Lightspeed and Ning: It’s Complicated

Over the weekend, TechCrunch’s Michael Arrington suggested that Lightspeed’s new $15 million investment in Ning —  whose online platform invites people to create their own social networks —  boils down to one word: marketing.

Lightspeed needed a sexy social networking startup to add to its portfolio, he wrote, adding: “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 bought themselves a bunch of marketing with their limited partners’ money…LPs [who] don’t really mind.”

I’m with the rest of Silicon Valley in trying to make sense of the round, which brought Ning’s total funding to a stunning $119 million and pegged its valuation at an even more astonishing $750 million. (According to some surveys sited last week, Ning, cofounded by Marc Andreessen and CEO Gina Bianchini, has about six million active users in the U.S., although closer to 30 million have registered for an account at some point.)

In fact, I last week reached out to both Lightspeed partner Jeremy Liew and Lance Tokuda, cofounder of RockYou. I’d heard that Lightspeed’s Ning investment might be tied to its efforts to marry the two-year-old company with RockYou, a widgets startup that has raised $68.5 million from Lightspeed, First Round Capital, Sequoia Capital and DCM (among others). Maybe there’s a phase II of this plan, I thought.
Tokuda told me he’d “never heard of that rumor” and “never talked to Lightspeed or Ning about a merger.” Liew added that there was “no truth” to what I’d been told.

Still, TechCrunch is off the mark, too, Liew suggested in an email to peHUB earlier today. “We invested in a terrific company with high growth and a fantastic management team. It’s as simple as that,” he said. “The company wasn’t looking to raise capital, but we got to know them because of longstanding relationships between some of the managing directors here and some of the management team there, and Ning saw value in adding a top tier VC firm to their investor base.”

Whether that’s the whole truth of just part of it, it’s hard to believe that Ning is going to burnish Lightspeed’s reputation. Let’s face it; Ning is no Facebook. And unlike many firms, Lightspeed isn’t desperate for a marketing boost; it’s actually seen a few of its portfolio companies go public in recent years, including Riverbed Technology, which IPO’d in 2006, eHealth, which also went public in 2006 and online jeweler Blue Nile, which went public in 2004. In fact, Lightspeed was able to close on an $800 million fund just last year.

Most important, I don’t know of many LPs who’d be okay with risking $15 million to jazz up a portfolio that already includes plenty of consumer Internet companies, including RockYou; Flixster, a social networking site for cinephiles; search startup Kosmix; and shopping search engine TheFind. In fact, the opposite appears to be true, particularly in this case.

“I would be appalled if one of my venture funds invested in a company at a $750 million valuation,” one big-league endowment manager told me earlier today. “The risk-reward of this type of investment is distorted.” 

As for the presupposition that Lightspeed is marketing itself to the cool kids, the LP scoffed. “It would be outrageous to invest for any reasons other than risk-adjusted returns on invested capital. If this really is some Hail Mary pass, it will fail.”

So why did Lightspeed invest in what seems like an already over-capitalized startup? I really don’t know yet, but considering how much negative attention the move has already generated, I’d guess there are Lightspeed partners — not to mention Lightspeed LPs —  who are right now wondering the same thing.

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