15 Billion More Reasons to Worry About Facebook
Oh, my.
Oh, my.
Dig a hole and hide. The end is nigh. And how do you spell Ponzi (as in scheme) again?
When I reported in this column two weeks ago that Facebook was looking to raise a new round of funding and that software giant Microsoft was a prime contender as an investor, I suggested a big number was being bandied about to create a giant war chest for the trendy social-networking start-up.
That’s a concept that the top dogs at Facebook are seriously mulling over now, according to sources, after getting so many inquiries from investment funds and several bigger companies–such as its ad-serving partner, Microsoft–about grabbing a stake in the fast-growing social-networking Web site.
“While who and how much is still unclear and, most importantly, in what form, sources said a deal could come together quickly if the numbers are lofty enough for the site, which has about 40 million members currently. But the investment could be quite large, well beyond its last $25 million one in 2006, for little dilution.
‘There are several B’s involved in the discussions,’ said one person interested in the possible round, referring to a multibillion valuation for the Palo Alto, Calif.-based start-up.”
Today, The Wall Street Journal follows up on my story by adding more interesting details, including the fact that Microsoft is seriously considering an investment offer that would value the company at $10 billion.
(Google might be in there too, according to the story, but I think it is just there to annoy Microsoft.)
In any case, this was the ludicrous price once floated by Founders Fund’s Peter Thiel, Facebook’s first investor, which was widely derided at the time he uttered it.
More laughable still is that Facebook, according to the Journal story, might be holding out for a $15 billion valuation.
Why? Because I believe Silicon Valley can now be considered to be at Delusional Level Red. Or green, given all the cash that is being shoved in Facebook’s direction now.
Thus, it is time to take a moment to consider four things that might take some shine off the shiny Facebook:
1. Facebook is not Google: Although many in the tech sector make the comparison to the search giant, it is simply incorrect.
Is Facebook like Yahoo a bit? Certainly. A newfangled version of AOL? Absolutely! A very well done media play with all sorts of interactive bells and whistles hanging off of it? Yes, ma’am.
Indeed, it is growing its media business nicely, with $30 million in profits on $150 million in revenue.
But in comparative terms to the search giant, Facebook is a lemonade stand. Google brought in $3.9 billion in revenue in just the second quarter alone and, um, is increasing its dominance over the search sector in a mighty scary way.
Facebook, on the other hand, gets half its annual revenue right now from a sweetheart guaranteed revenue deal with, drum roll, Microsoft. No matter what either Facebook or Microsoft says, it is a money-losing deal for Microsoft so far.
How do I know this? According to many sources, Google is struggling to make ends meet in its own sweetheart guaranteed ad deal with Facebook rival MySpace, which is much larger, and Google has the best monetization engine out there.
2. Potential is not actual: While the minions at Facebook under its young leader are laboring mightily to come up with new ways to make revenues and its strong growth is laudable and I loved the splashy widgetmania Facebook unleashed, let us try not to be too jaded when we say we have seen this story of spiky growth followed by less than spiky growth before.
One need only to consider the bloom that has fallen off the MySpace rose to realize this, but the list of fast-growing and quickly wilting tech phenoms is long. PointCast! GeoCities! Netscape! AOL! Yahoo!
3. Most techies were not popular in high school: No, it is not fair, but this is true. But in a friending and poking frenzy, Silicon Valley’s denizens have embraced Facebook as only those who were picked last at dodgeball could.
I kid about the dodgeball part, but what is more serious is the warped view those in the tech sector have for Facebook, because it is the latest and shiniest thing and because their geek friends are all using it.
Are they anticipating a fatigue factor with regard to the service? I am. Are they wondering how hard it will become for Facebook to constantly innovate, despite its embrace of third-party apps, to keep fresh? I am. Do they know that there is a limit to the subscriber growth over time? I do.
As I have said many times–I like Facebook. I think it is well built and run. It’s cool. I think it is, in its next-step way, even visionary.
But do I think it will sustain this over time? Count me dubious.
4. A sucker is born every minute: Let’s go to the calculator.
Thiel initially invested $500,000 in 2004 in the company, which was followed by two more rounds, for a total of about $32 million. The last one was more than a year ago for $25 million, giving Facebook a $525 million pre-money valuation.
Other major investors include Accel Partners (Accel’s Jim Breyer is also on the board, along with Zuckerberg) and Greylock Partners, as well as Meritech Capital Partners.
Tally: Microsoft has to be seriously desperate to be considering this much of an investment for so little, even with its bags of cash to spend. While I like big, bold and even addled moves as much as the next person, this one is a doozy.
That said, there is always another fool in line to pass on the buck. A sky-rocketing IPO could wipe clean this round of insanity.
But that does not take away the fact that Facebook is not worth this ridiculous price now. It might be in time, or it might not.
So, as I once advised Zuckerberg in another post: If you can get it, take the dumb money and run as fast as your flip-flops will carry you.
Please see this disclosure related to me and Google.
Comments
Good piece, Kara, sometimes you must wonder if there are any adults left Silicon Valley.
Posted by Tom Coseven at September 25th, 2007 at 7:07 amI think you make a VERY serious mistake in evaluating FB. I know someone who got laid dozens of time through this site. It’s changing our lives in ways Yahoo! could never dream. A person in college without a FB page is a non-person. It’s a truly disruptive offering - a sky-rocketing would do it justice.
Posted by yuval romik at September 25th, 2007 at 7:34 amNice analysis Kara, and controversial to some. I agree with you though that the $15Bln value of Facebook is way over the top. It is also a very risky strategy for Microsoft to invest a large amount in a single platform. While Google makes a great deal more in advertisement revenues each quarter, Microsoft will be forced to monetize their investment by increasing ad pressure on Facebook users. Given that a Facebook user is spending lots of time on his on-line identity I don’t think they will like that very much. I wrote a post on that subject this morning if you’re interested:
Posted by Alexander van Elsas at September 25th, 2007 at 8:14 amhttp://vanelsas.wordpress.com/.....-facebook/
kara: i respect your opinion, but i think in this case your familiarity with Google (& their cashflow) is breeding unnecessary contempt for Facebook.
while an acquisition at $10-15B without Facebook having defined a long-term monetization strategy might be irrationally exuberant, an investment of $500M that simply values the company at $10-15B is not such a huge risk, for either Microsoft or Google (or in fact, at $500M, even for Yahoo). that’s chump change for a piece of the Facebook action.
while you might suggest they could do better things with the cash, continuing to have the inside track on the fastest-growing service in a target demographic isn’t without value. and at the moment, neither company has demonstrated they have a clue as to how to build a social platform (altho Google professes to be building a competitive alternative).
furthermore, the real alternative “buyer” for either MSFT or GOOG’s head isn’t each other, but rather, the retail investor’s valuation of Facebook if/when they IPO. noting the previous market insanity surrounding Google’s IPO a few years back, and the subsequent rocketship Google was for the next 2-3 years, most retail investors have unfortunately forgotten the lessons of the dot-com bust — they’re going to pile into any Facebook IPO thinking this is Google 2.0 all over again. they might be irrational, but there’s no question they’ll be similarly bullish for a Facebook IPO.
given that potential future scenario, Microsoft or Google would likely be foolish not to get in the game now, if they ever want to get in. the price will likely only go up.
altho i was thinking acquisition at the time i wrote this post back in June, the same philosophy still applies to an investment… only moreso:
Facebook: World Domination Ahead
(note to GOOG/MSFT: don’t pull a “Semel”)
http://500hats.typepad.com/500.....orld-.html
in any case, while there is certainly exuberance in the valley these days, i’m not so sure it’s irrational. only time will tell.
- dave mcclure
Posted by dave mcclure at September 25th, 2007 at 9:47 amhttp://500hats.typepad.com
http://GraphingSocial.com
Very good analysis Kara. Most grown ups agree with you. I’d like to mention a point that you missed: “Growth in the international market”. Google gets 45% revenue from international market. Facebook doesn’t have that kind of growth prospects internationally and given its inability to monetize in the US it is definitely not worth $15 billion. Facebook has no presence in Europe, China, India or Brazil. Bebo in Europe, Orkut in Brazil-India and MySpace in China are formidable. Also, people forget that Google was already making $3 billion in 2004 when it took the IPO route.
Posted by Nirav Bhavsar at September 25th, 2007 at 7:10 pmIf Facebook goes for IPO route; I’d buy shares and sell within 1 week before the bubble bursts.
I’m a relatively new facebook member but been in & around the valley for a long time. I was an early employee at Wily, and have been inside during two aquisitions (Zero G and Macromedia). I’ve seen the whole Techcrunch phenom develop (met Mike at the BBC in Menlo very early on), and I’m the founder of a service used by software developers globally. So I think I get the culture.
I have two takes on facebook - one as a member/user, and the other as an entrepreneur.
First, as a user:
I’ve watched LinkedIn, Netvibes & facebook (and countless others) attempt to grab me & my demographic. But here’s the rub: I have not clicked on a single ad in Facebook (or LinkedIn or Netvibes) ever. Ever. I use Netvibes far more than facebook, because of the aggregated feeds view. That’s handy, and I might even pay for it if they go to a fee model.
But there just isn’t that same draw for facebook. I believe the guys at webreakstuff called it “…a glorified address book”. I have to agree.
I can’t imagine my experience is much different from others. I’m using facebook today as an interesting way to communicate w/ and track the doings of some of my friends. But the ones that I *really* want & need to communicate with, I’ll simply call, email, or IM. facebook has absolutely no influence upon this. That’s what I did before facebook and it is what I’ll do when it is gone.
Beyond serving ads, which I don’t click and in fact completely ignore, what is the value in facebook for me? I’ll quit using it when it becomes boring (maybe sooner), or when the ad placement becomes too obnoxious to ignore.
Now, as an entrepreneur to Mark Z & his team:
Take the money & run (as you pretty much said yourself). We dream of billion dollar valuations, so if this is really happening, don’t be foolish. Settle on an amount & take the investment. And cash out as soon as you legally can, because this house of cards is in the direct path of a very fickle consumer “big wind”.
Posted by John Minnihan at September 26th, 2007 at 8:22 amNote to Kara : Wearing glasses, making numbered lists and using cute cliches does not mean you know anything about internet company valuation. It’s just a shame that journalist page view volume does not equate with credibility.
Posted by John Bunnett at September 29th, 2007 at 3:06 pmI’d be interested to see an update to this blog now that a little less than a year has passed and Facebook has continued to grow. It may have been a glorified address book, but I think it is quickly moving beyond that and will continue to in the near future.
http://www.positivereturns.net
Posted by Ron Chapman at July 20th, 2008 at 4:35 pm