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Investing Or Marketing? The Real Reason Lightspeed Invested In Ning At A Crazy Valuation

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A couple sprinkles of Donut lore as developers dig in

A lot of readers were incredulous over last week’s news that Ning raised another $15 million in venture capital from Lightspeed Venture Partners at a $750 million valuation. That comes despite the fact that Ning traffic appears to be flatlining, and revenue to date is likely very small.

A typical comment to that post: “What an ASTOUNDING way to waste money.” Others pointed out that venture capitalists typically invest hoping to at least have a chance at a 10x return – and in Ning’s case, it seems unlikely that the company will be worth the necessary $7.5 billion any time soon. So, why’d they invest?

Marketing.

Lightspeed doesn’t have an investment in a big name social networking startup right now. In fact, their entire Internet portfolio looks a little sleepy and dated. Competitors like Greylock can show investments in Facebook and LinkedIn, two of the hottest pre-IPO startups in Silicon Valley (as well as Pandora and SGN, both of which are getting lots of press attention and fast user growth).

Lightspeed needs to get itself back in the game. And Ning was willing to take the money. A match made in heaven.

Do they expect to see a big return on the investment? Almost certainly not. But they also haven’t put their money at extreme risk. They likely have a liquidation preference that lets them get their $15 million out of the company before others can take part of the pie. So effectively they just bougtht themselves a bunch of marketing with their limited partners’ money.

Of course, the LPs don’t really mind, since they look at returns on the fund, not individual investments. And it may work out well for them. When Greylock invested $25 million in Facebook in 2006 at then-absurd valuation many of the same criticisms were leveled at them, too. But they had a stake in the hottest startup around at the time, and increased their profile in Silicon Valley. Likewise, Microsoft’s investment in Facebook at a $15 billion valuation, was done not in the hope of making money on the investment, but to lock up a search marketing deal.

So at the end of the day Ning gets some much needed additional capital in exchange for a tiny amount of equity, and Lightspeed gets its name associated with the Ning and Marc Andreessen brands. And while they won’t expect to make much of a return on that investment, they will almost certainly get that money back, at least. Everybody wins.

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