I remember how excited average investors were at the prospect of a new way of going public when Google announced its innovative auction IPO. "Finally, Wall Street banks wouldn't be able to crowd to the front of the line!" Their public auction, their "don't be evil", and their continued use of their power for good -- like their trick to get openness principles adopted during the wireless spectrum auction -- all exemplified a company thinking and acting like a good corporate citizen at all levels.
Contrast this to FB. They are actually cozying up to Wall Street rather than eschewing them. "Don't be evil" was replaced with a series of privacy gaffes, a flurry of lawsuits surrounding the company's founding, and a CEO who has called early users dumb fucks. It's sad to see how Google's pioneering isn't being emulated by the next big tech company.
The behavior and culture of a company is often a direct reflection of the character of the people who founded it. Unfortunately, very few 24 year olds are mature enough to handle the responsibility and decisions that come with a large corporation - even though the corporation may be successful, other problems become evident. Take Etsy, for instance, another company founded by a 24 year old. While they have been successful overall, the company culture is atrocious. It's not just youth that is the problem, of course.
"And don't give me that crap about VCs being "early stage" and wanting to cash out of a "mature" investment. These people are as money hungry as any other institutional investor, and would let it ride unless….they saw something that suggested that the era of stupendous growth was over."
The author doesn't seem to understand how the venture asset class works.
Venture funds are owned by their limited partners (LPs), and typically have a fixed, 10-year life. After 10 years, the fund liquidates and the LPs (hopefully) get a nice return on their investment.
It's been 6.5 years since Facebook's first venture investments. If the investment vehicle was already 2-3 years old at that time, then they have to liquidate soon, even if the managing partners believe Facebook will continue to appreciate in value.
The author seems to think that anytime an investor wants to cash out, it's because they don't "believe" in the investment.
I remember when Goldman Sachs went public in 1999, only 12% of their shares went public. The remainder stayed with the partnership. I'm not sure (or able to quickly find) the current ownership, but it's certainly not ALL publicly traded.
So $50 billion would get you about one-fourteenth of Goldman. Not half.
Edit: grossly mis-remembered my facts. 511M shares include both stockholders and the shares of the former partners.
The only people what can make money on Facebook stock, is Chinese government officials. All they need to do, is to accumulate $FCBK stock and then allow Facebook.com to be used in China. Number of Facebook users will jump from 0.5B to 1.5B, same with the valuation from $50B to $150B ;)
This makes me wonder about net neutrality. If you had the jump on the announcement by a huge data carrier of site specific charging then wouldn't that give you a similar albeit smaller advantage?
"It's hard to see why, though: DST got in at a $10 billion valuation in May 2009. Facebook's user base has more than doubled since then. So its valuation should…quintuple?"
Good point, according to Metcalfe's Law [1], it should actually only have quadrupled.
Why is Mark so reticent to IPO? Because he loses control? Or because that means making the numbers public, and people will see just where the money is going. Either way, if the CEO doesn't want to go public and may be forced to, that is not good.
Bill Gates was another person who didn't want to do an IPO. He almost cancelled it a number of times during the process as he felt it would just be a distraction to actually getting real business done. Mark Zuckerberg could have similar concerns.
He's said (maybe at Davos?) that the main reason is because Facebook has a lot of stuff they want to launch that is high risk and might not be acceptable to see come from a public company. (For example, could you imagine what would have happened the stock when Beacon came out?)
He's only ever really had to answer to himself, right? From what I know of him, he probably likes that a lot more than having to answer to a bunch of shareholders.
One of the downsides of going public is that the customer base shifts---no longer are your customers the ones that buy/use your product, but your customers are the ones that buy your stock. And because of the legal requirement of increasing shareholder value, the company may be forced into short term profitability (make the numbers next quarter) instead of longer term long range profitability or stability.
It may simply be that he's heard from others who do run public companies how much it sucks. It dramatically changes how you run things, and you wouldn't want to be CEO of a public company. He knows that much at least.
There may be other reasons as you say, certainly having to deal with the scrutiny would not be fun, no matter how above board you may be (or likely not).
I don't use FB either (although I do have an account).
However, my kids use it all the time and it's a vital part of their social life. I can sort of understand the valuation of FB - the people who use it regularly really depend on it and in a way that is much stickier than things like Google search.
The only thing that I can see that might hurt FB is if it becomes too popular and there is a mass switch by the "cool" people to use some other service - given that it is based on socializing rather than hard features this could well happen. However, I don't see any risk of this at the moment.
The future of Facebook is not targeting you on 'a social network', its opening up an ad-sense competitor and targeting you on any website - with your personal information. The like and connect buttons are just the first step.
With that in mind it sounds like a good deal to me.
I was an early adopter of Facebook back in the day it was only open to a handful of school (VERY early 2004). It was nice and exciting and whatnot. But I've lost interest in it completely. I speculate that it's only newcomers that find it interesting. I now use FB only as a means of sending someone a quick note, getting invitations to events (a la evite -- remember that?), or maybe looking up a picture I was tagged in by a friend. If back in the day people put in their hobbies, activities, interests, and list of classes (yup, that was available. Great stalking tool...!), I find people's profiles completely empty.
Anybody with a different experience? Do you ACTUALLY use FB, or are you only drawn to it because of the reasons I outlined above?
Please note that I'm not hating on FB. They do what they do well. Just sharing my experience (and at this point, I will never ever be able to get a job at FB... ;-) ).
Yes. It probably helps that my family, and my wife's family, are all several thousand miles away and we just had our first child. We spend a lot of time on both FB and Skype, keeping everyone up to date.
GS has sustained its business over 140 years, consistently making a lot of money. (Also we recently found they are now, in effect, insured by the US government in a way FB can only dream of)
Reason #3 shows that the author does not understand even the basics of virtual goods and facebook platform monetization. The other points are nearly as non-sensical.
"Reason 2 : Goldman has likely earned the lead book runner slot in any initial public offering."
When Microsoft valued Facebook at 15 billion, it was the same thing : they paid 240 million for 1.6% of the company AND running ads on Facebook (while excluding Google) AND some other things we may not know.
But people just said 1.6% for 240 million = 15 billion without taking other parts of the deal into account.
Facebook is very similar to vmware. I expect it would follow a similar path in stock price. Currently vmware is trading at 140 p/e ratio. People are afraid to miss the next Google, Microsoft, etc.. SO they are willing to buy the latest trend. If facebook made $2 a year off 300M users they would have a market cap of 60B with a 100 P/E ratio.
> People are afraid to miss the next Google, Microsoft, etc
Yup, and they don't realize that it's not a winning strategy. Of course I would love to get in on the "ground floor" of the next Microsoft or Intel. Unfortunately it's like trying to get rich by buying enough lottery tickets. Sure one of them is going to be a big winner but the EV of your investment is negative.
> Let's just say for argument's sake that it is early stage investors who are selling. Why would they sell? Because they're in need of cash to invest somewhere else? The way the social network is talked about these days, it's the best investment opportunity in town. So why would anyone want to forsake it?
What a silly argument.
Diversification. Duh.
Even if you've got a hold of what you're certain is the biggest, bestest, most badass-est investment ever that's already gone up 20x, you'd do well to cash out a bit of it and spread that around. On the off chance something crazy happens, you're not up the creek.
I mean, that's not exactly revolutionary right? Diversify? If I owned Facebook equity now, I'd really happily cash some of it in and invest in something as uncorrelated to FB as I possibly could. Like, real estate in Bulgaria or something.
On Zynga: You think they're going to justify a $50 billion market capitalization through banner ads?
These games actually do really well, not from banner ads but from virtual currency. Now that FB is pushing devs to use FB credits, they should be in for a healthy cut of the action.
Games like Farmville are a fad, like Rubix cube and Cabbage Patch Kids. That's not to say that casual games won't continue to an important segment of gaming, just that they will not provide an income stream that justifies a 50 billion company valuation. If it wasn't for the fact that "the market can stay irrational longer than you can stay solvent", I would short a Facebook IPO in a heartbeat.
Facebook's core value is that (nearly) everyone is on it and it is considered to be "cool". The cool aspect will not last. I'd be amused to hear any arguments as to how it possibly can. Young people will move on to something else.
I also think it's very likely that their power as a centralized manager of personal contacts will be eroded over time. Really, it's not that hard of a problem and some other applications will end up being compelling enough for people to switch. They will try to prevent it (e.g. like trying to prevent GMail from exporting email addresses) but ultimately will fail.
The history of the Internet is filled with the corpses of technologies that were supposed to be "the future". Who remembers PointCast? How about Orkut? For a while RSS was touted as the solution to all of mankind's problems. ;-)
If these guys precipitate a bubble burst we should all hate them.
2011 is the year Facebook growth (users, hours, page views, pick one) plateaus, it is inevitable it will happen as some point, and this is very likely the year.
we shouldn't, really. I mean, they practically /made/ the bubble, and I think we've all profited from that, even those of us who don't work for google. Demand for webapp dudes (and infrastructure) is way up because of this bubble. Hell, my own biggest account does some kind of facebook app thing.
Nobody has mentioned acquisition. I think it is safe to say that MSFT would be interested in FB at 50B. 100B starts to look like real money and it is hard to know who would be interested...
[+] [-] nostromo|15 years ago|reply
Contrast this to FB. They are actually cozying up to Wall Street rather than eschewing them. "Don't be evil" was replaced with a series of privacy gaffes, a flurry of lawsuits surrounding the company's founding, and a CEO who has called early users dumb fucks. It's sad to see how Google's pioneering isn't being emulated by the next big tech company.
[+] [-] code_duck|15 years ago|reply
[+] [-] portman|15 years ago|reply
The author doesn't seem to understand how the venture asset class works.
Venture funds are owned by their limited partners (LPs), and typically have a fixed, 10-year life. After 10 years, the fund liquidates and the LPs (hopefully) get a nice return on their investment.
It's been 6.5 years since Facebook's first venture investments. If the investment vehicle was already 2-3 years old at that time, then they have to liquidate soon, even if the managing partners believe Facebook will continue to appreciate in value.
The author seems to think that anytime an investor wants to cash out, it's because they don't "believe" in the investment.
[+] [-] rogupta|15 years ago|reply
That said, it's not the return multiple that matters for VCs, it's the IRR (i.e. time is a factor).
[+] [-] aston|15 years ago|reply
http://venturebeat.com/2010/11/19/facebook-accel-34-billion/
[+] [-] mootothemax|15 years ago|reply
It's a fair point: if you had $50 billion lying around the place, which of the two would you choose to invest in?
[+] [-] polynomial|15 years ago|reply
[+] [-] portman|15 years ago|reply
So $50 billion would get you about one-fourteenth of Goldman. Not half.
Edit: grossly mis-remembered my facts. 511M shares include both stockholders and the shares of the former partners.
[+] [-] nivertech|15 years ago|reply
[+] [-] garply|15 years ago|reply
[+] [-] pbhjpbhj|15 years ago|reply
[+] [-] frederickcook|15 years ago|reply
Good point, according to Metcalfe's Law [1], it should actually only have quadrupled.
[1] http://en.wikipedia.org/wiki/Metcalfes_law
[+] [-] InclinedPlane|15 years ago|reply
Just let that sink in for a while.
[+] [-] roadnottaken|15 years ago|reply
[+] [-] Swannie|15 years ago|reply
I don't have $2mil lying around.
Another one;
Why is Mark so reticent to IPO? Because he loses control? Or because that means making the numbers public, and people will see just where the money is going. Either way, if the CEO doesn't want to go public and may be forced to, that is not good.
[+] [-] SteveC|15 years ago|reply
[+] [-] gfodor|15 years ago|reply
[+] [-] sliverstorm|15 years ago|reply
[+] [-] spc476|15 years ago|reply
[+] [-] cincinnatus|15 years ago|reply
There may be other reasons as you say, certainly having to deal with the scrutiny would not be fun, no matter how above board you may be (or likely not).
[+] [-] mjuhl24|15 years ago|reply
In any case, I think it will be quite interesting to see just how much revenue facebook is generating from it's various sources.
[+] [-] Loic|15 years ago|reply
For me, FB is the future Second Life. Making money now and hyped, but at the end, it will just be a simple good business, but not a stratospheric one.
[+] [-] arethuza|15 years ago|reply
However, my kids use it all the time and it's a vital part of their social life. I can sort of understand the valuation of FB - the people who use it regularly really depend on it and in a way that is much stickier than things like Google search.
The only thing that I can see that might hurt FB is if it becomes too popular and there is a mass switch by the "cool" people to use some other service - given that it is based on socializing rather than hard features this could well happen. However, I don't see any risk of this at the moment.
[+] [-] nhangen|15 years ago|reply
He ruined a perfectly objective point with this subjective generalization.
That being said, I'm with him for on most points, and I agree on the bigger picture.
[+] [-] matthewcford|15 years ago|reply
With that in mind it sounds like a good deal to me.
[+] [-] draz|15 years ago|reply
[+] [-] abstractbill|15 years ago|reply
Yes. It probably helps that my family, and my wife's family, are all several thousand miles away and we just had our first child. We spend a lot of time on both FB and Skype, keeping everyone up to date.
[+] [-] kia|15 years ago|reply
GS was founded in 1869; Facebook in 2004.
[+] [-] nir|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] far33d|15 years ago|reply
[+] [-] chailatte|15 years ago|reply
[+] [-] patd|15 years ago|reply
When Microsoft valued Facebook at 15 billion, it was the same thing : they paid 240 million for 1.6% of the company AND running ads on Facebook (while excluding Google) AND some other things we may not know.
But people just said 1.6% for 240 million = 15 billion without taking other parts of the deal into account.
[+] [-] palewery|15 years ago|reply
[+] [-] nas|15 years ago|reply
Yup, and they don't realize that it's not a winning strategy. Of course I would love to get in on the "ground floor" of the next Microsoft or Intel. Unfortunately it's like trying to get rich by buying enough lottery tickets. Sure one of them is going to be a big winner but the EV of your investment is negative.
[+] [-] lionhearted|15 years ago|reply
What a silly argument.
Diversification. Duh.
Even if you've got a hold of what you're certain is the biggest, bestest, most badass-est investment ever that's already gone up 20x, you'd do well to cash out a bit of it and spread that around. On the off chance something crazy happens, you're not up the creek.
I mean, that's not exactly revolutionary right? Diversify? If I owned Facebook equity now, I'd really happily cash some of it in and invest in something as uncorrelated to FB as I possibly could. Like, real estate in Bulgaria or something.
[+] [-] bemmu|15 years ago|reply
These games actually do really well, not from banner ads but from virtual currency. Now that FB is pushing devs to use FB credits, they should be in for a healthy cut of the action.
[+] [-] nas|15 years ago|reply
Facebook's core value is that (nearly) everyone is on it and it is considered to be "cool". The cool aspect will not last. I'd be amused to hear any arguments as to how it possibly can. Young people will move on to something else.
I also think it's very likely that their power as a centralized manager of personal contacts will be eroded over time. Really, it's not that hard of a problem and some other applications will end up being compelling enough for people to switch. They will try to prevent it (e.g. like trying to prevent GMail from exporting email addresses) but ultimately will fail.
The history of the Internet is filled with the corpses of technologies that were supposed to be "the future". Who remembers PointCast? How about Orkut? For a while RSS was touted as the solution to all of mankind's problems. ;-)
[+] [-] cincinnatus|15 years ago|reply
2011 is the year Facebook growth (users, hours, page views, pick one) plateaus, it is inevitable it will happen as some point, and this is very likely the year.
[+] [-] lsc|15 years ago|reply
[+] [-] tpatke|15 years ago|reply
[+] [-] kylelibra|15 years ago|reply
I don't have the $10 million required by Goldman Sachs to be involved.
[+] [-] malloreon|15 years ago|reply
Answer: monetizing friendships
[+] [-] cincinnatus|15 years ago|reply