With all the volatility and complexity of public markets, emerging companies—like Facebook, LinkedIn and eHarmony—are choosing to raise capital somewhere else entirely: in private.

Facebook started 2011 with a $500 million infusion of cash from Goldman Sachs and other investors, and a market value estimated at $50 billion. Except, unlike legions of red-hot tech companies that have gone before, Facebook achieved this massive balance sheet and market cap
without an IPO.

The money was raised privately, allowing founder Mark Zuckerberg to maintain almost complete control over the company, while avoiding the volatility of public markets, the pressure of shareholders and analysts, and the onerous red tape of regulators.

Not only that, Facebook is able to dictate the terms of the deal in a way no public company ever could: it’s rumored that the hand-picked investors brought in by Goldman had to commit a minimum $2 million to the table and would be prohibited from selling their shares until 2013.

Wall Street 2.0

Facebook—along with other social media sites, such as Digg, LinkedIn and Twitter – have helped transform the Internet from a static, one-way “information dump” to a dynamic, two-way dialogue. As conventional capital markets become increasingly daunting, it should come as no surprise that these social media firms are using the very technology they helped popularize to raise capital directly from private investors.

For example, cruise over to sharepost.com and you can obtain research reports, make an investment, and trade your shares of privately held companies seeking venture capital, ranging from obscure start-ups to household names. The site says it has $1-billion-plus in shares wanted to buy or sell at any given time, and claims its 45,000 members manage more than $125 billion in capital.

Credit un-crunched

Another interesting player in the online private market is secondmarket.com, which launched in February 2008 to enable investors in illiquid debt securities, such as long-term bonds and preferred shares, to auction off their holdings to willing buyers in the wake of the credit crunch.

The concept of an auction-rate market is nothing new—broker-dealers have held such auctions regularly since 1984. But as these auctions began to fail, with sellers drastically outweighing buyers, broker-dealers found themselves unable to support auction prices by taking the securities on their balance sheets.

In just a few years, secondmarket.com says they have become the leading secondary market for the approximately $150 billion in auction-rate securities on the market today.

Our view

We tend to support innovations that bring capital and ideas together. While it seems unlikely that traditional investment bankers will ever be out of work, Internet-enabled private markets can certainly fund ventures and fill gaps in the market that will help great businesses flourish.

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