Peter Kafka

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Early Twitter Backer Union Square Sits This One Out

rocketTwitter CEO Evan Williams thanked a long list of investors in his blog post today formally announcing his newest funding round. Not included: New York’s Union Square Ventures, which has been one of the messaging service’s most prominent backers, but which didn’t reinvest in the company this time.

Union Square was the lead investor in Twitter’s first funding round in July 2007, and participated in subsequent rounds in May 2008 and February of this year. In that last round, Union Square said it was re-upping “to maintain our ownership position.”

What happened this round?

Union Square partner Fred Wilson, who is a Twitter board member and a tireless Twitter advocate (and Twitterer) declined to comment. So I’ll hazard an Occam’s Razor guess: The $1 billion valuation that Twitter achieved in this round priced out Wilson’s fund.

If that’s the case, it’s a high-class problem to have. Union Square is a relatively small venture player (the two funds it manages have a total commitment of $281 million). It specializes in early-round investing in which the bets are comparatively low stakes–a few million dollars here and there. If things go well, those bets are enough to get the company to an exit–in the old days, that meant an IPO, these days, a sale to Microsoft (MSFT), Yahoo (YHOO) or Google (GOOG).

But as the valuations increase, so do the amounts a start-up’s investors need to pay to keep their ownership stake, which is why angels and other early investors usually drop away. A player Union Square’s size can play up to a point, but then has to step aside or it would end up with most of its portfolio invested in a single company.

In order to re-up at this level, Union Square would have needed to make a much larger bet than it is used to making, and perhaps more than it is able to make. The new round, which raised $100 million, is nearly twice as much as the $55 million Twitter had raised to date. Which means Union Square’s bet would likely have to double as well.

[Image credit: Steve Jurvetson]

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Just as the atom bomb was the weapon that was supposed to render war obsolete, the Internet seems like capitalism’s ultimate feat of self-destructive genius, an economic doomsday device rendering it impossible for anyone to ever make a profit off anything again. It’s especially hopeless for those whose work is easily digitized and accessed free of charge.

— Author Tim Kreider on not getting paid for one’s work