15 Billion More Reasons to Worry About Facebook
Dig a hole and hide. The end is nigh. And how do you spell Ponzi (as in scheme) again?
When I reported in this column two weeks ago that Facebook was looking to raise a new round of funding and that software giant Microsoft was a prime contender as an investor, I suggested a big number was being bandied about to create a giant war chest for the trendy social-networking start-up.
That’s a concept that the top dogs at Facebook are seriously mulling over now, according to sources, after getting so many inquiries from investment funds and several bigger companies–such as its ad-serving partner, Microsoft–about grabbing a stake in the fast-growing social-networking Web site.
“While who and how much is still unclear and, most importantly, in what form, sources said a deal could come together quickly if the numbers are lofty enough for the site, which has about 40 million members currently. But the investment could be quite large, well beyond its last $25 million one in 2006, for little dilution.
‘There are several B’s involved in the discussions,’ said one person interested in the possible round, referring to a multibillion valuation for the Palo Alto, Calif.-based start-up.”
Today, The Wall Street Journal follows up on my story by adding more interesting details, including the fact that Microsoft is seriously considering an investment offer that would value the company at $10 billion.
(Google might be in there too, according to the story, but I think it is just there to annoy Microsoft.)
In any case, this was the ludicrous price once floated by Founders Fund’s Peter Thiel, Facebook’s first investor, which was widely derided at the time he uttered it.
More laughable still is that Facebook, according to the Journal story, might be holding out for a $15 billion valuation.
Why? Because I believe Silicon Valley can now be considered to be at Delusional Level Red. Or green, given all the cash that is being shoved in Facebook’s direction now.
Thus, it is time to take a moment to consider four things that might take some shine off the shiny Facebook:
1. Facebook is not Google: Although many in the tech sector make the comparison to the search giant, it is simply incorrect.
Is Facebook like Yahoo a bit? Certainly. A newfangled version of AOL? Absolutely! A very well done media play with all sorts of interactive bells and whistles hanging off of it? Yes, ma’am.
Indeed, it is growing its media business nicely, with $30 million in profits on $150 million in revenue.
But in comparative terms to the search giant, Facebook is a lemonade stand. Google brought in $3.9 billion in revenue in just the second quarter alone and, um, is increasing its dominance over the search sector in a mighty scary way.
Facebook, on the other hand, gets half its annual revenue right now from a sweetheart guaranteed revenue deal with, drum roll, Microsoft. No matter what either Facebook or Microsoft says, it is a money-losing deal for Microsoft so far.
How do I know this? According to many sources, Google is struggling to make ends meet in its own sweetheart guaranteed ad deal with Facebook rival MySpace, which is much larger, and Google has the best monetization engine out there.
2. Potential is not actual: While the minions at Facebook under its young leader are laboring mightily to come up with new ways to make revenues and its strong growth is laudable and I loved the splashy widgetmania Facebook unleashed, let us try not to be too jaded when we say we have seen this story of spiky growth followed by less than spiky growth before.
One need only to consider the bloom that has fallen off the MySpace rose to realize this, but the list of fast-growing and quickly wilting tech phenoms is long. PointCast! GeoCities! Netscape! AOL! Yahoo!
3. Most techies were not popular in high school: No, it is not fair, but this is true. But in a friending and poking frenzy, Silicon Valley’s denizens have embraced Facebook as only those who were picked last at dodgeball could.
I kid about the dodgeball part, but what is more serious is the warped view those in the tech sector have for Facebook, because it is the latest and shiniest thing and because their geek friends are all using it.
Are they anticipating a fatigue factor with regard to the service? I am. Are they wondering how hard it will become for Facebook to constantly innovate, despite its embrace of third-party apps, to keep fresh? I am. Do they know that there is a limit to the subscriber growth over time? I do.
As I have said many times–I like Facebook. I think it is well built and run. It’s cool. I think it is, in its next-step way, even visionary.
But do I think it will sustain this over time? Count me dubious.
4. A sucker is born every minute: Let’s go to the calculator.
Thiel initially invested $500,000 in 2004 in the company, which was followed by two more rounds, for a total of about $32 million. The last one was more than a year ago for $25 million, giving Facebook a $525 million pre-money valuation.
Tally: Microsoft has to be seriously desperate to be considering this much of an investment for so little, even with its bags of cash to spend. While I like big, bold and even addled moves as much as the next person, this one is a doozy.
That said, there is always another fool in line to pass on the buck. A sky-rocketing IPO could wipe clean this round of insanity.
But that does not take away the fact that Facebook is not worth this ridiculous price now. It might be in time, or it might not.
So, as I once advised Zuckerberg in another post: If you can get it, take the dumb money and run as fast as your flip-flops will carry you.
Please see this disclosure related to me and Google.