Chester Higgins Jr./The New York Times The partners at Felix Investments, from left, are John Bivona, Frank Mazzola and Emilio DiSanluciano. Felix has been buying shares in Facebook, Twitter and others.
When others were questioning whether Facebook was really worth $10 billion in February 2010, two Wall Street investors were quietly buying chunks of its shares at a $15 billion valuation.
The investors, Frank Mazzola and Emilio DiSanluciano, principals of Felix Investments, a Manhattan-based broker-dealer, are not part of Silicon Valley’s elite. Dressed in crisp wool suits, the two New Yorkers are more comfortable navigating the narrow streets of Lower Manhattan than on tree-lined Sand Hill Road in Menlo Park, Calif., well known for its venture capital residents.
But in late 2009, the pair had a plan: buy as many shares of the largest private Internet companies as quickly as possible. And if valuations go up, just buy, buy, buy.
Felix, which manages more than a dozen funds, is part of a new wave of capital washing up on Silicon Valley’s shores.
Over the last year, a number of investment firms have created special purpose vehicles to buy shares in red-hot private Internet companies and sell slices to wealthy investors. The group includes small firms, like J.P. Turner Company and EB Exchange Funds, and a few large investment banks, like Goldman Sachs, which recently sold $1 billion worth of Facebook shares to its foreign clients. At the same time, new exchanges like SecondMarket and SharesPost have emerged to facilitate these trades.
The flood of new money, some investors and technology executives say, is inflating valuations and disrupting the way new Web start-ups have long been nurtured. The investment firms are not just competing with one another for private shares, but they are also jostling against venture capital funds and angel investors (generally, wealthy people who invest early in budding companies), the ones who have traditionally supported start-ups.
Felix was among the first of the new money, snapping up millions of shares in Facebook, LinkedIn, Twitter and Groupon at billion-dollar-plus valuations, according to two people close to the firm and documents obtained by The New York Times.
“In the fall of 2009, we saw this whole thing evolving,” Mr. Mazzola said in a recent interview at his firm’s headquarters in downtown Manhattan. “Because the I.P.O. market was shut there was an opportunity to get in at interesting valuations.”
What some called foolhardy bets in 2010 now seem like bargains.
Facebook, which represents the firm’s largest holding, is expected to go public in the next six months at a valuation above $100 billion. LinkedIn, which held its initial offering in May, is trading at a $6.5 billion market capitalization. And Groupon, the fast-growing daily deals site, is said to be seeking an offering valuation north of $30 billion — about 15 times the figure at which Felix started buying its shares.
After putting some $200 million to work, the firm’s holdings are now worth well above $1 billion.
“When we invest, we’re not looking for a board seat, we just want to bet on the right guys and get out of their way,” Mr. Mazzola said. Felix’s investment philosophy runs counter to the ethos of most venture capitalists, who argue that their value to a start-up goes beyond money because they provide a wealth of resources in connections and knowledge.
The firm has been one of the most aggressive buyers of private shares. Early on, Felix cold-called Facebook employees in search of shares — a tactic that some venture capitalists criticized as tacky. Mr. Mazzola said the practice was eventually discontinued. Earlier this year, the firm also received heat for an e-mail that went out to investors calling Twitter a “must buy.”
“This is the first Twitter stock we or anyone else has had in the past six months and like Facebook it will continue to trade up in price rapidly!” the letter crowed.
Mr. Mazzola acknowledged the letter was written by someone at Felix but said it had been sent only to current investors. “Look, we are over the moon about the opportunities we have, and everything we’ve ever said has turned out to be conservative,” he said, defending the e-mail.
Felix’s swagger and hardball tactics have not won it many fans on Sand Hill Road. On Quora, a questions and answers site, a thread on Felix is peppered with complaints from anonymous would-be investors and sellers, who claim the company was not able to fill their orders or failed to get enough funds on time. One well-known technology executive, who had sold some of his shares to Felix, said the firm did not close in a “timely manner.”
“They don’t have the strongest reputation,” said Bo Brustkern, a managing director at Arcstone Equity Research. “I get the sense that they stumbled into this market and very quickly learned how to take advantage of the hype around Facebook — but they’re not very sophisticated.”
Mr. Mazzola said it was difficult to keep every potential client happy because there are limited shares in the market and companies often reserve the right of first refusal. It also does not have a “captive pool of funds” to draw from, he said.
Several venture capitalists declined to comment on the record about Felix, highlighting a peculiar tension between venture capital and new money. While Felix is a threat, it also offers a possible exit — a buyer willing to pay at high valuations.
Venture capitalists are “certainly not happy with what we’re doing in their backyard,” Mr. Mazzola acknowledged. “We are not valuation-sensitive and the traditional community feels threatened.”
Tensions could escalate as Felix behaves more like a traditional venture capital firm by entering earlier rounds of investing in start-ups. Now that the firm has already racked up stakes in some of the largest Web companies, it is looking at the next generation. It has closed investments in Jumio, a payments company; Qwiki, a visual search start-up; and BadgeVille, a service that helps Web sites integrate game mechanics.
Felix has also started a new fund, called Binary Ventures, that will make angel investments of $50,000 to $1 million.
“After the obvious rounds, what’s next?” Mr. DiSanluciano said. “We have to go after the Series A rounds,” he added, referring to a company’s first major investment round. It’s a riskier strategy, but one Felix hopes will generate even greater returns. Not everyone is as optimistic.
“They have no venture chops, they are brokers with a good sales team,” Mr. Brustkern said. “They were able to get money, but they cannot compete with the Institutional Venture Partners of the world.”
While some entrepreneurs are not ready to team with Felix, it can be a blessing for more established founders, according to Daniel Mattes, the chief executive of Jumio. Mr. Mattes, who previously founded Jajah, an Internet phone company that was sold to Telefónica in 2009 for $207 million, said Felix’s willingness to invest at a steep valuation, with no strings attached, was too compelling to turn down.
“The question is, do you want to be dependent on a large venture capital firm or do you want to use your track record to get the best valuation,” Mr. Mattes said. For his latest financing round, he contacted Felix and said he needed about $5 million. Felix came back with $6.5 million from its investors, at a far better valuation than he had hoped for.
“We may be the dumbest guys in the room, but we’re opportunistic,” Mr. Mazzola said, adding that “Felix is Latin for ‘lucky.’ ”
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