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Private Equity Investing in Digital Media Expected to Increase in 2011

Digital media companies are reinventing traditional business models and transforming the distribution of media content, services and applications. The global growth of emerging digital media channels and the convergence of media, marketing and technology are challenging traditional business models and compelling companies to explore alternative revenue models. Advertising remains the leading revenue generator for many digital media companies, but these dollars are often being generated in very creative ways. These rapid and dynamic changes in digital media have also impacted private equity firms and how they evaluate new platform and add-on acquisitions.

Private equity groups are expected to boost their level of investment in digital media in 2011 as they work to protect existing investments, unlock new economic opportunities, and open new markets. The top verticals that will likely attract interest are social networking, mobile/location-based services, niche Internet sites, videogames, and online advertising/technologies. According to the PricewaterhouseCoopers/NVCA MoneyTree Report, $11.6 billion flowed into 2,266 Internet-specific companies from 2008 through 2010. In 2010 $3.8 billion was invested in 729 deals. This robust early-stage to late-stage venture investing in digital media over the past three years indicates that there will be an emergence of category leaders operating in new verticals and leveraging disruptive business models.

Digital Media Companies - Recent Funding & Estimated Value” width=

Source: CruchBase, April 2011

This trend has already become apparent with companies such as Facebook, Twitter, LinkedIn, Groupon, LivingSocial and Zynga. Private equity firms will likely actively pursue established late-stage category leaders as they look to establish positions in market-defining companies before IPO’s. As the public equity markets continue to improve and as IPO’s become a viable path to near-term liquidity, private equity investors will be attracted these companies. As an example, in January 2011 Demand Media (NYSE: DMD), run by former MySpace Chairman Richard Rosenblatt, went public and sold 8.9 million shares at $17 each. Since it was founded, Demand Media had raised approximately $375 million in financing from investors that included Oak Investment Partners, Spectrum Equity Investors, Generation Partners, 3i Group and Goldman Sachs. As of April 9, 2011 Demand Media had a market cap of $1.9 billion.

Recent noteworthy investments in digital media companies include:

LivingSocial – In April 2011 the company raised $400 million from Amazon (NASDAQ: AMZN), Lightspeed Ventures, T. Rowe Price, and Institutional Venture Partners which valued the company at approximately $3.5 billion.

Facebook – In January 2011 the company raised $1.5 billion from Goldman Sachs and DST in a deal that valued the company at $50 billion.

Groupon – In January 2011 the company raised $950 million from Andreessen Horowitz, Battery Ventures, DST, Greylock Partners, Kleiner Perkins Caufield & Byers, Maverick Capital, Silver Lake and Technology Crossover Ventures in a deal that valued the company at $4.75 billion.

Twitter – In December 2010 the company raised $200 million from Kleiner Perkins, Benchmark Capital, Union Square Ventures and Spark Capital in a deal that valued the company at $3.7 billion.

Zynga – In June 2010 the company raised $300 million from Softbank Capital and Google (NASDAQ: GOOG) which valued the company at approximately $4.5 billion. As of February 2011 it was rumored that Zynga was raising another $250 million at a valuation of $7 to $10 billion.

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