Memo to Mark: BoomTown Is Baaaack and We’re Still Dubious!
Please see this disclosure related to me and Google.
Well, we’re glad it’s done, our conflict of interest shoved aside by the hey-big-spenders at Microsoft and we can again resume our incredulous analysis of the insane $15 billion valuation of Facebook.
No matter who would have gotten to make nice with founder Mark Zuckerberg in the hefty ad-investment deal–Google or Microsoft–we will be sticking to our guns on this ridiculous roundelay of hype and circumstance.
That’s because this valuation, while a paper windfall for its investors and those currently employed at Facebook, has exactly no meaning until the company actually performs financially to keep up with the lofty figure and then, presumably, goes public in a great rush of glory.
Of course, that does not mean this bump–which could only happen in a very bubbly Silicon Valley–will not help the company pick up some tasty acquisitions now using its overpriced stock, as long as targets are willing to play along with the still-questionable dream of future riches.
And, of course, in the here and now, Facebook will get an even bigger slug of guaranteed ad dollars from international as well as U.S. markets from Microsoft, which will be losing a giant amount of money in the arrangement.
As a plus to Facebook and an important element in Microsoft signing this deal, by the way, sources confirm that the start-up got much better terms in its U.S. ad deal that basically lets them control the whole partnership without any hooks for Microsoft.
Does any of this really matter? From a perspective of big, cash-rich companies throwing huge dollars at hot start-ups, it is, as one investor told me last night, meaningless.
“It’s trivial to Microsoft to spend this money and worth the gamble,” this person said.
Indeed.
Because while execs at both companies talk about the potential–and there is a massive amount of it in the Facebook business model–both Microsoft and deal-loser Google, too, were willing to bankroll a loss leader in the hopes of later return, a whole lot of important education about the social-networking space and also likely solid returns in an IPO scenario.
And for Microsoft, that is OK, given that the software giant needed to land this deal for all sorts of reasons (seeming relevant in the fast-moving Web 2.0 space and, of course, the sweet-sweet feeling of actually beating out Google) and has more than enough money to burn.
That’s obvious too with the $240 million cash investment (with more to come from other greedmonger private investors, of course, in another round now being arranged by Facebook) that bought Microsoft exactly 1.6% of Facebook.
That puts Microsoft behind Greylock Partners’ and Meritech Capital Partners’ 1.7%, Founders Fund’s 5% and Accel Partners’ 11%–Accel partner and Facebook board member Jim Breyer also has a personal 1% stake, now valued at $150 million–and Zuckerberg’s 20% (not the 30% that has been widely reported), which is now worth $3 billion.
So what can we say but: Party on, Garth!
But let’s not lose sight of the fact that for all the fabulous growth, Facebook is still a very small business now carrying a very large valuation on its slight shoulders. So far, it has only $150 million in annual revenue, half of which comes from its guaranteed ad deal with Microsoft, and is break-even on a cash-flow basis.
So more cash in the kitty is a good thing, allowing Facebook, as one of its execs said yesterday, to double its work force to 700, jack up its international business and better service its 50 million active users.
This is all well and good for turbocharging a business that is growing like gangbusters. But while Facebook executives argue that all trends point upward, I still maintain that potential is not actual.
As I have previously written: “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.”
So excuse me for being worried about this deal and what it might do to the business discipline and attitude of Facebook, making it sit too long on the laurels of being able to gin up an investor frenzy and not focus on making the service one that is consistently innovative and useful to users and, of course, building a truly different kind of advertising business.
Frankly, while spending on social-networking sites is supposed to triple this year, I have still not seen a breathtakingly groundbreaking new kind of advertising from Facebook (or anyone else) that merits this valuation.
All the rich data Facebook collects and parses back out is amazing, but I still need to see actual ad programs and results that blow the mind and change the game.
I have talked to Facebook investor Jim Breyer many times about this concern related to this cart-before-the-horse valuation, so let me quote him directly about it, from one of our conversations:
“Companies always need to separate valuation from strategic and performance issues, and this is obviously a valuation we need to grow into and we hope we will,” he said. “But we know it is an aggressive valuation.”
That’s what you might call an understatement, Silicon Valley-style.
Comments
When is microsoft going to learn that you can’t buy your way into the party? Thanks, for trying, though.
Posted by fghf gfhf at October 25th, 2007 at 4:10 pmWell, you actually CAN buy your way into a party.
Posted by Kara Swisher at October 25th, 2007 at 8:00 pmIt could be a fundamentally mistaken view of investors intention: If an investor like Microsoft considers such an investment as an “experimental field”, than possible revenues and profits come second. If (!) they come someday, so much the better - if not, this will not ruin Microsoft. In today’s internet market it is not such simple as claimed to perfectly evaluate the future profitability of investments.
Posted by Yehuda Levinson at October 25th, 2007 at 10:30 pmLet me get the math right:
Zuckerberg=20%
Accel=11%
Founders Fune=5%
Meritech=1.7%
Greylock=1.7%
Microsoft=1.6%
Jim Breyer=1%
==============
41%
===============
Who owns the rest?
Do the co-founders and employees own the rest? Seems like they have a big option pool…
Btw Kara- BoomTown really needs to do something about its commenting process. I understand the need for filtering comments but a 2 step email confirmation process is too much. The simpler Valleywag system is waaaay easier and yet has good comments.
Posted by Jack Nicholson at October 25th, 2007 at 10:37 pmWell, I have started a countdown fro the downfall of Facebook. For trying to leverage the value of the network build by their users, instead of trying to provide the user some value:
Posted by Alexander van Elsas at October 25th, 2007 at 11:03 pmhttp://vanelsas.wordpress.com/.....r-ad-play/
Kara, I wonder whether your disclosure statement should be more explicit. Megan is not just VP of new business development (which could mean anything to readers) but was actively involved in discussions with Facebook - the photos were there for all to see on ValleyWag (and presumably will be with all similar potential deals).
Correct me if I’m mistaken.
If not, I think that this makes it impossible for you to write with impartiality and therefore credibility about Google and possibly other tech companies.
That’s a shame because I like what you’re doing, but I somehow feel that I’ve been duped.
Posted by Mike Seery at October 26th, 2007 at 6:02 amAs a devoted fan of this blog, I’m actually a little sick of how often Kara has to double back on herself to prove her credibility and objectivity. Reporters have been married to people in the sector they cover for years, in every industry. Only in the no-privacy internet age do we have to hear about everything endlessly. Though clearly Kara has to, because there are people out there — Mike — who think she hasn’t disclosed enough. Or do you just think she shouldn;t be able to report period?
It’s like insider trading — almost everyone in the financial world (my sector) has the opportunity to do it. But no one with any ethics or foresight ever does. If Kara’s purpose in writing were to defend her partner’s career, surely she wouldn’t have made it this far. It just doesn’t work that way.
Kara, I am always defending you and we’ve never even met! You owe me lunch.
Posted by Felix Martinez at October 26th, 2007 at 2:34 pmhigh valuation? sure.
but don’t think for a second that Google wouldn’t have taken those terms as well if they could have gotten them.
for once, the shoe was one on the other foot — Google was Facebook’s stalking horse, and they always intended to do the deal with MSFT given the same terms.
whether or not they can prove out the valuation, both Google and Microsoft were ready to value it at $15B, and “hedge-tards” or not (love that handle), there were multiple folks ready to pay up.
Kara: maybe you should go back to the shed on this one & re-think. you’re right the valuation is aggressive, but you’re dead wrong that it’s dubious or ridiculous. continuing to deny there’s some “there” there is short-sighted.
they may be toy apps right now, but this is just the beginning of the revolution.
Posted by dave mcclure at October 26th, 2007 at 3:23 pmYehuda:
Most people are going with the”experiment” reason for MS investment. As in: Who cares? It’s only $240 million!
Wheeeee!
Posted by Kara Swisher at October 28th, 2007 at 12:44 pmJack:
Sorry about the comment system, but I think we’re aiming a little higher than Valleywag level, where I was recently called an ignorant slut (by the editor!). But we will consider your request to make it easier.
Re: rest of company: other execs and employees, other investors, the company kitty. It all adds up!
Posted by Kara Swisher at October 28th, 2007 at 12:46 pmAlexander:
You know how much I love countdowns!
Posted by Kara Swisher at October 28th, 2007 at 12:47 pmMike:
You are not mistaken, although Megan worked with a team of people at Google, most of whom were her bosses, all reported in Valleywag, on the possible Facebook deal.
Still, I posted specifically on that and linked to the Valleywag item and even confirmed it and gave Valleywag an on-the-record quote about it. I also repeatedly linked to the Valleywag item and referred to it.
I also posted that I was refraining from writing about a story I was very much all over for months now (and breaking stories on), while the deal was going on (even stooping to do a silly but fun post on vacation photos of Facebook execs).
And I always linked prominently and twice in most posts to the main disclosure related to Megan.
But that deal is finished and I am still maintaining the same line related to this ridiculous valuation and the unproven business model that I have consistently done and in post after post for months.
If Google had won the deal, I would have said it (and, by extension, Megan) was wrong to do the deal for the reasons I outlined. I promise I would have whacked the Google in the same manner and essentially said Megan and the Google brainiacs were as nuts as Steve Ballmer. And that’s saying something!
I am sorry if you feel duped, but I have covered the Internet for a dozen years decade for major media outlets, have written two book on the subject and now co-run the leading digital conference. I think I can parse what is going on without favoring Google (which I have called in this column: arrogant and dangerous many times) and will rise and fall on the depth and quality of my analysis.
Please read my disclosure here and call me on it when you think I am wrong. But I am trying to be as transparent as possible and as clear to readers as I can be.
See here:
http://allthingsd.com/about/kara-swisher/ethics/
Posted by Kara Swisher at October 28th, 2007 at 1:02 pmFelix:
I appreciate the support, but I only have eyes for Jerry Yang when it comes to lunch.
Posted by Kara Swisher at October 28th, 2007 at 10:39 pmDave:
How much I enjoy our back and forth.
But let me once again best you!
1) high valuation? sure.
but don’t think for a second that Google wouldn’t have taken those terms as well if they could have gotten them.
for once, the shoe was one on the other foot — Google was Facebook’s stalking horse, and they always intended to do the deal with MSFT given the same terms.
I DON’T KNOW ABOUT THIS, BUT I DO SUSPECT MSFT WAS ALWAYS OUT FRONT IN THIS, GIVEN THE LONG-TERM RELATIONSHIP.
whether or not they can prove out the valuation, both Google and Microsoft were ready to value it at $15B, and “hedge-tards” or not (love that handle), there were multiple folks ready to pay up.
AHA, EXCEPT THAT WAS TRUE IN THE LAST IDIOTIC BUBBLE WITH ALL SORTS OF BLUE-CHIP FOLKS READY TO HAND OVER DOUGH TO A BUNCH OF CRAPPY COMPANIES.
I BELIEVE IT IS CALLED THE GREATER FOOL THEORY.
Kara: maybe you should go back to the shed on this one & re-think. you’re right the valuation is aggressive, but you’re dead wrong that it’s dubious or ridiculous. continuing to deny there’s some “there” there is short-sighted.
I HAVE BEEN TO THE SHED AND I THINK NOW: COMPLETELY RIDICULOUS! ABSOLUTELY DUBIOUS! ALSO THE INVESTORS AND MSFT WILL PROBABLY DO OKAY UNTIL THE ECONOMY TANKS (SEE GREATER FOOL THEORY ABOVE).
they may be toy apps right now, but this is just the beginning of the revolution.
AHA A TOY GUN REVOLUTION! COUNT ME OUT UNTIL WE GET SOME REAL FIRE POWER!
Posted by Kara Swisher at October 28th, 2007 at 10:44 pmKara,
I should have been more explicit (and I had already read your disclosure statement).
The bit that I feel needs clarifying (especially so with the recent coverage over the Microsoft deal) is the description in your disclosure statement of what Megan does at Google.
Obviously many of your readers, like Felix, are in the know, but I think that the level of her involvement in deals like the Microsoft one is not clear from her job title.
Only yesterday there was a piece on NBC News about the overuse of the title vice president in corporate America.
And by the way, I agree that a $15bn valuation for Facebook is daft but, as you mention, MS did this deal for lots of reasons, not least to get its ad technology out there. So, of course, it’s way expensive but it shouldn’t necessarily be used as a straight valuation metric.
Posted by Mike Seery at October 31st, 2007 at 6:37 am