Goldman Invests In Facebook, Innovation Ensues

mark zuckerberg

Photo: Associated Press

Reports of the US$ 500mm investment from Goldman Sachs in Facebook are all over the Internets. Of course, this is a significant event, because as ‘the age of entrepreneurship’ continues to gain momentum new financial constructions and liquidity events are needed to keep the ecosystem going and growing.And as Albert Wenger notes:

These deals are designed to provide significant liquidity for insiders (especially early investors and employees), provide a piggy bank for continued aggressive growth and establish a share price for use in acquisitions. Those are all the things that companies traditionally got from an IPO.

These are exciting times, it will be very interesting to see how this plays out and what kind of role institutions like Goldman Sachs want to play in the longer term. Consider this:

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

Pending SEC approval, I think this is very good news for both innovators and investors. It brings new, different financing structures to the scene, which no doubt will be good for innovation. Many innovative companies have a long-term outlook that does not match the quarterly requirements of public companies. Additional private money can help bridge a particularly interesting growth phase and prepare for acquisition or an–in this case probably inevitable–IPO.

For small investors, who for the most part do not have direct access to the pre-IPO market, this means they can now help fund the next wave of companies that will change the world. For now it’s just Goldman, but you can be sure that more and more banks will try to raise this kind of investment.

So unlike Albert (who is probably about 100 times more knowledgeable than I am) I’m quite enthusiastic about this development, and I think it will help grow the ecosystem for innovative startups around the world and create an even more sophisticated financing/investment structure for breakthrough innovation.

This article originally appeared at Klatergold.

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