More on the Facebook Hype–Oops, I Mean Promise
by Kara Swisher
Posted on September 27, 2007 at 12:00 PM PT
I got a lot of reaction from my piece earlier this week poking holes in the recent round of funding that hotsy-totsy social-networking site Facebook was looking for.
Two weeks ago, I broke the news that the start-up was looking to raise more investment dollars at an insanely high valuation from patsies–oops, I mean investors–like Microsoft, Facebook’s ad-serving partner.
And earlier this week, The Wall Street Journal followed up with a piece putting actual numbers on the board–Microsoft was interested in investing at a $10 billion valuation and Facebook founder Mark Zuckerberg was holding out for $15 billion.
My initial reaction? Eek. Why wait for a puffed-up IPO when you can demand ridiculous prices like that from supposedly savvy investors?
Some of the commenters on our site mostly seemed to agree that this was all a little frothy.
Noted Tom Coseven: “Good piece, Kara, sometimes you must wonder if there are any adults left [in] Silicon Valley.”
Tom, I don’t wonder at all. Let’s review: Exercise balls as furniture, unless it is a beanbag chair; free fun food and energy drinks for all; volleyball in the courtyard; flip-flops.
But another poster, Yuval Romik, pointed out that I was underestimating the romantic pluses of Facebook on his way to making a more salient point: “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.”
While I am with Yuval on the afternoon-delight aspects and college popularity parts of Facebook, I would have to respectfully disagree on the sky rockets in flight.
Alexander van Elsas noted the danger to software giant Microsoft of doing such a deal: “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 online identity, I don’t think they will like that very much.”
Yes, indeed, an ad-serving nightmare. My read was simpler: Microsoft desperate=cash forthcoming.
Again, others have a different view.
Wrote Dave McClure: “While an acquisition at $10 billion to $15 billion without Facebook having defined a long-term monetization strategy might be irrationally exuberant, an investment of $500 million that simply values the company at $10 billion to $15 billion is not such a huge risk, for either Microsoft or Google (or in fact, at $500 million, even for Yahoo). That’s chump change for a piece of the Facebook action…noting the previous market insanity surrounding Google’s IPO a few years back, and the subsequent rocketship Google was for the next two to three 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.”
Ah, the greater fool theory! Dave, you’re right on the money here, but it is a profoundly cynical way of looking at it and has nothing to do with the underlying business of Facebook. If the company does not live up to its hyped promise, as Google has done, it is also extremely dangerous for the company’s long-term future.
Nirav Bhavsar makes an excellent point about 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 U.S., it is definitely not worth $15 billion,” he writes. “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. If Facebook goes for [the] IPO route: I’d buy shares and sell within one week before the bubble bursts.”
I could not have said it better myself, so I will not.
Lastly, John Minnihan makes points as both a user and an entrepreneur.
As a user: “I’m using Facebook today as an interesting way to communicate with and track the doings of some of my friends. But the ones that I *really* want and 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.”
As an entrepreneur: “Take the money and 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 and 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.’”
Indeed, that wind will eventually huff and puff and blow your house down if you don’t build it well and in a way that is less about valuation and more about what comes after all the hype has died down.
And here’s a certainty: It always does die down, often taking promising companies with it to oblivion.
Please see this disclosure related to me and Google.
Comments
hey Kara -
agreed on the long-term hype risk, but my point was more tactically about whether Google or Microsoft would end up paying more later in next 12-24 months, and/or after an upcoming IPO. again my guess is it’s cheaper for them to buy in now than later.
but regardless, thanks for including my comment in the discussion… it’s a pretty interesting conversation.
and for those interested in more of this stuff, please come to our upcoming conference on Facebook & social networking Oct 7-9th in San Jose:
Graphing Social Patterns:
The Business & Technology of Facebook
http://graphingsocial.com
(shameless, shameless plug… did i mention how awesome D is/was?
)
regards & hope you can join us too kara,
- dave mcclure
Posted by dave mcclure at September 27th, 2007 at 12:35 pmHi Kara, thanks for including my comment, and compliments on the wrap up. Can’t wait to see what the next move will be. But hyping services up the way is done now with facebook ultimately is only good for the service owner. The investor, but also the market will be harmed when such investments are not meeting the supposed value creation.
Posted by Alexander van Elsas at September 27th, 2007 at 1:18 pm@John Minnihan. I agree with your views as a user of Facebook. If interested (yes a plug here as well), check out a post I wrote about that a while back:
http://vanelsas.wordpress.com/.....ou-part-2/
Kara, now that Rupert’s ruling the roost will they make you use MySpace instead of Facebook?
in the unlikely event News Corp spun off MySpace, what kind of valuation would you give MySpace? If I remember right the potential deal never done with Yahoo put the valuation @ around $10-$12 billion.
Posted by Robert Seidman at September 27th, 2007 at 1:56 pmTo Dave:
It’s like tulipmania. Sometime, somewhere, someone gets tuliped.
I am coming to your shameless conference!
Posted by Kara Swisher at September 27th, 2007 at 4:39 pmTo Alex:
There is no end to the hype machine.
Posted by Kara Swisher at September 27th, 2007 at 4:40 pmTo Robert:
BoomTown on MySpace?
I think not.
BTW, it was Rupert who put that valuation on it, simply by declaring it so. Now that’s chutzpah!
Not sure you know, but he also just called and told me AllThingsD was worth upwards of $43.
Posted by Kara Swisher at September 27th, 2007 at 4:42 pmMaybe this “investment” is just a sneaky way to pump up Microsoft’s anemic (by comparison with Google) ad business.
What goes around, comes around.
Posted by Mac Beach at September 27th, 2007 at 7:54 pmI sense a strong Google bias. This isn’t just about a search engine with people clicking through on ads (despite its magnitude). It should be evaluated independent of that comparison. Facebook is about the potential of acheiving far more than any internet company has ever achieved. Google and MSFT are both wise to pursue with vigor a stake in Facebook.
Posted by John Winters at September 28th, 2007 at 11:54 amTo John:
Look, I get the potential, and have noted it many times. And it is potentially more powerful than Google.
But if this feels like a bad case of putting the horse well before the cart. Like about 15 billion miles before it.
Posted by Kara Swisher at September 29th, 2007 at 12:39 amKara,
As I point out in the following post, entitled: “Valuation, Shmaluation — How to Win Big When Mr. Market is Wrong” (see http://www.facebook.com/topic......mp;ref=mf) I do believe that facebook has a valuation that is well north of $15 billion.
The proof of this is that the only valuation that matters is what a willing buyer and willing seller ultimately agree to. And since, Mark Zuckerberg probably wouldn’t sell Facebook for less than $100 billion, that pretty much sets the valuation for the entire company at or near this figure.
It is a mistake to try to use P/E ratios and multiples of revenue for a company that hasn’t yet found the keys to its profit kingdom. As an example of why you should be more bullish on facebook, when was the last time you’ve heard about a non-porn-related piece of software that was so addictive that Fortune 500 company’s were having to ban its use at work? It seems to me in the early days of the web browser, companies tried to get their workers not to use the internet. Who won that battle?
You seem to have missed the point that the Social Operating System War has started and Google’s sees the threat even when you do not. Unlike you, they are not dismissing Facebook as the latest in an ever-renewing cycle of social networks that blow hot and cold and are easily replaced.
It is not surprising that Google is not making the same mistake WRT Facebook that Yahoo did WRT to Google when they thought search engines were a commodity type of technology that they could use for a while and dismiss when the next good one came along.
Google’s ultimate stickiness SURPRISED them to the tune of $177 billion in missed market opportunity when Google’s search engine “user interface and brand” got woven into consumers’ brains as the GoTo home page when it dawns on them that it is time to search for something. And now, Yahoo (even with Microsoft, AOL, Ask, Snap and Mahalo’s help) can’t seem to stop the giant hat they suckled into health from growing to the sky.
So, before I get to the specifics of how valuation works in a young, entrepreneurial company (vs. an established Post-IPO company), let me ask you one question:
1. If you knew everything you knew now and were transported back to 2002 with $500 million in your pocket, would you have invested this money in Google to own 5% of their company. Remember this was at a time when they had little or no revenue other than a sweetheart deal with Yahoo that paid them on a per query served based and it was before they started running any keyword-driven, CPC ads. So, do you invest so much money in such a puny company that was being run by a pair of drop-out founders and a washed-up CEO who was the only one in the valley willing to provide adult supervision to such a strange little company that though “search” could be a business.
Hopefully, your answer is “Yes” since that is what any rational investor in 2002 would do when armed with 100% certainty about how the next 5 years would evolve.
Given that Google now has a valuation of $177 billion with the revenues and the brand-based, technology-enhanced, market lock-in to justify it on the base of a high, but reasonable P/E ratio, your $500 million would now be worth $8.5 billion. Nice work, Kara you are a genius for ignoring the market comparables of 2002 and betting on the future stickiness of a system that provided more advertising accountability than CPM ads in an environment that was year-by-year accounting for more and more of the time that used to be spent watching commercials on TV.
As an interesting aside, the next time you see them you should ask Larry, Sergei and Eric if, in that time period, they would have turned down a $15 billion offer for their entire company. I believe that would have and I think this is what they will tell you.
They had a vision for organizing the world’s information and getting to be among the richest geeks on the planet in the process and they wouldn’t want to have settled for only $3 billion each when a little patience would yield each of them $30 billion.
I believe Mark Zuckerberg sees the world in a similar way. I’m sure he is saying, “the world called me an idiot when I turned down $1 billion for 100% of my company in Feb. 2007. Now, it is 6 months later and I’m being offered $500 million for 3% to 5% of my company and the world is calling the potential investors idiots. I wonder what might happen if I take this war chest being offered and use it to acquire the golden goose that will allow me to painlessly extract cash from the 200+ million users I will likely have by Dec. 2008? What will they call me and my strategic investors/allies then?
The strategic landscape is set and only one little invention is required to give Facebook the same key to the kingdom that GoTo’s bid-based, keyword-driven, Cost Per Click invention gave Google.
What could such an invention be? I’m just guessing here but it seems clear that it will be tied to Facebook’s core strength which is keeping users on their site vs. CPC advertising which worked great for Google’s core strength of getting users quickly off of their site.
This implies a transactional model that keeps the user glued into facebook (which is one of the reasons why their current CPC ads are so poor in terms of conversion — because users can spot them as ads and know that they clicking on them will take them away from the site).
CPM ads on google failed in 2002 because people already knew how to tune them out and so no one noticed them. These banner ad impressions were ultimately valued by google and the market at $0.00 CPM rate when they introduced CPC ads where the text link ad impressions were free and only actual clicks counted. You will note that the CPC text ads on Google also looked enough like search results to prevent most users from ignoring them or even thinking of them as ads.
By extrapolation, the ultimate winning “ads” on facebook will be valued at $0.00 for their impressions and $0.00 for their clicks. They will be valued solely based on the actions that they cause the user to do (e.g., buy a product, share a recommendation, give a gift, call or chat with a local merchant, etc.) To make this work correctly, facebook will need to own a OneCart transaction system that offers all of the merchants and all of their products in one standard facebook-hosted shopping and gift-giving experience. They will also need to have the rights to any patents related to offering such a unified shopping system.
The new invention will be in providing a system whereby this Cost Per Order user experience is handled in such a way that users accept it because they see it as a natural extension and benefit of using facebook.
One of Altura Ventures portfolio companies is working in this area, so I shouldn’t say more. Other than, don’t judge Facebook’s valuation without acknowledging the potential value of a site where 200+ million consumers in the richest countries in the world are locked in and sharing their online and offline lives with the various sub-groups of friends that make up their family, social and work lives — the very same group of people with and for whom they shopa nd buy things.
Thanks,
Lee Lorenzen
CEO, Altura Ventures — the first facebook-only VC
(c) 2007 Altura Ventures LLC.
Posted by Lee Lorenzen at September 30th, 2007 at 12:07 am