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.
Comments
Kara,
Nice reporting on the possible ways in which Facebook might raise $500 million at a $15 billion valuation. This warchest will give Facebook the cash cushion to react should Google starting paying people to leave facebook to join a College-Only Facebook-Throwback Social Network. At $100 per student and a grand Facebook moving day of Jan 1, 2008, Google might be able to use $1 billion to tempt 10 million college students to try a social network that their moms and dads won’t be a part of. I doubt this strategy will work but Google has got to try everything possible to deal with the fact that Facebook is a “Google-Free Zone.”
This cash will also allow them to wait for their apps to have more appeal to folks like you.
In two of your recent posts: http://kara.allthingsd.com/200.....e-said-it/ and http://kara.allthingsd.com/200...../#comments, you’ve bemoaned the current “childish” state of facebook apps.
In essence, you are complaining about the lack of a “killer app” for facebook, which has historically been defined as: as the single app that would convince people to buy the machine that the app ran on.
The First Killer App
At the dawn of the PC era with a product called the Apple II that Steve Jobs and Steve Wozniak thought was cool and might impress their friends had interesting color graphics when hooked up to a TV monitor and a stripped-down BASIC. I believe it may even have lacked a SHIFT key. Some said at the time (like you’ve posted about facebook) “How childish… a machine for alpha geeks in the homebrew computer club to make games for and not much else.”
Well, I worked in a computer store in San Antonio in 1980 when a little piece of software called VisiCalc came out. I was instantly selling a lot of Apple II’s to businessmen who were dealing with huge ledgers of white-out strewn inventory counts and balance sheets who would give their eye teeth for a spreadsheet template that auto-recalculated their work whenever they needed to correct a mistake.
VisiCalc was the killer app that put Apple and Steve Jobs on the road to billions in wealth. And with respect to Tim O’Reilly’s concern expressed in his facebook stats report about the fact that only a few big apps are getting most of the use on Facebook, isn’t that always the case? At least with facebook operating system, unlike Microsoft’s, the main apps are currently owned by 3rd parties.
The real point is that Facebook is exactly ONE APPLICATION away from having their Social Operating System embraced and endorsed by the entire business world. This app will quickly zoom to the top of the list and will be the first app that causes new users to join facebook — just like VisiCalc caused business people to buy the only computer that offer it.
Is SuperGroups the Killer App for Facebook?
As I mentioned in an early comment to your Part2 post above, Facebook’s own Groups app could be a possible starting point for a Killer App for business people. The Groups app’s “Create Event” feature works well and gracefully leverages the social graph to broadcast events and track attendees’ RSVP’s. This app which Mark Zuckerberg wrote himself in one evening leads to more invitations being sent and responded to than evite.com. The Groups app also allows the group creator to send messages to their entire group that is quite useful in a business setting.
With respect to sending a message to the entire group, the group owner(s) can do this at the beginning of the group’s formation but Facebook cuts off this capability when your group exceeds 1,000 members. I think this is kind of a silly restriction and it hampers a real business but I guess they are trying to prevent folks from using groups to spam folks. My own belief is that since groups are opt-in, I’m not sure this makes sense. However, it does show Mark Zuckerberg fanatical dislike of spam and groups could be misused to create spam-traps for unwitting users.
That being said, if App Developers could target the group page with the missing group features (like they can currently target Personal Profile pages) and if Group owners could monetize their group members by either displaying ads or charging to join subscription groups via a single facebook payment system, then we have the makings of the first Killer App on facebook that every cataloger, e-tailer, retailer, brand manager, blogger, unique content owner, etc. would want to use to connect with their key influencer customers.
This Super Groups app is my current suggestion for a Killer App candidate for Facebook. If there are developers out there working on it, please contact me and perhaps we’ll invest in your company. Past killer apps that drove hardware purchases were:
1. VisiCalc — Apple II
2. Lotus 123 & WordPerfect — IBM PC
3. Excel & WORD — Windows
4. PageMaker — Mac and Laserwriter
5. iTunes — iPod
In the case of facebook, the definition of a Killer App will be one that causes people who aren’t yet on Facebook to Join Facebook itself. In that since, you might say that the Friend Lists, Photos and Events apps are already Killer Apps for high school and college students. The next Killer App will be one that crosses over and brings in business people. Ideally, this will be combined with a Facebook universal shopping cart and wallet service that will allow these SuperGroup creators to efficiently monetize the audiences they build on top of the social graph (with facebook taking a share of all of this revenue). Then folks will see why I believe Facebook is worth $100 billion (see http://blog.adonomics.com).
Thanks,
Lee Lorenzen
CEO, Altura Ventures — the first facebook-only VC
(c) 2007 Altura Ventures LLC.
Posted by Lee Lorenzen at October 11th, 2007 at 5:12 amJust saw a post by OM Malik on the traffic comscore measured on Facebook. Looks like a pretty big dip to me. Maybe the Facebook hype is slowly turning on them?
Posted by Alexander van Elsas at October 11th, 2007 at 5:53 amAnd for the same reasons Microsoft shouldn’t invest heavily in Facebook, I don’t think Yahoo should do either. Perhaps there is something to learn here from Google. Why don’t they invest in Facebook? They could, obviously, but I think wiht Orkut on its way to drive traffic (especially in Asia and the pacific), the developers api that will be less restrictive than Facebook, the power of adding mobile presence to their network with Jaiku and a few other reasons I mentioned earlier Google doesn’t need Facebook. And I doubt that Yahoo or Microsoft can get a decent return on a $15 bln value.
i’m sure many folks might be interested in taking some winnings off the table… in fact,that way makes it easier to keep aiming high(er).
Posted by dave mcclure at October 11th, 2007 at 8:31 am>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.
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Kara, can you explain this to us a bit more? Does that mean if the 5% stake deal is done, new employees’ option price rise? Good to know this knowledge.
I am interested in reading your articles more and more…
Posted by Peter Lee at October 11th, 2007 at 10:50 pmPeter:
I will be doing a more detailed piece on this once the deal is struck. Why? Facebook employees, who shall not be named, demand it!
Seriously, an interesting issue for Facebook and Silicon Valley in general.
Posted by Kara Swisher at October 12th, 2007 at 12:50 amAnother mask on FaceBook’s profile!
In the anniversary of Semptember 11, 2001 the Financial Times dedicates a full page to data mining company FaceBook, which has become a favorite of the creators of social networking sites. The Financial Times, as did the virtual magazine, Wired, last week, and the rightwing magazine, Newsweek, two weeks ago, praised young Zuckerberg’s FaceBook as the next online fantasy social networking world that would eventually rival Google and the wonderful Yahoo!s of the future.
Posted by Daron Johnson at October 18th, 2007 at 3:29 pmAs was recently stated in early coverage, Newsweek Puts a Mask on FaceBooks Profile, the social networking sites are an outgrowth of the projects of the British intelligence creation known as International Network for Social Network Analysis (INSNA).
After the 9/11 attacks INSNA members were consulted by Homeland Security, which had decided a new type of intelligence gathering was necessary: Social Network Analysis (SNA). This INSNA data mining method was called by British intelligence earlier as the village survey method or traffic analysis, which was used in Ireland, Africa and many other countries under the eyes of the British Empire. The analysis of these networks gave the British Empire a means to use any rogue groups, such as the IRA, to maintain social control.
In a 2006 report, Social Network Analysis as an Approach to Combat Terrorism: Past, Present, and future, by Steve Ressler, president of the Department of Homeland Security Scholars and Fellows Alumni Program, explained, “The use of social network analysis in the mainstream has increased with the growth of a number of new online Internet sites based on social network principles. For example, MySpace, Friendster, and Facebook are three websites that allow users to connect with friends and friends of friends to share photos, blogs, user profiles, and messages. Especially important in teenager culture, these sites map out each user’s network of friends and acquaintances…”