Facebook and the Era of Access

Facebook is going public today and most of us will not be getting rich as a result. This is not because we are not smart and it’s also not because we’re not lucky. The investors that backed Facebook all have an attribute that is very difficult to emulate – access.

The subject of access occurred to me as I was doing some back-of-the-envelope math on Elevation Partners and its gleeful experience with Facebook. The firm is one of the celebrated insiders that will find its net worth exceptionally higher today as a result of having been an earlier investor in Mark Zuckerberg’s dorm project. According to a source close the firm, Elevation invested “about $270 million” in two tranches into Facebook. At the IPO valuation set yesterday, the firm’s stake is worth some $1.52 billion (according to this excellent overview).

Just as impressive as the return on equity is the fact that Elevation’s Facebook stake is now worth just a bit less that the total sum of the entire $1.9 billion fund from which the equity was drawn. Being able to return to your investors the value of their capital commitments from the proceeds of a single deal is something that all GPs dream about but few ever accomplish.

The Facebook success will have a steroidal effect on the firm’s investment performance. Sans Facebook, many investors argued that Elevation had to date turned in a so-so performance. Its prospects were also diminished by the departure of several key partners. The firm is now reportedly eyeing a follow-on fund, which you only get to do if investors are sufficiently impressed with your first one.

Elevation Partners raised its debut fund in 2006 to much fanfare. This was the golden era of private equity fundraising and the Elevation team was the closest thing to an all-rock-star lineup that the industry had ever seen, bolstered by the listing of an actual rock star, Bono, in the PPM. The firm also included Roger McNamee (pictured at left) and Marc Bodnick (Silver Lake founders), Fred Anderson (ex-Apple) Bret Pearlman (ex-Blackstone) and John Riccitiello (of video-game giant Electronic Arts). Placement guru Kevin Albert joined the firm mid-fundraise in 2005. Riccitiello, Bodnick and Albert have since left the firm.

As is painfully evident to many private equity market participants, today’s fundraising environment is acutely Darwinian. Limited partners want to know not only how your track record compares to the crowd of other GPs trying to raise money, but how you earned your returns. Were you smart or just lucky? Did the fortunes of your portfolio companies improve because your firm executed a smart plan, deployed the right people and resources, cut the right slabs of fat? Or did the value of your portfolio companies go up because of factors beyond the control of the GP team, ie general market trends, economic improvement, multiple expansion, lucky breaks?

In evaluating Elevation’s investment in Facebook, an investor might wonder: were those guys smart or just lucky? What “operating value-add” did they bring to Facebook that made it grow to $100 billion in market capitalization? What skills unique to the firm were applied to the Facebook investment that are replicable and can be applied to the next fund?

Certainly there was keen judgment required to place a bet on Facebook, and judgment is a rare, valuable and replicable GP skill (famously, David Rubenstein of Carlyle declined an opportunity to be an early investor). But many of us would indeed have also had the prescient wisdom to invest in Facebook. What we lacked was access. We didn’t know the right people from not having spent long careers building companies and contacts in the ecosystem from which Facebook emerged.

In raising its next fund, Elevation will work hard to show that its prowess in supporting its portfolio companies and executing on strategic plans have been the primary drivers of success in its debut fund. But many investors, perhaps without acknowledging this explicitly, will recommit to Elevation II because they want to benefit from the gold-plated access that McNamee and the band enjoy in Silicon Valley, where capital is in oversupply but winning ideas and entrepreneurs are scarce. If you want a chance to be part of the next earth-changing startup, you’d better know the right people or you’ll have to line up like the rest of the chumps to get your shares on IPO day. There will be many venture and growth-capital funds raised over the next few years that will reach final closes in large part because the LPs will recognize that who you know can sometimes be even more valuable than what you know.