Accel’s Jim Breyer is joining eBay’s board. I am not a major fan of VCs, admittedly, most are having a hard time running their own business, let alone giving sound advice to the businesses they invest in.
But some VCs have managed to build their brand quite well, deservedly so, oftentimes through shrewd investments, sound decisions and a healthy dose of networking.
Breyer is probably best known for being on the board of Facebook and one of Mark Zuckerberg’s biggest backers. But while everyone can question Mark Z.’s wisdom for not selling Facebook yet or his management team’s game of musical chairs, as an entrepreneur myself, I must say, it’s great to see Jim Breyer back Mark Z. 100% (I don’t doubt if privately they have heated exchanges, but at least in public, the man stands alongside and behind Mark, and doesn’t seem to try to get in the way).
Anyway, what’s interesting about Breyer is that he’s not just a sought after board member of startups, but also established powerhouses such as Marvel and Walmart. Well, you can add eBay to the lot, too. For eBay, this is critical since they just announced spinning off Stumble Upon and word on the street is that Skype is next.
If a company shells out billions on startups ($4B for Skype, $75M for Stumble Upon) and doesn’t know what to do with them, they lack startup mojo, and perhaps having someone like Breyer on board will allow them to not just spot amazing opportunities but integrate and scale them further. Read Mark Arrington’s man crush here.
And speaking of Marvel, check out some of these videos on DC Comics and Marvel action heroes below:
Jeff Weiner just joined both Accel Partners and Greylock as en EIR. EIRs are basically former company execs looking for something to do… at a new company funded by the VC housing the EIR or at one of the VCs companies.
The thing is… usually it’s one VC, not two. Say what you want about how the VCs absolutely love Jeff and are willing to share him etc., but that’s BS. This one is pretty obvious: Jeff Weiner was tapped to become Facebook’s next CEO.
Accel and Greylock share an investment in Facebook and frankly, neither company has really helped Mark Zuckerberg navigate through privacy, advertising revenue, revenue in general… the one thing that Facebook has done well, frankly, is not sell to Viacom, IAC, Yahoo!, Google, MSFT and Yahoo! again… yet something tells me that Facebook’s VC did want to sell (at every cross road from $800M on out); the only one that held out was Mark…
Yet now, the VCs tagged team to lure Jeff with the promise on giving him the CEO role. This begs the question: did the VCs run this by Mark Zuckerberg before? If not, they are dumb as rocks because this will create a lot of friction between Mark and the VCs (Mark is said to own 30% of the company).
More importantly, in Yahoo!’s numerous failed attempts to buy Facebook, what role - if any - did Jeff have? Jeff basically had everyone and their cousin report to him… so naturally Mark has already once balked at reporting to Jeff… why should things be different now?
Sure, Beacon was a disaster and Facebook remains in search for a business model befitting the $15B valuation that MSFT bestowed on it… but is Jeff the man to deliver that?
No disrespect to Jeff at all, I don’t know him, never dealt with him, but I would not put too much stock in anyone hailing from YHOO these days, or ever. YHOO is the best example of a shipwreck.
Bottom line: Mark Zuckerberg just found himself in the corner with two less people to trust (hint: David Tse and Jim Breyer). The question is, did he ever trust Jeff to do a deal with him while at YHOO?
UPDATE: Valleywag has a great piece on why this actually might not happen.
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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