Facebook backers see overfunding of web startups

Jim Breyer and Sean Parker, who were early stakeholders in Facebook Inc. and had a falling out at the company in 2005, agree on one thing: there's too much capital flowing into Silicon Valley Internet startups.

The two investors were interviewed today at the Techonomy Conference in Marana, Arizona, by David Kirkpatrick, who chronicled their story in the book, “The Facebook Effect.”

Breyer is a partner at Accel Partners in Palo Alto, California, and Parker is a general partner at San Francisco- based Founders Fund, the venture firm founded by Peter Thiel. Both are looking for deals in other markets and countries instead of focusing on social-media startups in the U.S., where Facebook, Google Inc. and Twitter Inc. are emerging as the winners.

“These little startups are ridiculously overfunded,” said Parker, 31, who co-founded music sharing service Napster Inc. in 1999, and later became president of Facebook. “A lot of these early-stage investors will fund, literally, anything.”

First-stage investments in startups jumped 68 percent to $1.6 billion in the third quarter from a year earlier, according to the National Venture Capital Association. That compares with a 31 percent increase of total venture funding to $6.95 billion.

Parker is an investor in Spotify Ltd., the European online music company that started in the U.S. this year. He also recently rejoined Napster co-founder Shawn Fanning to start Airtime, a stealth startup that he said will “allow people who would not otherwise have met to find each other.”

Breyer, 50, co-led Accel's investment in Facebook in 2005, gaining a 15 percent stake and valuing the Palo Alto-based social-networking company at about $100 million. Breyer also joined the board. Facebook is now valued at $76 billion on secondary exchange SharesPost Inc.

Later in 2005, Parker was arrested on suspicion of cocaine possession, Kirkpatrick reported in his book. While he wasn't charged, Breyer insisted Parker leave the company, Kirkpatrick said in the book. Accel is now an investor in Airtime.

For the most part, Breyer is looking for investments outside of Silicon Valley, including overseas. Accel raised about $2 billion this year for funds in the U.S. and China.

The best opportunities, are “not necessarily in Palo Alto, or Cambridge, Massachusetts, or Manhattan,” said Breyer, who is also on the boards of Wal-Mart Stores Inc., Dell Inc. and News Corp. “They're all over the world. We see them in areas as diverse as rural Brazil.”

In addition to the boom in early-stage investments, Parker said traditional venture firms are now investing in seed-stage funds to “remain close to the deal flow.” He called the trend a “completely new phenomenon” that's adding to the excess amount of capital available.

Breyer agreed, saying “it will end very badly.”