Last week, I asked Mark Zuckerberg how he would see MySpace and Facebook coexist under News Corp., with the implication being that Rupert Murdoch dreams of acquiring Facebook and would eventually make it happen.
It was a couple of questions in one :
- is News Corp. really that interested in Facebook?
- would Facebook actually sell to News Corp., a media company, that already owns Facebook’s bigger direct competitor MySpace?
- does Mark, in fact, view MySpace or Google as his bigger competition?
The question was moot, as Zuckerberg answered “that won’t happen”.
It was something we hear CEOs of privately held companies say all the time, but his answer was slightly more convincing than when YouTube co-founder Chad Hurley said “we’re going to IPO” in the summer before Google bought them.
History Repeats Itself?
While MySpace remains the most obvious, direct competitor to Facebook, I think Facebook’s main competitor is Google and has been for a while. Maybe that explains why Microsoft is about to invest $300-500M for a 5% stake in Facebook (maybe).
The reason why Google is Facebook’s larger threat is simple: MySpace is part of News Corp. and is, as such, a media company, whereas both Facebook and Google are technology platforms that try to remain neutral. That’s another thing that Zuckerberg kept stressing in his interview with Michael Arrington at Tech Crunch 40.
But, it’s not just that Facebook views Google as its main threat; the feeling must be mutual, because Google is planning to out-Facebook Facebook in the coming weeks.
Well, that’s the spin, anyway. For over 2 years now, Google and Facebook have been competing, even if they were not acutely aware of it. It’s just that with Facebook gaining momentum and Google’s stock - and expectations - at all time highs, there is an inevitable clash waiting to happen. And we can’t wait to witness it.
Google is a Social Network
I won’t get into the social graph vs. network rhetoric, to me, it’s semantics.
What is important to note, though, is that Google is already a social network, people just don’t know it yet.
For the initial part of Google’s history, users interacted with the search giant in a confidential way. Then, things began to change as Google started to make acquisitions and launched new products.
Asking the Right Questions
From 2003 onwards, people kept asking whether Google would become a portal, whereas they should have been saying: “Look, Google is becoming a social network”.
After all, email is the biggest connector of people, and as such, the glue that holds a social network together. No wonder Google is adding improvements to Gmail.
But there is much more to Google’s identity as a social network these days, the transformation, in fact, began a few years ago. Acquisitions like Picasa, Blogger, YouTube and product launches like Gmail, Calendar and Docs changed the way Google interacted with its user base: now, a lot of users are signed in to Google as they surf the Web. When you are in Gmail, until you sign off, you are technically in Google’s network that includes all of its products, but also all of your searches and surfing patterns. The purchase of Urchin amplified this.
In fact, a real social network is open, and there is no more open ecosystem than Google, that is the Web. Facebook will be opening up soon because it finally realized that it cannot be the social utility it strives to be and remain closed.
This is probably nothing new to those who follow Google’s every move, but one reason why Facebook wants to open up more and more is that it probably realizes that its closed network hurts it a lot more than it hurts Google.
In fact, Google could very well not need to buy Facebook because it’s already a bigger social network than Facebook. But, that does not mean that it won’t consider it, because Facebook is a fantastic asset for Google - or anyone else - to have.
Haven’t We Been Down this Road Before?
Of course, Google is publicly doing the opposite:
- pretending it’s not a social network,
- saying that it’s not yet a threat to Facebook but wants to become one.
Consider the following: apparently, Google got 15 luminaries together, made them sign NDAs, chatted about what to do to beat Facebook. Yet, within hours, Tech Crunch got a handful of these luminaries to a) violate their NDAs and b) cross Google by going public. What’s my take on it? I think this is all part of the PR effort to make Google seem like an upstart to Facebook when in fact, Google is the bigger social network that is about to weave itself further together to officially overtake Facebook and MySpace as the biggest social network.
Think back to the MySpace deal. Why would Google so overpay (as I argued on deal day) and pay a whopping $900M for an asset it could have bought for $580M previously. Could it be, perhaps, that Google sought the data it would get by way of that deal? In fact, MSFT has all of the data in the world on Facebook, and maybe that is why it’s not crazy enough (yet?) to pay what Facebook’s investors are asking, knowing full well that a closed social network is not worth as much as some claim it is?
Maybe.
Bottom Line
The outcome of this inevitable clash of the titans is pretty clear.
This is awfully reminiscent of Google’s efforts in video, which culminated with Google buying YouTube for $1.65B just less than a year ago, subsequently shelving Google Video. That was a likely outcome because both companies were backed by Sequoia Capital.
While YouTube had little in the way of path to revenues, let alone profits, it had only raised $11.5M and could have continued to weather the storm by raising more money. It had momentum, after all. We’ve dubbed YouTube the most explosive web startup of all time, ironically, we’ve called MySpace the best M&A deal of all time.
Facebook, technically, has certainly moved up the list on the former list, and depending on its eventual exit could make the latter, too.
Google’s Real Asset: It is the Web
Back to YouTube, one reason why it chose to exit when it did was the legal question: alone, it would have been vulnerable, under Google, it’s not.
Forget the barrage of lawyers, Google carries a far bigger stick: traffic. With Google accounting for 66% market share in search, and 8 out of 10 websites being discovered (and recovered) by way of search engines, media companies that lack portals and high traffic need to be nice and kind to Google. Viacom, currently suing Google for $1B launched a network of dozens (or was it hundreds) of websites. These websites need traffic. Google might not be evil, but it’s not stupid. The more pressure Viacom applies to Google, the lower the search engine mojo these sites will have. I don’t need a PhD in mathematics or computer science to put 2 and 2 together and realize that.
Traffic Counts
Connecting the dots, the day Facebook goes open and search engines can index it, it will gain an immediate thrust of additional search engine traffic… but overnight, it will become vulnerable to Google, too. This is a major consideration that people are overlooking.
When GoTo.com was acquired by Yahoo!, it lacked negotiating power because it had little direct traffic. GoTo.com generated revenue by way of distribution deals with AOL, Yahoo! etc., so if Yahoo! were to cut off GoTo.com, its revenues would fall, become cheaper, and Yahoo! could buy them cheaper afterwards.
Thankfully for Facebook, it’s one of the largest sites in the world and will probably not rely much on Google for traffic, but over time, if Google owns 66% market share and indeed 8 out of 10 websites are found by search engines, do the math and you will see that in any negotiation or competition, Facebook will lose out to Google.
That is why, despite what people say, invariably, Facebook will listen to any deal Google has to offer.
What about MSFT? Let’s see…
VCs’ Power Struggle
Mark Zuckerberg clearly does not want to sell. Like all entrepreneurs in their early 20s - and having taken some money off the table - Zuckerberg is really aiming for the fence. But his backers, namely Accel, Meritech and Greylock might find themselves in a position where they will have to consider the inevitable reality that Facebook is:
- increasingly pricing itself out of the M&A market and is too expensive for most companies to acquire and
- lacks the revenue growth to IPO.
Yes, I know, it took Google a few years before finding its revenue mojo, and once it did, revenues scaled:
- Google’s 2002 revenues grew 409%
- Google’s 2003 revenues grew 234%
- Google’s 2004 revenues grew 118%
- Google’s 2005 revenues grew 92%
- Google’s 2006 revenues grew 69%
- Google’s 2007 revenues will grow by 50-60% to over $15B.
But search is one thing, an actual social network is another when it comes to monetization. For more on that, see my “Memo to Facebook’s Sales Team” post.
Just a couple of months ago, I outlined the case for why MSFT was the only company that could buy Facebook. Read that here.
While I don’t think it makes financial sense for Google to buy Facebook for the following reasons:
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.
It would be a grave mistake for Google to let Facebook fall into MSFT’s hands. I don’t think Zuckerberg wants to sell to MSFT. We also know he won’t sell to Rupert Murdoch.
Facebook is considering raising even more money, and might, to weather the storm and go deep, real deep. But what I see happening is Google will make a run for Facebook (yes, despite what I said above). Heck, financial engineering can do wonders, in one post, we tripled the value of a publicly traded company, after all.
Tale of the Tape
Point is: Google is now at $175B in market cap, MSFT is at $268B; that’s a $93B difference, Google is 65% there…
If you look strictly at their enterprise values: Google comes in at $162B, MSFT at $247B; the difference falls to $83B, and interestingly, it’s still 65% there.
This however explains why Google will want to buy Facebook more badly than MSFT would: because as much as Google generates cash quickly, MSFT still generates it faster. Over time however, MSFT’s core business will slow down more so than Google’s will… so MSFT needs Facebook in the long run, while Google needs Facebook in the short run, to accelerate its chase of MSFT. In some ways this is counter-intuitive, but in the grand game of world domination, it makes sense.
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.
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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