Decision Time For Facebook: Term Sheets Received At $2 Billion Valuation
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People like Marc Andreesen claim that they could be profitable in a second. If this is true, why would the company be trying to raise more VC and dilute everyone's holdings?
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There is definitely value that's being squandered as time goes on. Putting the lipstick on the pig and dumping it before time runs out might not be such a bad idea as they seem to think.
Yahoo was willing to pay at least 1.5-1.6 billion two years ago. If they are really burning through $20 million/month, they've not gained very much by waiting.
Compared to almost any other investment over the past two years, a gain of 25-30% is a lot.
(Since the rumored YHOO $1.6B offer: GOOG -21%, MSFT -35%, YHOO -45% -- while Facebook is +15% or more, even with the dilution.)
Sure, they'd prefer $4B or $6B, but anyone who portrays a $2B term sheet now as creating regret they didn't combine with Yahoo (ha!) is missing the larger context.
Because they're concentrating on continued growth of their user base. But there's probably a valuation threshold that's well above $2 billion where they'd rather to go into revenue mode rather than take the money.
1. At what valuation would you invest in Facebook?
2. Why is your number so different from that of people who have a lot more information than you? Are you that much smarter?
People who are a lot smarter and had much better information than me thought that loaning $300,000 to a minimum wage immigrant (one anecdote among hundreds of thousands) was a highly profitable business, too. For eight of the last ten years they were looking pretty prescient now weren't they.
If that's all that you did then you'd be fine (everyone else is of course another story but business is business).
It may be "reasonable" to engage in fraud when the government is enabling it - but its not honest. Hopefully our country can come to a point in the future where being honest is viewed as the "reasonable" thing to do.
2) Like those people who invested in the bonds backed by subprime mortgages? Or the people who invested big in the first bubble? Or the people who are really just playing with other people's money? What makes the group of people who think Facebook is somehow worth billions smarter than those groups? Only time will tell. It's a big gamble on either A) Facebook monetizing their traffic to the tune of a few billion dollars or B) finding BIGGER suckers down the road to buy/merge/invest in/buy the stock of/etc... A is imho a big gamble, and B is imho both a gamble and a poor way to do business (not poor $ wise, but banking on big suckers seems unethical to me somehow). All of it is unattractive as a way for me to wager my money.
I also don't bet on boxing or horse races. Am I that much smarter than people who do? Hard to say.
2 - Do they have more information than us? They might have concrete operating costs, revenue, etc, but I'm convinced that many analysts haven't a clue how the internet works.
Historical perspective also works too: remember the last dotcom crash? Those companies were being valued in the billions by a large number of analysts who "know a lot more" than the average joe. Hell, kicking and screaming against ridiculously absurd valuations at the time was a minority voice.
1 - I wouldn't invest in a company unless it needs a road for profitability.
2 - I grew up on the internet and I have no clue how the internet works. I have no clue how advertising works, but I'm probably unique against normal people that advertising doesn't make me buy a single thing. (Anecdotal example: My reason for buying an Xbox 360 was because it can push 720p to a HDTV and was cheaper than a new PC. I was never told it could do this through advertising, I found it out myself.)
I understand how Real Estate works, how all functions of commerce and trade works. I just do not get advertising. Does Coke advertising make me buy it over Pepsi? No, Pepsi is too sweet. Do all the dozen adult-phone services make me call them? No, these didn't even work when I was twelve.
The only place I've noticed advertisements to ever work on me is for movies, however I regularly go to apple trailers so I generally see the advert before I see it on TV or in the Cinema, which negates the point of advertising; IE you can't make me buy something I'm already trying to buy. This, however, doesn't extend to the crap they used to put on VHS's and now DVD's, which I find offensive and disgusting. I pay $30 for a movie, I don't expect there to be 20 minutes of trailers, just like when I go to eat my cereal I don't want fifty advertisements for other cereals.
Two example priming studies:
Gladwell mentions the study of two Dutch researchers who had several groups of students each answer forty-two Trivial Pursuit questions. Half were asked to take five minutes to think about what it would mean to be a professor and write it down, while the other half were asked to do the same with soccer hooligan in place of professor. The students who thought about professors ended up getting 55.6 percent of the questions correct, while the soccer group got 42.6 percent correct.
and
In a separate study, when African-American students were asked to identify their race on a pre-test questioner, the simple act of checking the box next to African American was enough to prime them with negative cultural stereotypes associated with African Americans and academic achievement. The number of items they got right was cut in HALF. Malcolm Gladwell makes a strong point that priming is a powerful thing. Personally I think this has incredible implications in our society. If ‘smart’ is really just a frame of mind, these social cues (such as African American=less intelligent) are shaping not only the results of standardized tests, but the way we interact with each other in business and other professional fields.
How do you think priming effects your buying decisions? How about your research decisions when pondering a purchase? How do you think it effects jury trials?
Of course, you like to think you're above such manipulation-- so does everyone else.
When I was in comp sci tutes, I'd spend almost all my time helping other students. I got the very strong impression that my confidence was the crucial difference.
Although I did have much more prior experience (in a different language), and lots of evidence that I was smart, the way I helped them solve problems that they couldn't solve, was by looking - whereas they didn't look. My extra experience really only helped in the sense of knowing to look at all places for the bug (not just where you think it is). What operationally made the difference in practice, was the confidence to look.
Of course, this is not scientific: maybe I just knew more and was smarter. But my impression does fit with the scientific study you cite.
Priming has similar effects as hypnosis, and is increasingly believed to be linked. 1/3 of people react negatively to priming and hypnosis, something that is rarely mentioned. Hypnosis research has repeatedly shown that you cannot get someone to believe something they don't want to, or to do something they don't want to. There's a very nice scene in Mythbusters where a researcher clearly refuses a hypnotic suggestion, and then quickly comes out of the hypnosis. Earlier in the episode they tried it on one of the main cast members who knew they were being implanted with a suggestion (to slap someone or jump up and down, depending on the cue) and he broke out in a laughing fit.
Also if you want to see priming in the extreme, read about the Milgram Experiment and then about the Strip Search Prank Call Scam.
Also I know I'm one of the 1/3 who doesn't react to hypnosis. I'm unsure about hypnotic flooding, but its effects are less certain than normal hypnosis due to the fact that it perverts the results. Incidentally I'm one of the (about 10% of people) who react negatively to sleep meds, they wire me like the energizer bunny.
The true effects of priming are the country and state flags sat in the court rooms (this is especially bad in death-penalty cases as national pride usually ups the pro-death vote). What about seeing a guy accused of cop-killing being marched to the stand by two cops?
We have to be careful of the unconscious effects of priming we place all around ourselves, because the conscious use of priming in wide civilization will likely have the opposite effect of what we desire.
> Of course, you like to think you're above such manipulation-- so does everyone else.
I do, as you say everyone does. It's just a mere fact that 1/3 of people are. So you, me and a random person means one of us is above such manipulation.
> Priming has similar effects as hypnosis, and is increasingly believed to be linked.
I don't know if there is any link between priming and susceptibility to hypnosis (do you have a source for that?). Even if there is, it certainly isn't a solid enough link to say that people who are resistant to hypnosis are always immune to priming. I have a degree in psychology-- but it's admittedly dated.
> We have to be careful of the unconscious effects of priming we place all around ourselves, because the conscious use of priming in wide civilization will likely have the opposite effect of what we desire.
Well, the REST of us do. You don't, due to your special mind powers. ;-)
What do you mean "how the internet works"?
IMO, companies that are experiencing huge growth are better off reinvesting all of their income into the business even if it makes it look like they are not profitable. Granted at some point dumping more money into the company is not going to help growth but maximize growth and then cut costs is a reasonable approach.
PS: When you see Facebook cut 5k jobs expect great things on next years balance sheet.
Hardware is usually not a significant data center cost, at least not in relationship to the power/cooling/floorspace costs. Wholesale bandwidth has dropped over the last several years from about $100/Mb/Mo to $35/Mb/Mo. I don't know how much lower that can reasonably go. But, let's say it becomes 1/3 the price again (down to $10/Mb/Mo) over the NEXT 5 years. That's a long time to wait when you're losing $20MM/Mo (using the speculative numbers quoted elsewhere for that). And the net cost savings probably don't yield more than a few $MM/mo.
Anyway, I think they are basically treading water and not just burning 20mill / month at this point in time. So their revenue is 300 million / year and there costs are close to that. Most of there money seems to be spent on infrastructure and people to support said infrastructure. So, if the cost of their infrastructure drops to 1/3 then their total costs should drop by ~1/2 as they still need people, and they would be making ~10million a month which is worth around 1 billion. However, I expect they can increase their revenue though optimizations and growth so they are probably worth in the 2 - 10 billion dollar range.
PS: Would need to look at their actual costs to get a better Idea.
#2: The biggest reason here is likely because I am thinking about it in terms of MY money. Most VCs are working with somebody elses money, and I think this can affect a persons judgement and cause them to take chances they wouldn't ordinarily take.
I would invest $0 of my money in FaceBook. But, I'd gladly invest $10M of YOUR money. And I could talk it up in a manner that made you think I was doing you a great favor. If I turn out to be right, then I look like a visionary. If I turn out to be wrong then we were both fooled by them, or snookered by the economy, etc.
More information does not always enable you to make better decisions...
Apply your same reasoning to pets.com in 1999 and it does not fare very well.
Does facebook have value, yeah I think so. Does it have an intrinsic value in the billions? I think skepticism is warranted.
Oh, come on. I'd put down 50K for 51 percent of the whole. How's that? Obviously, a one-sided bid is pointless.
2. Because there are some people that are willing to wager their money on a 1% chance that their money will become 10x larger. It's a terrible bet, but people make it all the time. I mean, if you are investing in Facebook at $15B, really someone has to buy it for a lot more than $15B for it to have been worth the risk and I don't see Facebook selling in the $50-$100B range. The fact is that Facebook is a much riskier investment than a company that has already been in the black. It could potentially just flop as a business. Google might not become as profitable as you expect, but it isn't just going to flop. So, Facebook is this really risky investment that can never sell high enough to justify the valuations they seek. At best, Facebook continues along nicely and makes some money. They aren't the next Google.
Seriously, what are the odds that Facebook is going to sell for a lot of money? If you place it at 50%, then you really need to be thinking it will sell for $30B to justify buying in at a $15B valuation. If you place it at 25%, you really need to think it will sell for $60B eventually. And how likely do you think that is?
Facebook is more like a YouTube than it is like a Google and what Facebook wants its valuation to be just can't be justified by what it has going for it. Companies will buy popular things just because they're popular in the sub $1B range - sometimes even slightly over that in the YouTube case. But they won't spend the $30B that would justify a buyout to the VC who have invested at a $15B valuation. I mean, those VCs don't just want to break even on their investment. Unless Facebook can find a way to be profitable - and hugely profitable - it just won't be bought for such a substantial amount. A $30B buy would put Facebook at a third of a Google and it just isn't that.
"As an interesting side note, Providence was heavily involved in the $15 billion round, and submitted a term sheet in the $10 billion range or higher at that time. The big rumor is that Facebook convinced Microsoft that the competition was Google, not a private equity firm, and it helped close the deal at a much higher rate."
(I'm equally stumped by Google's wealth too, though.)
For one thing, Facebook is clearly not a chat platform, nor is it a venue for in-depth discussion (try doing it sometime, the limitations become apparent).
It's a way for you to keep tabs on friends in a passive way without engagement - which is something that I think will only increase in the coming years, for better or for worse.
Where you only had time for a close circle of friends before, and knew essentially nothing about your many brief acquaintances, now you can keep a much better track of your social network without nearly as much effort. Your old coworker John? He's at Google now, and you didn't even need to email him to find out - in fact, you didn't have to ask anyone at all. It allows what used to be your "peripheral" social network to play a larger role in your life than it used to. Think of it as a tool to improve your general social "situational awareness".
[edit] Another strength of Facebook is that you don't have to participate to derive value. I don't post status updates to Facebook very much, but I enjoy keeping up with friends who do. They're in a unique situation where a small group of hardcore users can keep perhaps an order of magnitude more casual users coming back for more.
That does sound like an apt way to sum up what Facebook promises. I'm not sure
a) that's worth much money to me, even if the money is extracted from me by responding to advertisements once in a while,
and
b) whether another company couldn't provide that functionality less expensively and less annoyingly and thus have a way to beat Facebook in the marketplace.
The paradox is that I am therefore more likely to find a stranger interesting than an acquaintance, especially a self-selected group of strangers. I think that is why you prefer HN to your facebook buddies.
How many businesses have failed that staked their entire existence on "we'll get tons of users... and show ads!"?
800,000,000 * .1 = 80,000,000
For most smaller scale websites, they are valued at 12-18 months of revenue, meaning Facebook's resale value at about 1,440,000,000.
2 billion isn't that far off the mark given the user base really.
I can bet you that a Facebook user eats up a lot more than 10 cents a month in storage, bandwidth, CPU usage, etc.
The problem with Facebook is that they've targeted a notoriously cheap demographic - one that is both culturally and financially opposed to paying for stuff. The only successful ads I've seen on my Facebook network is for things like college movers and maybe media promotions... You can't tap into the goldmine of actually valuable ads like, say, car sales or law services.
FB perhaps needs to find ways to upload more of the personal activities and data in order to make ads more accurately targeted.
They definitely offer a valuable service to millions of people but it seems that social networks are not allowed to charge their users. It's definitely taboo and would be criticized to no end. I can see my news stream filled with "Soandso joined the group 'Paying for Facebook? WTF?'".
I'm sure that, for many people, Facebook feels trivial to do even though they put in place a very reliable and fast infrastructure that handles a ridiculous amount of data.
Facebook is worth a large amount because of their scale. If they find a way to monetize it well, they too will make lots of money. That's a big "if" at the moment though, which is why they aren't worth what Google is, despite the fact that on a pageview basis they may one day be an order of magnitude larger.
Based on the scraps of rumors flying around, I suspect tat if they put their heads down for a year & tried to push down costs & revenues up they'd get somewhere.
The company probably could be a profitable one. The question is how big it will be. Again from rumors, they now take in the 1/4b - $1/2b per year. Lets give them the benefit of a doubt & assume they can get to the bigger number and hold costs down so that the have make 10% profits. Let's also assume they're a growing company. No reason they shouldn't b.
Revenues would probably continue to grow as (a) Advertisers will learn how to use Facebook properly. It will become more valuable to them & competition will drive the price up. Remember that early on most Adwords ads were snake oil salesmen paying 10c per click (b) Facebok improve the advertising platform.
What is a company like that worth? I think less than $15bn. Maybe less than 4. At least everyone will stop talking about how much runway they have.
I don't now nothin' about anti-dilution provisions or expectations investors have for all that capital. But I look at it this way: There is a viable business in there somewhere. maybe not one worth $15bn. But probably one worth more than $375m (the amount of investment they have taken). So
I know. I know. I'm not accounting for risk. Previous valuation. I'm not accounting for the founders & early stage investors getting very rich. But where is the rule that the founder of a $2bn company gets to keep half or a quarter of that? If it takes some founders, $375, some risk & some luck to make a $2bn company, it should get built.
As for facebook - I think there's value. Lets compare it to an Australian TV Station. We've got 3 commercial stations - who have a max viewer base of 21 million viewers. Facebook has 7 or 8 times that many users, which are much much more targeted/segmented (which should be valuable for advertisers) and is still growing. I'd also hazard a guess that there are a number of young/disposable income types who spend a lot more time on facebook than they do watching TV. They've created value for their users - and probably for their advertisers, but I don't think the advertisers see that yet.
My contrast was to TV - when I'm watching TV I'm there to watch a show - (superbowl maybe an exception) - and the ads are an interruption. I can't see how that is much better than advertising on FB - aside from the fact it's been around longer. FB also knows more about me (at least it should - I'm always amused getting ads for dating sites when my profile is kinda clear that I'm married).
To go to your bar example - that depends on how it's done. I've bought beer mugs from a bar/brewery before - I saw the sign that they were for sale. I then had to take an action (click the link) and go to the counter and buy them. Or in terms of taxis - the rank could be there as you go in/out of the bar - perhaps even signs / posters / bar mats / coasters / etc. At the end of the night when I need a cab - then I can act on the info I've been looking at. Now if the cab driver came up to me while talking to my friends and tried to get me into his cab - that's a different story. But branding and well targeted service offerings - that's definitely valuable. And facebook should know that I want to go to the next Living End show in Melbourne, and I want to buy the next Wheel of Time book, and I'm likely to want to go see the next Harry Potter movie. The TV station doesn't know that - and so might show me useless ads for VB or the new Zac Efron movie...
For the record, I don't see any way that Facebook is worth even $1B. Feel free to mock me in 10 years.
Microsoft will probably end up buying them for "free" in 2-3 years.