Does Facebook Solve VC Industry Woes?

Source: Michael A. Greeley5/17/12Follow @greels1

So here is my obligatory post on Facebook…which will be the most spectacular IPO of a venture-backed company in the history of mankind…and it just priced tonight.

The shares priced at $38 giving the company a market cap of $104 billion fully diluted, raising $16 billion in proceeds. Of the 421 million shares being sold, 57 percent (or 241 million shares) are being sold by insiders; in the past few years only LinkedIn and Pandora had a higher percentage of shares coming from insiders. Assuming the “green shoe” over-allotment option is exercised, the total amount of proceeds will exceed $18.4 billion. And this is where I want to focus.

Putting aside the potential negative signaling of all this insider selling—and General Motor’s voting with their feet (or tires) this week—what is the impact on the VC industry with all this liquidity? First—according to Fortune—some of the numbers:

—Individual shareholders (mostly Zuckerberg) are selling $3.2 billion of stock and will retain stock worth $27.7 billion

—Institutional shareholders are selling $8.3BN of stock and will still hold $15.8 billion

—This does not include the existing institutional investors (T. Rowe Price, Andreessen Horowitz) which hold about $1 billion of stock and are not selling, nor does it include all the other employees who are now fabulously wealthy

—Of the institutional investors, $5.1 billion of stock being sold is held by institutions which have traditional LPs and/or are themselves LPs. This same group of investors will still have $10.6 billion of Facebook stock yet to be sold.

For me what is most interesting is to speculate about what is to become of all this liquidity. The venture industry has struggled mightily to raise capital; in the past few years the VC industry has raised between $12 to $15 billion annually. As these proceeds are realized and distributed, do much of these dollars get recycled—that is, will underlying LPs begin to increase their allocations to VC as they start to see Facebook distributions? The math suggests that one year’s worth of VC fundraising is now in around half a dozen VC firms fortunate enough to have invested in Facebook!

Additionally, we are watching a very deep and wealthy pool of new angel investors get created and collectively they will play a powerful role in the next wave of great company formation. Much like the “PayPal Mafia” from the last decade which sponsored many of this cycle’s great companies, the Facebook Mafia should do the same over the course of the next decade. These individual investors themselves could become significant LP’s in many venture funds which, if that were to be the case, would further drive VC industry expansion.

Or is this just all wishful dreaming?

This essay originally appeared today on Michael Greeley’s blog, On the Flying Bridge.

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