April 27 (Bloomberg) -- More than a decade after missing out on the most valuable Web companies of the 1990s, venture-capital firm Accel Partners is emerging as the leader in the new rapid-growth area of investing: social media.
Early bets on Facebook Inc. and Groupon Inc., the tech world’s most valuable privately held companies, have propelled Accel past Kleiner Perkins Caufield & Byers and Sequoia Capital, once the dominant venture investors in dot-coms. The challenge now is staying on top as valuations swell and competition mounts in the hunt for the next billion-dollar payday.
“We’re all conscious and paranoid of the fact that you’re only as good as your last set of deals,” Richard Wong, a partner at Accel, said from the firm’s Palo Alto, California, headquarters. “There’s a continued hunger to make sure we sustain what’s been a nice patch of progress.”
That means sticking to the firm’s motto, “chance favors the prepared mind,” taken from 19th century French chemist Louis Pasteur, Wong says.
While social networking remains a focus, Accel is also targeting entrepreneurs in the mobile and cloud-computing markets, and is looking for startups worldwide through its funds in the U.K., China and India.
The firm is using existing investments to find future growth areas. Accel bought a stake last year in BranchOut Inc., the largest business-networking service on Facebook. In 2009, it led the first investment in Cloudera Inc., a Web data analytics company co-founded by Facebook’s former head of data, Jeff Hammerbacher. Social-gaming company Tiny Speck, started by Flickr co-founder Stewart Butterfield, has raised three rounds of funding since 2009, with Accel participating in each.
As valuations surge, investments by Accel and other backers may become riskier. Facebook and Groupon have yet to prove they’re worth the combined $75 billion cited on private exchanges. Groupon faces fierce rivalry from LivingSocial and dozens of daily-coupon copycats. Facebook is fending off a threat from Google Inc. and has yet to prove it can profit from the rising popularity of smartphones.
Like other top venture firms, Accel makes money by charging about a 2.5 percent management fee and taking 30 percent of investment gains if there’s a takeover or an initial public offering. Venture investors also sometimes find buyers for partial stakes in companies. Accel sold roughly 15 percent of its Facebook stake last year, earning about $500 million.
The 28-year-old firm manages about $6 billion globally and is raising an additional $2 billion this year in funds for the U.S. and China. While it doesn’t disclose returns, transactions in the past two years indicate that it’s faring better than dozens of peers.
The firm made hundreds of millions of dollars from the acquisitions of portfolio companies AdMob Inc., Playfish Inc. and Quidsi Inc. It may reap more from expected IPOs of companies such as Kayak Software Corp. and Glam Media Inc.
“Based on taking a few great deals, somebody defines an era in Internet investing,” said Rob Solomon, who has led companies backed by Accel and is currently president of Chicago-based Groupon. “In this phase right now, Accel is that firm.”
The risk of a frothy market is not lost on Accel. Arthur Patterson, who co-founded the firm with Jim Swartz in 1983, says venture capital goes through 14-year cycles, which include a one- to two-year bubble, followed by a five-year retreat. Valuations then stabilize before resurging to form new bubbles.
“We could probably get ourselves into more trouble in this part of the cycle than we could making $2 million to $3 million bets in the early part,” said Accel partner Kevin Efrusy, who co-led the investments in Facebook and Groupon. “We try to concentrate our really big capital positions to fundamentally good businesses.”
Accel’s Wong made one of those bets last month on Rovio Mobile Ltd., the Finnish maker of smartphone game “Angry Birds.” Prior to the investment, the game had attracted more than 40 million active users without raising any money. Wong made weekly, sometimes daily, calls to Peter Vesterbacka, who runs Rovio’s North American operations. In November, he flew to Helsinki, putting Accel in position to co-lead a $42 million investment.
“They got on a plane and showed us they were serious,” said Vesterbacka, who’s in charge of Rovio’s marketing, branding and partnerships.
Change of Direction
Accel’s turning point came in 2003, after the firm missed out on investing in Google, Amazon.com Inc., Yahoo! Inc. and EBay Inc. Accel’s focus had been in the networking and infrastructure markets, where it backed Redback Networks Inc., UUNet Technologies Inc. and Riverbed Technology Inc.
Accel held an offsite meeting in October 2003 in Sausalito, just over the Golden Gate Bridge from San Francisco. Following a competitive mountain biking expedition in the hills of Marin County, the partners convened at the Casa Madrona Hotel & Spa.
That’s where they committed to investing in the Web. Social-networking sites Friendster Inc. and Myspace Inc. were gaining traction, as were video-calling service Skype Technologies SA and a new crop of e-commerce companies.
“We sort of understood it, but we really felt we wanted to gear up more for it,” said Swartz, who was at the meeting along with fellow partners Patterson, Jim Breyer, Efrusy and Theresia Gouw Ranzetta.
Betting on Facebook
Accel hired more partners and prepared to shell out for startups it believed would be market leaders. When it invested in Facebook in 2005 at a valuation of about $100 million, the service was limited to college students and had little revenue. Five years later, that investment has multiplied by 500 times.
“The Facebook deal clearly vaulted Accel to the very top tier of Silicon Valley VCs, just as Amazon and Google did for Kleiner a decade ago,” said Mitch Kapor, a San Francisco-based angel investor, founder of Lotus Development Corp. and a partner at Accel from 1999 to 2001.
Based on Groupon’s expansion, another blockbuster may be on the way. Efrusy persuaded the partners to do the Groupon deal after he met Chief Executive Officer Andrew Mason while in Chicago for a wedding in late 2009. He wasn’t deterred by a valuation that had approached $250 million.
By January, investors were valuing Groupon at $4.75 billion. The company has since held talks with banks about an IPO that would peg its worth at as much as $25 billion, according to two people familiar with the matter.
Accel also has backed Etsy Inc., an online marketplace for handmade goods, and Glam, a provider of Web-advertising services targeting women. And it has a stake in cloud-storage company Dropbox Inc., which venture firms are now trying to invest in at a valuation that may exceed $1 billion.
“The reason they have such a strong portfolio today is they were standing out as one of the few venture-capital companies that was very active in pursuing Web 2.0 content and social companies in the 2003-2005 timeframe,” said Samir Arora, CEO of Glam in Brisbane, California. “That became their DNA.”
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