Late-Stage Web Companies Took In The Largest Tech Investments Of 2011

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Gillmor Gang 12.31.11 (TCTV)

One of the defining trends of modern web companies is that the top ones have been choosing to raise giant, private late-stage funding rounds instead of going public. In 2011, some of these rounds got so big that they passed the other types of companies that typically raise the biggest fundings each year — manufacturing and infrastructure technology companies that need to heavily invest in real-world goods to scale their businesses.  Look at the ten companies that raised the most money this year in CrunchBase.

Facebook is at the top of the list this year with its $1.5 billion round in January led by Goldman Sachs and Digital Sky Technologies. Groupon is close behind, with a $950 million round led by DST, with Morgan Stanley and a long line of venture and private equity firms in the mix. The rest of the list is dominated by web companies, too — Zynga, Twitter and LivingSocial are next.

In the previous four years, most of the ten largest investments have been in cleantech, biotech, electronics, networking and other industries of the less virtual sort. In 2011, the only two companies squarely in hardware-oriented businesses are wireless networking company LightsSquared and white-label healthcare device manufacturer Kaz.

While it’s true that big web companies have been putting hundreds of millions of dollars into physical goods like data centers and servers, they’ve also been using large portions of these fundings for something that to buy shares back from early investors and employees. Up until recently, the main way stockholders made money was by selling their stakes on the public market.

The other side of this trend is that public investors aren’t able to get their money into companies when they’re still at peak growth phases. The private equity and venture firms getting into the later stage deals are instead the ones benefiting from the differences in valuations (that is, unless the late-stage valuations are so high that they exceed the eventual public offering prices, and leave the investors underwater).

So, why are web companies waiting to go public? One main rationale is that they don’t want to be subject to the quarter-by-quarter profit growth demands of public investors. Instead, they want to focus on building long-term businesses free of outside interference. They may also not like the often-ugly IPO markets — for good reason, judging by the mixed public performances of Groupon and Zynga. Or the increasingly heavy regulatory costs.

Anyway… the late-stage web funding trend is still playing out. Facebook is widely expected to go public early next year, and Twitter and LivingSocial likely will too, later on at some point.

Meanwhile, a new crop of web-oriented companies are also raising big new rounds at valuations of around $1 billion, including AirBnB, Dropbox, Spotify and Gilt Groupe. Each of these is in an earlier stage of life than the companies in the top ten, and may be raising big amounts now for other reasons, like easy terms offered by lots of eager investors. Earlier-stage companies appear to be some of the few bright spots in a world that is offering mostly poor investor returns.

[Image via the BBC.]