Peter Thiel’s initial claim to fame was as the CEO of Paypal.
Today he runs Clarium Capital Management and the Founders’ Fund. The former is a hedge fund with $2B under management, the latter is a $50M venture capital fund that has raised the ire of uber angel investor Ron Conway, mainly for allowing entrepreneurs to partially cash out when they sell equity to VCs in funding rounds.
Paypal was included in our 13 Explosive Web Startups of All-Time. The merged company went on to be acquired by eBay for $1.5B, placing in our Top 10 Web M&A of All Time.
As President of Paypal, Thiel made a lot of money by most Americans’ standads, but a paltry sum by Silicon Valley standards: his 3.7% stake in Paypal converted to a $55M payoff. Paypal was the product of a merger between Elon Musk’s X.com and Thiel and co-founder Max Levchin’s Confinity.
Paypal: What Could Have Been?
Today Paypal drives a lot of value at eBay each quarter, as outlined in this Bank of Paypal article in Business Week. Had Paypal not sold to eBay, eBay could have squeezed Paypal’s revenues by shutting it out of the largest auction service’s community. On the one hand, Thiel saw what a successful merger could do to grow his baby, on the other hand, he knows just how much larger and more valuable Paypal could have been. One day, after all, Paypal might generate over 50% of eBay’s revenues.
The Man with the Midas Touch?
Thiel of course, is also known for being one of Facebook’s initial investors, having funded Facebook with $500,000 in 2004. Facebook is this year’s MySpace. In addition to Facebook, he has also invested in LinkedIn, Friendster, Rapleaf, and IronPort. Of course, Facebook is the one horse that Thiel is most happy to have bet on.
Peter Thiel’s Stake in Facebook?
While everyone is wondering just how rich Facebook will make Mark Zuckerberg, it’s interesting to see just how successful Facebook.com might make Thiel. Thiel’s LinkedIn is also slated to go public next year, but it is Facebook.com that has captured the imagination of Silicon Valley and the bankers that monetize the startups that Thiel and his cohorts finance.
Like many angel investments, Thiel’s $500,000 capital might have come in the form of a convertible note from Facebook.com, whereby he did not dilute in the first VC round of funding, but one that got him anywhere from 5 to 10% of the company. More on this below.
Who are Facebook’s Investors?
Facebook seems to boast as many investors as it does founders, though not as many as would require it to file for an IPO, something that happened to Google.
It’s very common to see different investors have different goals for a company they have invested in. A VC wants to maximize return, they don’t want a 25% or 100% return, they want 10x their money back.
According to BusinessWeek.com, “Facebook’s first round came in at a $100M valuation, its second was a $500M valuation”. Since you can’t trust everything in a traditional media’s publication (in my experience: the more established a media, the less effort they seem to put in to ensure all the facts are 100% accurate), I’m going to add a note that BW is referring to funding rounds by VCs, and not indivuals’ angel round.
After all, according to Wikipedia, the $100M round led by Accel Partners was done in May 2005 when they raised $12.7M. This was supposedly the first VC funding round, but second in all, since Peter Thiel had invested $500,000 in late 2004.
By March 2006, Business Week reported that Facebook turned down a $750M buyout offer from Viacom, which at the most recent funding valuation was for 7.5x return.
Later that year, in April, 2006, Peter Thiel, Greylock Partners, and Meritech Capital Partners invested an additional $25 million in the site for a reported $500M valuation. So this was in fact the second VC funding round, which Thiel participated in as well. My theory is that he was not diluted in the first VC Round of 2005 but would have been in 2006’s second VC round.
Timeline of Buyout Offers to Acquire Facebook.com
It was throughout 2006, too, that Yahoo!’s $1B and $1.62B buyout offers came in, as well as the less-reported $2.3B buyout offer from Google (source being Jason Lee Miller on WebProNews).
As you can see, the $1B and $1.6B buyout offers represent a 10x and 16x return for Accel Partners, but far less for Greylock and Meritech (2x and 3x, respectively). I don’t think that either Greylock and Meritech had the same leverage and rights as did Accel Partners… in other words, had Accel wanted to cash out, they probably would have forced Meritech and Greylock to accept the deal.
But, even at the alleged $2.3B price tag that Google supposedly threw out, this represents a 23x return for Accel but a far less interesting 4-5x for Meritech and Greylock.
Then again, the relative multiple is one thing, the absolute return in dollars is a different story. As a side note, this is what makes Private Equity an altogether different beast: they invest in less deals but the numbers are much larger, meaning that a hit drives substantial dollars back into the coffers.
Thiel’s Stake in Facebook is Worth Hundreds of Millions
Back to Thiel, say the initial angel funding was for at most a valuation of $10M (I’d suspect maybe even as low as $5M), then Thiel had until VC Round 1 a 5-10% stake in the company. That might have gotten diluted, it might have not, depending on the structure of the deal, until Round 3 (or VC Round 2), where Thiel probably maintained his stake.
In other words, Thiel has far more to gain as an early angel investor than Accel, Meritech and Greylock do.
Because a 5-10% stake in Facebook, which could command by our analysis anywhere from $3.3B to $6B in a sale could translate to $165M to $600M to him individually.
Thiel’s Mammoth Ambition
These are big numbers, for sure, but since Thiel made millions in Paypal’s sale, can we blame him for wanting to strike a billion dollars in the Facebook deal? If Thiel owns 10% of the company, this means that a $10B sale would earn him $1B. If he owns 5% of the company, a $20B would get him there. Obviously, despite all of the buzz, hype and flash surrounding Facebook, no one thinks that Facebook could command anything north of $10B (yearly revenues are at $100M, after all)… that is why I would guesstimate that Thiel probably owns 10% of Facebook.
I don’t even think that if a sale were to be entertained, it need to go above $6B, mainly because few bidders could afford it. I’m not even comfortable to state on record that Facebook is worth more than a $1B, but I think that in an auction, many bidders could afford to pay $1B, so it can rise to $2 or $3B before the price tag gets too rich and the would-be bidders disappear. And, as I’ve stated, if Mark Zuckerberg does own 30% of Facebook, then a $3.3B would yield him a $1B payoff, an offer and payout that would make it very hard to resist.
Facebook’s Capital Structure?
We’ve read in numerous places that Zuckerberg owns 30%. According to Facebook’s PR rep Brandee Barker, Facebook’s other co-founders are Chris Hughes and Dustin Moskowitz. This is a crapshoot because not all co-founders are created equally, but I’ll estimate that Hughes and Moskowitz own anywhere from 7.5% to 15% each. So for the sake of this analysis, let’s just assume that co-founders Hughes and Moskowitz own 10% each, or 20% in all.
So according to this, the three co-founders own 50%. Bear in mind this seems very high for a startup with $35M in funding, but:
1 - It would not really make sense for Zuckerberg to have 30% now and the other two have far less, if they were in fact co-founders (At the very least, they would have 5% each… or 10% in all).
2 - When your first and second rounds of institutional funding come in at $100M and $500M, you better hope the founders managed to retain lots of equity.
We’ve outlined above why we think that Thiel owns 10%. Right there, that’s 60%.
Accel invested $14.7M at a valuation of $100M. Depending on whether this was pre- or post- money, let’s just assume this gave Accel a roughly 15% stake in Facebook.com. So, we’re now at 75%.
Greylock and Meritech and Thiel invested $25M at a valuation of $500M, so that gave them 5% in all. Assume then that Greylock and Meritech own 2% each (that seems low but by then, at a $500M valuation, what can you expect?) and the other 1% went to Thiel who also invested in that $25M round for a valuation of $500M to maintain his stake. In other words, and this is purely speculative, we project that Thiel invested $5M of that $25M to maintain a 10% stake, alongside Greylock and Meritech who invested $10M each for a 2% stake. Accel did not invest, and probably diluted, but to avoid numerous scenarios we’ll leave them at the approximate 15% stake.
In all, that makes the shareholding as follows:
Note that Facebook.com just recently made its first acquisition, for Parakee, and everyone presumed it was a stock and cash deal… so that would fall under the 21%.
If those percentages are correct, then a sale from anywhere from $1B to $10B would yield the following windfalls:
If this breakdown is correct, you start to see why the amount it takes to please investors is widely different, and a potential stale mate might materialize, with Zuckerberg and Thiel holding out for the insane offer whereas Accel would want something reasonable to liquidate its holding. Greylock and Meritech, I would presume, are just happy to be part of the ride.
Last week, I was interviewed extensively (but not credited, quoted or anything, mind you) for an article by David Shabelman in TheDeal.com named “Facebook to remain swinging single”.
After reading it, you walk away with a feeling that Thiel is aiming for the parking lot across the fence, and not just the fence. Here’s why:
If these numbers are close to being accurate, the higher the purchase price, indeed Accel makes more money than Thiel, but in absolute terms, Thiel’s payoff relative to Accel’s payoff becomes a rounding error (well, sort of anyway). Of course, Zuckerberg stands to make more than anyone else, and good for him… but at these levels, the urge for Thiel and Zuckerberg to hold out for a massive grand slam might cause a rift between them and Accel, Meritech and Greylock. Note that Thiel bills his VC as the founder’s fund, so there is merit in anticipating a showdown down the road when the buyout offers range from $1 to $5B.
In fact, in TheDeal.com article, Thiel shed some light on what his expectations in a deal would be:
There’s a fairly simple explanation for why Facebook Inc. is not for sale and won’t likely be acquired anytime soon - there is a big gap between what the company and what potential buyers think the social-networking Web site is worth.
That’s the view of Peter Thiel, a Facebook director who invested $500,000 in the Palo Alto, Calif.-based company’s
In an interview, Thiel said despite having serious talks with Sunnyvale, Calif.-based Yahoo! Inc. about an acquisition during the past year, the company has better things to do than listen to low offers from potential acquirers.
“We’re so far apart with what we think it’s worth and what other people do it doesn’t make sense for us to have conversations,” Thiel said. “Either they’re underestimating it or we’re overestimating it, but given that disconnect, it would be a complete waste of time for the company to be talking with people.”
In other words, while Facebook has been a popular subject of takeover speculation, Thiel estimates it would command a price tag between $7 billion and $10 billion. The market, on the other hand, values the company closer to $3 billion, he admitted to TheDeal.com. One of the problems, frankly, is that while it generates $150M in revenues, about 50% come from one deal from MSFT. MSFT, it should be noted, is the one company that can pay it what its investors might want. Problem? MSFT has an inside peek inside Facebook’s kimono and if the ad returns don’t justify a mammoth price tag, it won’t offer anything getting close to the $6B I think it will take to outbid everyone else, let alone the $7 to $10B Thiel feels Facebook is worth.
Bear in mind, too, that some of the strengths Facebook has can very quickly turn into weaknesses:
“We have an extremely rich amount of data about our users, so we believe there will be some way to monetize it better than what people have done in the past,” he said.
A week ago, that sounded great. But in light of the government’s reaction to Google’s purchase of Doubleclick over privacy concernes, and IAC’s Ask.com’s move to delete user’s search histories, Facebook’s investors should weigh all of the pros and cons of not cashing out now because the Web climate changed quickly, and with little warning.
“If we have a fully developed revenue model, it would be much easier to value, and we would see if it made sense as a standalone business or with something larger,” he said. “But we’re very, very far from that point.”
As we highlighted in Memo to Facebook’s Sales Team, much the same way that Google looked beyond Yahoo! dominance in CPM-priced banner display ads to master CPC-priced text ads, Facebook can look at maximizing its Database of Connections to fine-tune referrals and recommendations and champion CPA-style ads. Then again, there are a million things that can go wrong with that theory, too. Then again, if I was Facebook’s Chief Revenue Officer, I’d recommend something very very different to hit $10B in revenues by 2014 (ten years after being founded, the time it took Google to hit $10B in revenues).
Of course, it helps that Thiel is patient:
Thiel said the “earliest” Facebook would go public is 2009, “and hopefully not until significantly after that.” One route could be to emulate Mountain View, Calif.-based Google Inc. and go to the public markets after its business is well established.
If anything, this shows that Facebook has little foresight into Facebook’s potential billion dollar revenue stream, because 2008 seemed to be the year that many expected Facebook to make a move (related: Facebook’s 2008 to do list: File for an IPO). But, like my old employer IGN did, the company can file only to put the interested parties on its timeline:
“I think the preference we have would to do neither - to neither take the company public or sell it,” he said.
If it were to consider a sale, it would take a large number to get the company’s attention, Thiel said.
“If we got an offer from someone for $10 billion, we probably would listen to them,” he said. “I don’t think we’re going to get that offer, and we’re not going to solicit it.”
Ultimately, Facebook is providing great fodder for pundits and analysts alike, and time will tell if it will end up becoming this cycle’s Friendster, MySpace or Google.
Do you think that seeing Paypal’s success after its sale make Thiel more or less willing to sell Facebook to see someone else ride into the sunset with all of the riches? Time will tell, indeed…
- Facebook’s Valuation? $3.3B to $6B.
- Facebook’s Valuation is Maximized If and Only If…
- Why Facebook’s VCs will Fund Facebook App Developers
- Facebook’s Mark Zuckerberg’s Entrepreneurial Dilemma
- Memo to Facebook’s Sales Team
- Facebook: IPO vs. M&A.
- Facebook’s 2008 to do list: File for an IPO.
- Should MSFT Turn its Attention to Facebook?
- Peter Thiel: Facebook is Worth $8B (by 2015).
- Murdoch: “MySpace worth $6B”, if so, then break up FIM!
- Facebook to be worth $2.35B by 2010.
To estimate how much a company is worth, you can look at:
1- comparables amongst publicly traded companies
2- recent merger and acquisition deals
3- estimate its future earning power, discounted to today
4- forecast what an asset would fetch in an auction or sale, be it in an M&A or an IPO.
Dave Winer yesterday asked how much is Facebook worth but did not answer the question. We’ll attempt to do that.
Clearly when it comes to guesstimating Facebook’s market value, it’s not that clear, or easy. But ultimately, the only thing that matters is “Is Facebook for sale now?”
Facebook will ultimately be sold, either to the public capital market or to another company. Let’s hold off in the IPO route and see what we can derive in each one of those methods:
1- comparables amongst publicly traded companies
There are not any real publicly traded social networking sites, so we’ll simply look at the leaders online: GOOG and YHOO are pure play web companies. GOOG trades at a Price/Sales of 14, YHOO at a P/S of 6. Their average is 10, so if according to Facebook investor Jim Breyer of Accel Partners Facebook makes $100M in revenues, that means Facebook is worth $1B. We won’t apply a liquidity discount in this case, because Facebook is no startup, even though its revenue diversification and pipeline might suggest that it is.
2- recent merger and acquisition deals
Recent high profile deals on the Web such as aQuantive and Doubleclick have fetched as much as 30 times revenue. Using that metric, Facebook is now worth $3B. Of course, comparing a social network with abysmal click through rates (CTR) with an online advertising media services and software company respectively is a crime. Yes, Facebook is growing rapidly, but its monetization - or lack thereof - implies that using a 30 times P/S multiple is a dangerous thing to do for an acquirer.
The only other M&A comparable, obviously, is MySpace. MySpace was owned by Intermix, who got $580M by News Corp. For simplicity, we’ll project the entire value of Intermix onto MySpace (we don’t think News Corp. would have bought Intermix otherwise, in other words).
At the purchase date, MySpace had 22M members and 15M uniques per month, today two years later it has 100M members and 70M uniques and is larger than Facebook. I’ve said that in 2008 Facebook’s growth suggests it will be larger than News Corp.’s MySpace, but that’s just me running wild in Excel.
Today MySpace can claim to have a valuation of $5 to $10B. The former is a fair, arms’ length valuation by many, the latter is Rupert Murdoch trying to heist 25% of Yahoo!
The point is, MySpace is larger, it’s part of an established media empire now, so just because one thinks that Facebook is a more attractive dame does not make it a more valuable enterprise. Since being acquired, MySpace has tripled in size, YouTube’s been acquired for $1.65B (providing an additional recent M&A comparable), so it’s easy to argue that MySpace is arguably worth $2-3B. Is it worth $5B? $10B? I’d say no, but seeing it become the largest site online when measured by pageviews at least gives Mr. Murdoch’s argument that it’s worth a lot plausible. Of course, just last year, he said MySpace was worth $6B, yet one month ago when trying to parlay his asset into a 25% share of Yahoo! implied a $10B valuation. I’d say Mr. Murdoch was showing his usual brazen dealmaking style and not accurately reflecting MySpace’s value.
The point we’re trying to make is that if YouTube fetched $1.65B last year and MySpace has tripled and is in the $2-3B range at most, then by this formula Facebook cannot possibly be worth more than $2B. For what it’s worth, Yahoo! offered $1.62B as late as October 2006.
3- estimate its future earning power, discounted to today.
The discounted cash flow model (DCM) is a theoretical formula that looks at constant growth companies’ future earning power to derive a present value. Of course, Facebook - whose unique audience grew from 21.8% from April 2007 to May 2007 - is anything but constant growth.
But that’s in audience. Its revenues, while growing, are not necessarily sustainable. I’ve covered that in points 3 and 4 of Facebook’s To do List in 2008: IPO. Briefly: MSFT is paying it an annual fee and I doubt it is seeing a positive return on its investment. Translation: no guarantee MSFT would renew, and sure, maybe Google would come in its place, but after agreeing to pay $900M over 45 months for MySpace (where I argued it might have overpaid) I wonder if lightning would strike twice for social networking plays striking it reach via Google.
A note on what could make Facebook money
Of course, it is plausible to argue that Facebook’s holy grail will come not in display banners or text links but something else.
Naturally, as we slide down the spectrum from CPM to CPC, one asks: will Facebook become the CPA king.
Briefly, CPA stands for cost per action, or sale, whereby the publisher gets a cut of a transaction when a user clicks through and purchases a good or service from a merchant or advertiser. For a complete look at web advertising definitions and terminology click here.
The argument for Facebook and the CPA brass ring theory is that if Facebook is the database of connections, then we would value one another’s recommendations and this would lead to a lot of transactional commerce whereby Facebook could, through sheer numbers and volume, make billions of dollars.
Maybe. Maybe not. It’s all a big theory right now. The problem here is, when people are urging others to add them as friends and what not, I don’t think one puts a lot of weight on the recommendations people make. For the record, I’m not criticizing the people who do that, we’re in high school again, I guess, but it does make the value of “connections and relationships” built in such a way go down the drain, quickly. Similarly, the value of any recommendations for products and services do steadfastly.
If suddenly people on Facebook have an incentive (think Ad Sense for Publishers but tweaked to pay out a portion of Facebook’s bounty to its users) then we start to recommend things we don’t actually like. This happened when publishers began to create “empty calorie” pages on high CPC keywords to generate more revenue.
4- forecast what an asset would fetch in an auction
Finally, the time-tested answer to “how much is something worth” is “whatever someone will pay for it”. In other words, the greater fool theory applies to private and publicly traded assets. Here, we know that Facebook’s Speculative Value (in other words: rumored) has risen from $800M to $10B just yesterday.
Rundown of Rumored Bids for Facebook:
Spike in Speculative Value:
That is folly. Here’s why:
Very few companies have the ability (cash and balance sheet) to make that happen. Let’s look at just a few of the usual suspects:
Let’s first state that any M&A deal for Facebook would be cash-based. I’m not sure Google stock is something that a seller of Facebook equity would welcome (if it were restricted - more on this below). Google offered Friendster a sum ages ago that today would be worth $1B. But, that was when Google itself was private; we know that pre-IPO stock is valuable, post-IPO usually less… and quintupled stock price after the IPO price even less so.
Why A Google Bid is Unlikely
People frequently think that Google will buy Facebook, but the problem is that Google today has about $10B of cash on hand (after you add the $1.5B it has added from operations in 2007 and the $3.1B it has earmarked for DCLK).
Sure, it can sell more shares in a secondary offering, and at a high of $500+/share, maybe Sequoia, Kleiner Perkins and the Google co-founders would sell $5B worth of shares or so to bolster their warchest for a run at Facebook, but those are a lot of “if’s and maybe’s” and until they do so, they are not really in the running to do so.
Then again, Google can always make a stock-based deal for Facebook with unrestricted shares which would allow Facebook shareholders to sell as many shares at any time. But, I personally doubt Facebook’s shareholders would swap ”cash in hand for shares in the bush”.
As well, I doubt Google would want that, because if Facebook shareholders decide to sell the shares en masse, that would put a considerable downward pressure on Google stock. Sure, at a market cap of $165B, paying something like $5B for Facebook means that it’s a drop in the bucket (didn’t we say the same thing about YouTube and its $1.65B price tag… drops add up, you know).
But, if Google shareholders know that Facebook shareholders got unrestricted shares and will start to sell, causing downward pressure, then the domino effect would entail Google shareholders to sell too. That is one slippery slope than could institutional investors, Google investors, Facebook investors and many individual shareholders to sell their shares and send Google tumbling down, because everyone will want to buy the shares back later at a lower cost. Google’s army of PhD’s have probably thought about this… at least I hope.
In this context: only MSFT and News Corp. have the wherewithal to pull the trigger, unless you think Google will part with 60% of its cash for Facebook, which is unlikely.
Why a News Corp. Bid is Unlikely
I doubt News Corp. will, especially if they plunk down $5B for Dow Jones, which looks increasingly like a fait accompli. Even though that deal will be cash and stock-based, I doubt Rupert Murdoch will have the appetite to part with much of his $7B cash hoard and dilute that much to existing Dow Jones and Facebook shareholders…
Of course, the problem lies in the fact that while the former is a monetizable asset, the latter less so, especially when News Corp. has its hand full with trying to monetize MySpace. All of FIM might generate $500M in revenues for News Corp., but that includes IGN and FOX’s legacy websites (FOXSports.com, American Idol, etc.) and accounts the $25M/monthly amount Google pays it, so as you can see, News Corp.’s digital dreams are still largely aspirational and a mere mirage.
The case for MSFT
Proponents of the MSFT-Facebook argument state that MSFT has proven that it would consider and has done a large web deal: that of AQNT (disclaimer: I owned AQNT up to yesterday). Of course, it’s one thing to pay $6B for an online advertising services company founded in 1996 and based in Seattle that made $400M in revenues and another thing to pay anything remotely close to that for SF-based Facebook which generates $100M largely from Microsoft and is being sued by ConnectU.com for the fact that Mark Zuckerberg allegedly stole the source code for their project from them. In other words, if it’s true that Zuckerberg did such a thing, it would give pause to anyone who would remit a multi-billion payoff to him and sign some form of employment and non-competition agreement. Yes, I know, non-competes are “useless” in California…
But the main argument is: this all boils down to “is Facebook for sale” before it does an IPO. Sure, Peter Thiel threw out a $6B figure, but if you read that properly, he said by 2015, if you look at MTV, Facebook can be worth $6B. The press omits that and runs with it. Just yesterday Jim Breyer said that any deal would have to be at least $1B. In other words, while we wish the Facebook shareholders nothing but the best, but Facebook is not worth $10B, let alone $6B because ultimately:
- very few companies can pay that (GE won’t pay anything near that for DJ, an actual business, to defend its profitable CNBC franchise, so let’s not pretend it would pay anything material for Facebook);
- very few companies can ever make money off of Facebook. In theory, everyone can make billions, but social networking is a crapshoot.
In fact, on the monetization front, up to 2002 or so, Google still had no clue about how to make money. It looked at Bill Gross’ model for Overture (disclaimer: in 2000 I worked for Mamma.com, a meta search engine, and we were then too running text ads alongside the organic results). It then bought Applied Semantics in 2003 for the contextual text link technology, bought out the only indirect competitor for that Sprinks from About.com, shut it down, and then leveraged its search engine traffic and superior content-matching text links to become the Web’s billboard champion on a CPC-basis. But even then, it was not Sergey Brin or Larry Page who executed that, it was Omid Kordestani - former sales executive at Netscape and Stanford alumni - who made the plan go from concept to reality.
The bottom line: sure, Facebook looks at the exponential growth of MySpace and says “why sell”. They’ll also look at Google’s rejection of Yahoo!’s $1B offer and wonder “what could be”. But when the dust settles and the buzz wears off, they understand that even an IPO will fail to maximize their investment. Here’s why.
The IPO is No Guarantee
When a company goes public, shareholders do not sell their entire shareholdings. That is why the Google co-founders are worth $16B each when they were worth $5B or so when Google went public. Sequoia’s Michael Moritz in fact sold nothing at the IPO when the Dutch-auction priced Google shares at $85 in lieu of $100.
The point I am making is even if Facebook can leverage demand and get a very high price for its shares upon its initial public offering, devoid of anything other than MSFT’s prized deal, it will not show the kind of revenue and profit profile that investors will want for a company with a valuation in the $2B to $10B range. CNET (yes, its traffic is falling) is worth $1B. Yahoo! and its $6B in revenues is worth $35B. Amazon.com is worth $30B…
To conclude:
Run down the list and you will see that at present time, the best answer for Facebook’s shareholders remains a sale in the $2-5B range if they can get that. That is why MSFT need not even contemplate going as high as $10B: Zuckerberg and Facebook shareholders are smart. They know that sure, in a crazy, crazy world, they can ask for the moon… but there are few actual takers out there, and since MSFT remains the only company with the financial firepower to make this happen, they can stop the bidding at $6B… and even then, the better question is: is Facebook worth that much?
Well, what was that about “the time tested answer to how much something is worth is…”
I previously said that relying strictly on human psychology: if Zuckerberg indeed owns 30% of Facebook, a deal at $3.33B would get the job done because he’ll pocket $1B. At 23 - or any age - it would be very hard to say no to that.
Of course, since $3.33B is within striking distance of many firms (technically, Yahoo!, Google, News Corp., Microsoft), then the price could move up. That is what happened with Doubleclick, I believe. The problem is even for Yahoo!, this means selling shares, and at a $26/share range, it would mean “sell low, buy [Facebook] high” [Disclaimer: I own shares in Yahoo!].
So when the dust settles, given all the variables:
- the low range for a deal is $3.33B
- the high range is $6B.
To answer a reader email: Clearly, this assumes everything continues as is for Facebook, we know that is not the case. I personally don’t even find Facebook all that useful. It’s “neat” to reconnect with former classmates, but ask yourself why you never kept in touch with the majority of classmates in the first place. This is an analysis very much set in the context of the hysteria surrounding Facebook and not a statement that in 6, 12 or 24 months, Facebook will be a coup. We’ve seen advertisers not getting much value from Facebook, in start contrast to Google. As such, if Google is worth what it is, it’s not because it’s neat, it’s because it is an effective ad platform.
Regardless, even in the context of such mania, these are very expensive prices from any traditional metric: 33 to 60 times revenues… but of course, this is a sought-after asset. To clarify, I’m not saying Facebook deserves to be worth so and so, I’m just saying that if ultimately an asset is worth what someone will come along and pay for it… then once you go through all of the dynamics and variables, this is a reasonable range… it does not mean that anyone will come along and pay that.
Any thoughts?
Disclaimer: I could be wrong, very wrong, of course…
The last time we heard an M&A rumor involving Microsoft, Yahoo!’s stock shot up 18%, only to come crashing down when nothing materialized. In fact, by the time the markets closed on the very same day the rumor crept up [again], that rumor was squashed.
Today, the rumor mill began again with Facebook being the latest company within Microsoft’s cross-hairs. If there’s one thing I learned involving MSFT is I’ll believe it when I see it.
Whether MSFT, Yahoo!, Google or News Corp. decide to pay anything over $3B for a company with $100M in revenues remains to be seen. It’s one thing to pay 30 times revenue for something like Doubleclick that is a monetization engine, it’s another thing to do so for Facebook. Of course, Facebook equals users, which equals growth, but we’ve been down this path and know that users do not equal revenues, let alone profits. I think that most companies could integrate Facebook in any one of those companies and make something out of it… but don’t kid yourself, the devil’s in the details.
Facebook is the right hands could prove to be a boom, in the wrong hands, it could be a bust.
Ultimately, this boils down to one of the oldest concondrum facing private companies: sell or remain independent. When Yahoo! offered $1B for Google, Google was nowhere near the company it is today… though it was already clear that search advertising would become the web’s holy grail.
Social networking has hitherto proven to be an elusive cash cow… and that is something that must not be forgotten. Facebook could make bundles of money, but could is really not an issue right now… online, everything could.
Mark Zuckerberg has stuck to his guns and that might prove to be a wise move… but he has to ask himself if he wants to become a 23 year old who became a multi-billionaire and then sold to a mega-corporation or if he wants to remain in full control of his destiny and become the next Google. There’s no guarantee of the latter, though the former is all but guaranteed.
There are no guarantees in life, or so they say… so maybe that last part will play a part in Mark’s decision. Sure, the VCs usually have a say, but in this case, Mark seems to be in charge…
In life, regret minimization is a major force in making decisions. This time around, it’s no different.
Less than 48 hours ago, I laughed-out-loud when I read that Bay Partners would be setting up a separate fund to invest in Facebook Application Developments (which incidentally spells fad, but that’s really just a coincidence). Don’t get me wrong, I am extremely bullish on Facebook (Facebook 100M users, a matter of when, not if) and if I were a part of the company I could envision a dozen ways to create an Ad Sense-esque revenue stream… but the fact remains, Facebook Apps is no brass ring for third parties. I’ve written on this here: Facebook OS: Be careful what you ask for.
In fact, by now it’s quite obvious that this is Facebook’s way to not only drum up excitement amongst developers but mainly a way to try to find that diamond in the rough product or application that it can then either develop itself, partner up with or outright acquire in the hopes of it becoming what Ad Sense was to Google: a $10B annual revenue stream within 4 years of launch.
Today Facebook’s own VCs, namely Accel Partners, Greylock and Meritech, got into the fun, stating that they too, had Facebook Apps monies to dole out. While at face value this seems like even more folly, this really shows three things:
1- Facebook, despite being the hottest privately held company out there in the consumer web space, is probably finding it hard to find a million dollar hit, so it’s hoping that someone else will (which is brilliant, frankly).
2- Facebook’s VCs are willing to finance that one-in-a-million product because like all case studies, it is easier to innovate such a product outside a rapidly growing but already quite large enterprise.
More importantly, or cunningly, while I’m still not convinced of the merits thereof for Bay Partners to back such ventures, it’s intuitive for Facebook’s VCs. After all, if any one application works, they will succeed both on their Facebook investment and their application one. Think of how Sequoia won when Google bought YouTube. Common area: Sequoia backed both and by selling YouTube to Google it got an exit in the former in an otherwise murky legal situation and strengthened the latter… See my take on the so-called Sequoia/YouTube/Google conspiracy theory here and the missing piece in Google’s puzzle here after it bought YouTube, Doubleclick and Feedburner.
3- Sadly or thankfully, depending on who you ask, the days of good old fashion business development seem to be gone. Nowadays, the extent of bizdev - what built Web 1.0, basically - is an RSS feed or an API. This is good in a few ways, but frankly, it’s a lazy and generally fruitless road that has hitherto failed to yield any home runs. I’m not talking HRs by Web 2.0 standards, I’m talking real stand-alone successful and profitable businesses. I’m not a ludite: APIs, RSS etc., greatly help some things scale, but devoid of a comprehensive plan to implement any initiatives, most of the so-called innovation will never bear fruit.
Ultimately, Facebook, whose talent is largely a product of Web 2.0, probably shuns the merits of “bizdev” deals and wants a turnkey solution to scale its revenues. This is a bold and daring strategy, will it succeed? We shall see. Note that even Google’s Ad Sense, which generates so much of Mountain View’s profits were negotiated by business development types who actually sent emails and called small, medium and large publishers… Remember, the meek shall inherit the earth, after all.
This is a key nuance in Facebook vs. Google’s modus operandi. Google did not invent Ad Sense, methinks that Facebook is hoping its strategy will prove to find something similar.
Google, after all, first bought Applied Semantics to get into the contextual ad market and then Sprinks to consolidate the segment… (see our Top 10 Web M&A of all time). It did not invent anything (let alone the fact that the underlying pay per click model was pioneered by GoTo and even my first web employer Mamma too was doing this in 2000, before Google was a toddler).
In other words, Facebook knows that its user and pageview growth is nothing short than breathtaking, but until it files for an IPO and opens its kimono to the investing community, like Google, it too needs a billion dollar baby… and as a former ad sales executive, looking at their current advertising, I can see that Facebook as a multi-billion dollar going concern is still largely a concept and not a reality.
If the VCs backing this puppy want to see their own investment follow the mythical hockey stick curve, then it is not crazy to dole out relatively small sums to outsiders who want to realize the next case of the innovator’s dilemma.
Related:
- Facebook: IPO vs. M&A.
- Facebook’s 2008 to do list: File for an IPO.
- Should MSFT Turn its Attention to Facebook?
- Peter Thiel: Facebook is Worth $8B.
- Murdoch: “MySpace worth $6B”, if so, then break up FIM!
- Facebook to be worth $2.35B by 2010.
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