.
Yes, that's right, the two firms who could most benefit from Facebook getting such a high valuation also happen to have been intimately involved. Goldman was actually one of the earliest investors in DST. In fact, "many" or "a ton," depending on whom you talk to, of DST's employees come from Goldman, as well as Morgan Stanley and Citigroup. It was those analysts who helped Milner pick the Silicon Valley winners. Naturally, when it came time for those start-ups to prepare to go public, DST hooked Goldman up, putting the firm in the very lucrative position of either paying off its investment with fees when the company goes public or fees for selling its share of stock.
But here's the rub: We still don't know anything about Facebook's finances. Someone leaked that the company made $2 billion in revenue last year — and even that leak didn't come with a corresponding leak about losses. As Duff McDonald at Fortune pointed out, when Google was as close to an IPO as Facebook is now, it was much more transparent with its balance sheet.
Google (GOOG), if you recall, was pretty open by the end of its life as a private company - everybody knew what it was doing and how it was doing it. Facebook (and, in the same sense, Twitter) reminds me of Kozmo.com during the dot-com boom. Kozmo, you will recall, somehow had people convinced that they were going to make tons of money doing something remarkably pedestrian - that is, delivering Ben & Jerry's by bicycle to Manhattanites.
The Kozmo allusion (oh, how we miss thee) seems a little far-fetched. Facebook has far more ubiquity and relevance and scalability — and far fewer expenses — not to mention its own verb. But considering Goldman won't make typical financial disclosures to the investors it's letting in on the deal (something the SEC is looking into changing a 47-year-old rule over), it's hard to believe that the $50 billion really adds up.
There's another mutual benefit to DST's and Goldman's relationship. While Groupon is already backed by Morgan Stanley and will likely use them when it comes time for an IPO, Goldman's affiliation with Facebook now puts the company in the pole position for Zynga's upcoming IPO. It's easy to see how the hype self-perpetuates. Well, if Facebook's worth $50 billion, then their No. 1 developer must also be worth a ton. Maybe I can get in early on that one!!!! And poof, like that, a whole new group of self-shafters are likely to come running, wallet-first with dollar signs in their eyes, toward Lloyd Blankfein's door, while Milner waits inside.
Facebook Backer Helps Lure Goldman Sachs, Morgan Stanley to Silicon Valley [Bloomberg]
Goldman Just Bought The Zynga IPO, Too [BI]
At Least Five Employees Have Worked For Both Goldman Sachs And Facebook's Russian Backer [BI]
Related: With Facebook Deal, Goldman Sachs Now Able to Get Clients to ‘Shaft Themselves’