All Things Digital

Silicon Valley luminary Marc Andreessen (pictured here) has been asked to join the board of Facebook, according to several sources with knowledge of the situation.

While the arrangement is not completed yet, sources said the longtime entrepreneur has verbally agreed to accept the post to become the fourth member of the board of the Palo Alto, Calif.-based social-networking site.

Other board members include Accel Partners Jim Breyer, Founders Fund’s Peter Thiel and Facebook CEO and Founder Mark Zuckerberg. Greylock Partners David Sze also has observer status on the board.

Since he co-founded browser pioneer Netscape in the 1990s and helped usher in the Internet age, Andreessen has been an active investor and has created several successful start-ups.

His most current effort has been Ning, also based in Palo Alto, which is a white-label social-networking company that recently raised another $60 million in funding.

If Andreessen joins Facebook’s board, the move is yet another sign that the much-hyped start-up, which has undergone some growing pains over the last year, as well as garnering a $15 billion valuation, is growing up by bringing some major high-profile tech figures into its ranks.

Last night, for example, BoomTown broke the news that Google PR head Elliot Schrage had accepted a similiar job at Facebook.

That comes after Facebook hired another top Google (GOOG) exec, Sheryl Sandberg, as its COO, in March.

A while back, BoomTown suggested that Web 1.0 golden boy Andreessen–pictured here on the iconic Time magazine cover in 1996–would be a good mentor for current golden boy Zuckerberg, in a piece I did about potential execs for Facebook.

As I wrote in February:

But why not go for the man who was Zuckerberg before Zuckerberg was cool. Yes, the shiniest of Golden Geeks himself, Marc Andreessen.

I could go on and on about the similarities I find between the two, if you compared today’s Zuckerberg with the Netscape founder in the mid-1990s.

From their arrogant innocence to their visionary qualities to their enfant-terrible charm, it is almost as if they were separated at birth.

But now Andreessen is all grown up and much, much matured from when I covered him. He has become all calm and sage and he even does a very decent blog.

Plus, he has also started and run a number of start-ups after Netscape, giving him deeper managerial experience over the last dozen years.

And, best of all, Andreessen knows the pressure of being the best-thing-since-sliced-bread in the tech sector, and its inevitable downside too.

Overall, a real mentor and partner for Zuckerberg, making a perfect pair of Golden Geeks.”

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.

Back around Day 55–ah, the lazy days of midpoint in Yahoo CEO Jerry Yang’s 100-day No-Sacred-Cows VisionQuest for the revitalization of the company he co-founded–I asked a bunch of people around Silicon Valley what they would do to help the beleaguered leader.

We got some good answers to be sure (the video is reposted below), but we left out these two new ones we also did at the time from venture capitalist David Sze of Greylock Partners and Max Levchin of Slide–both of whom were quite a bit sharper in tone! Tough love!

By the way, it’s Day 83 (not that we’re counting or anything), so get ready for my special 10-day countdown starting in one week!

It’ll be like the 12 days of Christmas, but without partridges, pear trees or any golden-ring harmonizing (although we are considering 300 Yahoo Vice Presidents a-leaping!)

Here’s Sze and Levchin:

Oh, my.

Oh, my.

Dig a hole and hide. The end is nigh. And how do you spell Ponzi (as in scheme) again?

When I reported in this column two weeks ago that Facebook was looking to raise a new round of funding and that software giant Microsoft was a prime contender as an investor, I suggested a big number was being bandied about to create a giant war chest for the trendy social-networking start-up.

That’s a concept that the top dogs at Facebook are seriously mulling over now, according to sources, after getting so many inquiries from investment funds and several bigger companies–such as its ad-serving partner, Microsoft–about grabbing a stake in the fast-growing social-networking Web site.

“While who and how much is still unclear and, most importantly, in what form, sources said a deal could come together quickly if the numbers are lofty enough for the site, which has about 40 million members currently. But the investment could be quite large, well beyond its last $25 million one in 2006, for little dilution.

‘There are several B’s involved in the discussions,’ said one person interested in the possible round, referring to a multibillion valuation for the Palo Alto, Calif.-based start-up.”

Today, The Wall Street Journal follows up on my story by adding more interesting details, including the fact that Microsoft is seriously considering an investment offer that would value the company at $10 billion.

(Google might be in there too, according to the story, but I think it is just there to annoy Microsoft.)

In any case, this was the ludicrous price once floated by Founders Fund’s Peter Thiel, Facebook’s first investor, which was widely derided at the time he uttered it.

More laughable still is that Facebook, according to the Journal story, might be holding out for a $15 billion valuation.

Why? Because I believe Silicon Valley can now be considered to be at Delusional Level Red. Or green, given all the cash that is being shoved in Facebook’s direction now.

Thus, it is time to take a moment to consider four things that might take some shine off the shiny Facebook:

1. Facebook is not Google: Although many in the tech sector make the comparison to the search giant, it is simply incorrect.

Is Facebook like Yahoo a bit? Certainly. A newfangled version of AOL? Absolutely! A very well done media play with all sorts of interactive bells and whistles hanging off of it? Yes, ma’am.

Indeed, it is growing its media business nicely, with $30 million in profits on $150 million in revenue.

But in comparative terms to the search giant, Facebook is a lemonade stand. Google brought in $3.9 billion in revenue in just the second quarter alone and, um, is increasing its dominance over the search sector in a mighty scary way.

Facebook, on the other hand, gets half its annual revenue right now from a sweetheart guaranteed revenue deal with, drum roll, Microsoft. No matter what either Facebook or Microsoft says, it is a money-losing deal for Microsoft so far.

How do I know this? According to many sources, Google is struggling to make ends meet in its own sweetheart guaranteed ad deal with Facebook rival MySpace, which is much larger, and Google has the best monetization engine out there.

2. Potential is not actual: 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.

One need only to consider the bloom that has fallen off the MySpace rose to realize this, but the list of fast-growing and quickly wilting tech phenoms is long. PointCast! GeoCities! Netscape! AOL! Yahoo!

3. Most techies were not popular in high school: No, it is not fair, but this is true. But in a friending and poking frenzy, Silicon Valley’s denizens have embraced Facebook as only those who were picked last at dodgeball could.

I kid about the dodgeball part, but what is more serious is the warped view those in the tech sector have for Facebook, because it is the latest and shiniest thing and because their geek friends are all using it.

Are they anticipating a fatigue factor with regard to the service? I am. Are they wondering how hard it will become for Facebook to constantly innovate, despite its embrace of third-party apps, to keep fresh? I am. Do they know that there is a limit to the subscriber growth over time? I do.

As I have said many times–I like Facebook. I think it is well built and run. It’s cool. I think it is, in its next-step way, even visionary.

But do I think it will sustain this over time? Count me dubious.

4. A sucker is born every minute: Let’s go to the calculator.

Thiel initially invested $500,000 in 2004 in the company, which was followed by two more rounds, for a total of about $32 million. The last one was more than a year ago for $25 million, giving Facebook a $525 million pre-money valuation.

Other major investors include Accel Partners (Accel’s Jim Breyer is also on the board, along with Zuckerberg) and Greylock Partners, as well as Meritech Capital Partners.

Tally: Microsoft has to be seriously desperate to be considering this much of an investment for so little, even with its bags of cash to spend. While I like big, bold and even addled moves as much as the next person, this one is a doozy.

That said, there is always another fool in line to pass on the buck. A sky-rocketing IPO could wipe clean this round of insanity.

But that does not take away the fact that Facebook is not worth this ridiculous price now. It might be in time, or it might not.

So, as I once advised Zuckerberg in another post: If you can get it, take the dumb money and run as fast as your flip-flops will carry you.

Please see this disclosure related to me and Google.

Here’s an interesting idea if you don’t want to get bought and you can’t quite IPO yet and you need to have a tidy war chest for expansion or perhaps a choice acquisition or two: Bring in more investors and raise more money at a huge valuation.

That’s a concept that the top dogs at Facebook are seriously mulling over now, according to sources, after getting so many inquiries from investment funds and several bigger companies–such as its ad-serving partner, Microsoft–about grabbing a stake in the fast-growing social-networking Web site.

While who and how much is still unclear and, most importantly, in what form, sources said a deal could come together quickly if the numbers are lofty enough for the site, which has about 40 million members currently. But the investment could be quite large, well beyond its last $25 million one in 2006, for little dilution.

“There are several B’s involved in the discussions,” said one person interested in the possible round, referring to a multibillion valuation for the Palo Alto, Calif.-based start-up.

Those kinds of valuations have already been bandied about for the site, from a just-under-$1-billion deal from Yahoo that fell apart last year and rumors of a $6 billion interest from Microsoft.

And in a widely read interview with the Deal in July, board member and early investor Peter Thiel (pictured here) of the Founders Fund floated a more massive figure.

“If we got an offer from someone for $10 billion, we probably would listen to them,” Thiel told the Deal’s David Shabelman. “I don’t think we’re going to get that offer, and we’re not going to solicit it.”

Thiel initially invested $500,000 in 2004 in the company, which was followed by two more rounds, for a total of about $32 million. The last one was more than a year ago for $25 million, giving Facebook a $525 million pre-money valuation.

Other major investors include Accel Partners (Accel’s Jim Breyer is also on the board, along with Facebook founder Mark Zuckerberg) and Greylock Partners, as well as Meritech Capital Partners.

In the Deal interview, Thiel also said that Facebook would not go public until its business was stronger and not until at least 2009, following the successful tactics once employed by a pre-IPO Google.

But that’s a lot of time for the company, which needs to keep growing at a rapid pace, both from a technology and innovation point of view.

While it is on track, Thiel and Breyer have both said publicly, to have revenues of $150 million this year, half of that comes from its guaranteed ad deal with Microsoft.

While its revenues are growing strongly, insiders report, so are its costs, as it ratchets up headcount and features and services.

Thus, it will need a lot of investment to keep competitive, including increasing its international profile.

For example, top Facebook execs are now in London, meeting with the British press and also announcing the opening of a spanking new office there. London is Facebook’s largest member city, in terms of geography, and Britain is its third biggest country, after the U.S. and Canada.

In addition, Facebook might need a pile of moolah to buy smaller companies to help build its business, such as its very first acquisition in July of Parakey (mostly for its star techie duo, Blake Ross and Joe Hewitt, co-founders of Mozilla Firefox).

But in order to do more acquisitions, Facebook might want a larger established valuation for its stock and also cash to use.

“If Facebook can do this without significant dilution, it’s a great deal for the venture investors,” said one person familiar with Facebook. “And it could give Facebook a lot of flexibility.”

But who gets to invest is another story, especially given that the company is the latest hot ticket since Google in Silicon Valley. An obvious candidate is Microsoft.

But some close to Facebook worry that aligning itself so closely with the software giant is a mistake, believing that it should not be too closely linked to any one company.

In any case, given the heat surrounding the company, there is no lack of moneybag suitors, all waiting to rain down copious cash on Zuckerberg and his team.

In what seems like a showy look-at-me event this afternoon in San Francisco, Facebook will host the “unveiling of the next evolution” of the No. 2 social-networking site, including the introduction of the “Facebook Platform.”

That’s a fancy way of saying that it will let third-party developers have a crack at annoying–oh, I am sorry, helping–its 23 million users. That means they can market to this giant population in a variety of ways, including selling services and products. A raft of partners will be announced at the event.

But sources say the program laid out will be even more substantial, although Facebook was clamming up about exactly what it would say. It will obviously not be an IPO announcement, which is likely to come at some point, after Facebook spurned Yahoo’s offer of $1.5 billion last year. Its big investors, like Accel Partners and Greylock Partners, have put $38 million into Facebook and will eventually want a lucrative out.

Could it be the television show the company is considering doing with Cox Communications, which is a big secret (oops, not anymore!)? According to sources, the show would center around the members of the service, which feels like a move to keep up with the other Web 2.0 wunderkinds over at Digg, who have their own shows.

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