Web companies raise money to make themselves recession-proof

Many economists and others think a recession is imminent, if not here already. A number of prominent web companies appear to have reacted over the last few months by raising large amounts of money.

Take widget-maker Slide, for example. The company hired well-connected investment bank Allen & Co. in December and rushed to raise $50 million at a $550 million valuation. Its executives flew out to New York right before Christmas to seal the deal with its private-equity backers, as Keith Rabois, Slide’s vice president of business development, tells me. They didn’t want to wait until the economy got worse (and pocketbooks thinner) in January.

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Perhaps the biggest thriller here is Glam, the online media and ad network for women, which boldly planned to raise $200 million in equity and debt in August, but which it has yet to close. Things are clearly taking longer than expected, although the company says it has an announcement coming soon.

Here’s some data. Out of 379 IT-related funding rounds that happened in the fourth quarter of 2007, 129 were for web companies, according to Dow Jones VentureSource. From total of $3.7 billion in investments, nearly $1.1 billion went to these web companies. “It’s pretty impressive for that little [industry] segment”, Dow Jones’ Adam Wade tells me, noting that there have been more than 300 rounds raised already in January, a good portion of which have been web deals.

For more data points on the latest funding, take a look at the social networks. Facebook raised $240 million from Microsoft last October, then raised another $60 million from Hong Kong billionaire Li Ka-Shing in November, and an undisclosed amount from European entrepreneurs the Samwer brothers in January. Hi5, as well, just raised another $15 million in venture debt on top of a $20 million round last summer. Meanwhile, Bebo hired a bank last fall, and I hear it is looking both at selling and raising more money.

What’s all this money for?

Why, to hire top entrepreneurs, many of whom have been working at smaller startups or at larger companies. Glam, for example, recently nabbed a top product manager from Yahoo, as did instant message service Meebo. Facebook, Admob and other fast-growing private companies have meanwhile hired top employees away from Google.

In fact, hiring big is Slide’s plan, and not the first time for its executives — PayPal veterans like Rabois, co-founder Max Levchin, and others. PayPal was able to hire plenty of top engineers in 2000 and 2001: People who were out of work after the dot-com bubble burst. It could afford to do this because it had raised more than $225 million in previous years, including a $100 million round that closed just days before technology stocks began taking a nose-dive in April of 2000. Even though PayPal continued to lose money for years, it improved its technology to combat fraud better than its rivals, and ended up selling to eBay in 2002 for nearly $1.5 billion.

Of course, there are other big factors at play in taking rounds, besides a recession. Most of these sites need money to pay for hosting costs, to handle their high traffic numbers. They haven’t, shall we say, perfected their revenue models — and they may take years to do so. Facebook plans to spend $200 million on capital expenditures this year (as well as double its workforce to 1000 employees), according to one report. While the company is making money, spending is set to outpace revenue growth.

It takes money to make money on social networks, apparently. Slide, which has made high growth the priority for much of its history, is itself starting to focus on monetization. It most recently cut a deal with Kodak, where the 60 million users of Kodak’s digital photo-sharing service can easily share their photos on Slide’s Myspace slideshow widget.

The other option besides raising money or breaking even is to try to sell, as I heard Bebo has considered. Last December, social news site Digg also hired Allen & Co. — but to shop itself around with an asking price of at least $300 million.

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Not selling, one hopes, will eventually have an even bigger upside. As opposed to the dot-com bubble, this downturn is not of the technology world’s making, as Bernard Lunn points out. Instead it’s an opportunity, he concludes, for technology companies to develop new services that save money for clients.

Let’s say social networks and other social media sites figure out how to help advertisers reach users more efficiently than print and television advertising, if not other forms online advertising — something these web companies are increasingly focused on. Advertising spending typically drops during a recession, and advertisers have already been busy developing their “widget strategies” for reaching social network users, we hear. If these web companies can prove themselves in the coming years, they’ll be major beneficiaries of increased ad spending when the economy recovers.

(Andy Warhol painting via.)