Kara Swisher

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Facebook Funding: A Yahoo Bovine Update?


“Why,” said a sharp Silicon Valley figure to me last night, “would Facebook give away the cow for the price of a quart of milk?”

Why, indeed, although it would be a $15 billion quart of milk.

But it was an interesting point he was making about the situation the hot social-networking site finds itself in right now, as it juggles how and in what manner to complete a round of funding it has been considering to tide it over before the IPO its investors have publicly said it is in line for in 2009.


In fact, there are a lot of interesting issues swirling around the Facebook funding deal and, thus, it’s time for an update!

First, Facebook, which has been basically floating this funding trial balloon to see what surfaces–much as a savvy Washington pol would an issue–is still debating whether to take such an investment and trying to determine what such a move would mean.

Is it just a way for the fast-growing platform to get money for critical expansion, to press forward with innovation and momentum and to even make acquisitions?


Or is it actually kind of an amateur move that will result in the early execs, especially founder Mark Zuckerberg, regretting the decision to sell out a piece of the potential moon shot of a start-up too early? If Zuckerberg and others really believe in their vision, goes this line of thought, why sell itself cheap now?

Or is this valuation, which is all about potential and not performance, simply insane?

According to my sources close to the company, in any case, it is pretty obvious Facebook will still not turn back now, given the level of interest from a wide range of investors, from investment banks to private equity funds to hedge funds to other VC outfits to big media companies.

Such an amount of money, if the valuation remains at $15 billion, for some chunk of the company (the size of which is also being debated), would give the company a cushion to figure out and perfect a truly powerful and innovative business model.

Facebook, many have observed, is somewhat like Google just before that company got its magic bullet with the perfecting of its AdWords product back in 2002.

Second, the principal activity around the possible investment centers, said sources, on two major tech players. As has been reported here and elsewhere, one is Microsoft, of course, which is Facebook’s ad-serving partner and which currently delivers the company a sweetheart guaranteed ad revenue payment of about $75 million annually.

But the second, said sources, is not, as might be expected, Google. It is, in fact, dark horse Yahoo.

In fact, as I reported earlier, Yahoo CEO Jerry Yang has been paying visits to Facebook on his own for some time, interested in some sort of international ad deal or other partnership. But sources says Yahoo is seriously considering making a major investment in Facebook.

Such a move would be bold for the typically cautious Yahoo, which bungled an attempt to buy Facebook entirely for a bit over $1 billion last year (some say $1.6 billion, but I am told the issue had to do with actually reaching a number just over $1 billion).

But Yang has promised there are “no sacred cows” at Yahoo and even the consideration of such a move represents some acknowledgment that perhaps a true needle-mover is needed to get the company back on track and in the game.

I have always thought that Yahoo spent too much of its time riveted on its rivalry with Google, even as Facebook was creating a product and now platform that features all the key elements of Yahoo’s strongest offerings (mail, messaging, boards, photos, personalization).

While it is not clear if Yahoo ever could have pulled off a Facebook-like shift in its orientation, it is obvious now that it should have perhaps tried harder to do so.

With an investment in Facebook, it might have a second chance to learn from its mistakes and even make some money.

Remember that Yahoo did pretty well with its Google investment back then, garnering $191 million for selling 2.3 million of the Class A shares during Google’s IPO in 2004 at $82.62 apiece in 2004. (Then again, it is now clear they sold that stake too early, as those shares would have been worth more than seven times that today.)

But a $15 billion valuation Facebook is insisting on is a high wall to climb for Yahoo, and even is tough for the cash-rich Microsoft, whose deal this is to lose.

Will it lose it though? It can’t have helped that Microsoft CEO Steve Ballmer recently dissed Facebook publicly, or that Facebook’s staff is uneasy about becoming too close to the software giant or that its and Microsoft’s goals might be different.

Whatever the case, it is clear Facebook wants to remain completely independent in any deal and a super-majority stock scheme for Zuckerberg, for him to maintain control, has been discussed.

Other stock issues will likely become irritated with such a deal too, as it gives options granted to current employees a massive lift and introduces major tax issues. More importantly, it makes it harder for Facebook to reward critical new employees, when such a high-flying valuation gets set in stone.

And Facebook really needs the skills of those new employees, and very sharp ones, if it is going to flawlessly deliver on all its users are increasingly expecting from it. Execution will be critical with each passing day, and Facebook cannot afford to falter.

Of course, there are the natural tensions among top staff over what to do, as well as between Zuckerberg and Facebook’s major investors over exactly the right direction.

Accel’s Jim Breyer, Zuckerberg and also the Founders Fund’s Peter Thiel are the only three members of Facebook’s board, and so cooperation is important.

That is not always the case. Last year, for example, Breyer leaned toward a sale to Yahoo, said many sources, while Zuckerberg was lukewarm. And while there was never a concrete offer with all the right moving parts from Yahoo, their disagreement resulted in tensions.

And those kinds of difficult debates over what to do, which are part of any start-up’s typical lifespan, have left repercussions to this day and are present in this round of navel-gazing, too.

The conclusion: Who knows?

“I think everyone agrees that Facebook could be something very major,” said one person close to the company. “Or it could blow it just as easily.”

Or worse, end up right in the middle.