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......038;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.

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.

What goes around, comes around.

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.

;)

There is no end to the hype machine.

It’s like tulipmania. Sometime, somewhere, someone gets tuliped.

I am coming to your shameless conference!

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.

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