From Russia with MONEY: Venture Capital Is the New Export

Twitter just landed the largest single venture capital investment deal in history: $800 mn, according to reports, although the company would only call the amount ‘significant’. Half the money goes to Twitter directly and the other $400 mn will buy shares of existing holders. That means an $8.4 bn valuation.

And who’s leading the round? DST Global, the fund run by Russian billionaire Yuri Milner. This isn’t the first time DST has written a big check to a social media start-up: two years ago, it made a big splash by investing $400 mn in Facebook, with a similar split of half the money to the company, the other half to provide liquidity to insiders.

The Twitter investment shows a change to the traditional troika of Silicon Valley start-up, American venture capital firm, and eventual IPO. Instead, companies get funding to build strength – working their way toward profitability before filing their S-1 with the SEC – and cash out early shareholders who don’t want to hold for years. Oversea investors help make that possible.

‘You have to hold on to a company much longer for it to become the size it needs to be to make it interesting to the public as a whole,’ says Mark Heesen, president of the National Venture Capital Association (NVCA), in an interview. Facebook might have been able to go public a couple of years ago; one reason it didn’t was that the early investors wanted a bigger bang for their buck. According to NVCA figures, companies are often taking 10 years to go public now, compared with the five to seven-year range venture capital firms once preferred.

Keeping companies private longer can be tricky and expensive, especially in high tech where start-ups may experience years of deficits; that can burn through a lot of cash. Even if some investors take a longer view, others don’t want to wait for an uncertain future payday. And then there are the employees who receive shares and options as part of their compensation – eventually, they become restless without liquidity.

Enter foreign money looking for high returns. There are only so many investments that offer even a chance of them, and taking a position in a high-profile company that eventually lands an IPO is one of them.

Interested in the private market for tech stocks? Check out this chart slideshow on first-half results.

[Article by Erik Sherman, Inside Investor Relations]

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