Zynga’s $1bn IPO puts a shine on VC

The social online gaming company’s liquidity event could increase LP appetite for venture capital, considered by some LPs to be the ‘least loved’ of the asset classes.

It’s game on for Zynga.

The social gaming company’s $1 billion initial public offering last week priced at $10 per share, reportedly the upper end of an expected $8 to $10 range. The massive liquidity event, along with some other high-profile IPOs and exits this year, are putting back a healthy shine on venture capital that has dulled over the last decade amid overall lacklustre returns.

Investors in Zynga include venture firms Kleiner Perkins Caufield & Byers, Institutional Venture Partners, Union Square Ventures, Foundry Venture Capital and Avalon Ventures.  All five firms hold minority stakes in the business, with KPCB owning slightly less than 12 percent of Zynga. Union Square and IVP each own between 5 and 6 percent of the company, with the remaining three firms together owning a little more than 2 percent of Zynga.

Zynga’s IPO could potentially be a transformative event for the industry, perceived to be the least loved asset class among many investors.

“If you look at venture for the past 10 years, there have been very, very few investments that swung for the fences and made it,” Kelly DePonte, partner at Probitas Partners, told Private Equity International in a prior interview.

In April 2010, the 10-year returns for venture dipped into negative figures for the first time in history, according to Thomson Reuters’ US Private Equity Performance Index. The long-term data point put a taint on the venture industry that in recent years had already lost a number of institutional investors due to a lack confidence in the asset class.

While limited partner appetite for venture has waned in recent years, in some ways the feeling was mutual. In the past, certain VCs took an elitist stance and shunned public institutions because of the enhanced transparency that came along with receiving their commitments. But with venture fundraising at its lowest levels ever – the industry raised about $11 billion in 2010 compared to $85 billion at its peak in 2000 – that stance has weakened.
Last week, venture firm General Catalyst Partners received a $25 million commitment from the New Jersey Division of Investment for its sixth fund, targeting a reported $450 million.

“I think that there are very good ways to attack venture,” former co-head of private equity at Kirk Dizon told Private Equity International. “I think we’re probably in the early innings of a technology and new business model movement.”

Hall Capital, an advisor to families, endowments and foundations that invests in strategies including buyout, growth, distressed, credit, and venture capital, directs approximately $20 billion in investment assets.

“Look at stuff like ZipCar, Groupon or Air Bnb. These are business models that are basically making things more efficient for everybody” Dizon said. “There’s definitely a lot more to do. I think you can do really well in early stage venture.”

The US venture industry has created a stockpile of privately held companies likely to have successful, high-profile exits in the near future, such as Facebook, Twitter and Bloom Energy – all of which are attracting high valuations on private trading platforms. This is leading some investors to review past assumptions and redefine their approach to investing in venture capital.

Venture firms that have heavily backed social media companies include online and digital media investor Spark Capital, which owns stakes in Twitter and Tumblr; and Andreessen Horowitz, which exited Skype alongside Silver Lake Partners and the Canada Pension Plan Investment Board in May.

As to whether or not the greatest opportunity in venture capital lies with firms investing in social media companies such as Zynga, the question remains largely unanswered, as picking winners is extremely difficult, Mark Cannice, professor of business at University of San Francisco, told Private Equity International in a prior interview. Cannice has been gathering data on venture capital since 2004, and said that only the market can decide whether social media or another industry will end up being the next transformative event for the asset class. “It always seems to surprise us,” he said, “and my guess is it will again.”