More on the Facebook Hype–Oops, I Mean Promise
I got a lot of reaction from my piece earlier this week poking holes in the recent round of funding that hotsy-totsy social-networking site Facebook was looking for.
Two weeks ago, I broke the news that the start-up was looking to raise more investment dollars at an insanely high valuation from patsies–oops, I mean investors–like Microsoft, Facebook’s ad-serving partner.
And earlier this week, The Wall Street Journal followed up with a piece putting actual numbers on the board–Microsoft was interested in investing at a $10 billion valuation and Facebook founder Mark Zuckerberg was holding out for $15 billion.
My initial reaction? Eek. Why wait for a puffed-up IPO when you can demand ridiculous prices like that from supposedly savvy investors?
Some of the commenters on our site mostly seemed to agree that this was all a little frothy.
Noted Tom Coseven: “Good piece, Kara, sometimes you must wonder if there are any adults left [in] Silicon Valley.”
Tom, I don’t wonder at all. Let’s review: Exercise balls as furniture, unless it is a beanbag chair; free fun food and energy drinks for all; volleyball in the courtyard; flip-flops.
But another poster, Yuval Romik, pointed out that I was underestimating the romantic pluses of Facebook on his way to making a more salient point: “A person in college without a FB page is a non-person. It’s a truly disruptive offering–a sky-rocketing would do it justice.”
While I am with Yuval on the afternoon-delight aspects and college popularity parts of Facebook, I would have to respectfully disagree on the sky rockets in flight.
Alexander van Elsas noted the danger to software giant Microsoft of doing such a deal: “It is also a very risky strategy for Microsoft to invest a large amount in a single platform. While Google makes a great deal more in advertisement revenues each quarter, Microsoft will be forced to monetize their investment by increasing ad pressure on Facebook users. Given that a Facebook user is spending lots of time on his online identity, I don’t think they will like that very much.”
Yes, indeed, an ad-serving nightmare. My read was simpler: Microsoft desperate=cash forthcoming.
Again, others have a different view.
Wrote Dave McClure: “While an acquisition at $10 billion to $15 billion without Facebook having defined a long-term monetization strategy might be irrationally exuberant, an investment of $500 million that simply values the company at $10 billion to $15 billion is not such a huge risk, for either Microsoft or Google (or in fact, at $500 million, even for Yahoo). That’s chump change for a piece of the Facebook action…noting the previous market insanity surrounding Google’s IPO a few years back, and the subsequent rocketship Google was for the next two to three years, most retail investors have unfortunately forgotten the lessons of the dot-com bust–they’re going to pile into any Facebook IPO thinking this is Google 2.0 all over again. They might be irrational, but there’s no question they’ll be similarly bullish for a Facebook IPO.”
Ah, the greater fool theory! Dave, you’re right on the money here, but it is a profoundly cynical way of looking at it and has nothing to do with the underlying business of Facebook. If the company does not live up to its hyped promise, as Google has done, it is also extremely dangerous for the company’s long-term future.
Nirav Bhavsar makes an excellent point about the international market. “Google gets 45% revenue from international market. Facebook doesn’t have that kind of growth prospects internationally and given its inability to monetize in the U.S., it is definitely not worth $15 billion,” he writes. “Facebook has no presence in Europe, China, India or Brazil. Bebo in Europe, Orkut in Brazil-India and MySpace in China are formidable. Also, people forget that Google was already making $3 billion in 2004 when it took the IPO route. If Facebook goes for [the] IPO route: I’d buy shares and sell within one week before the bubble bursts.”
I could not have said it better myself, so I will not.
Lastly, John Minnihan makes points as both a user and an entrepreneur.
As a user: “I’m using Facebook today as an interesting way to communicate with and track the doings of some of my friends. But the ones that I *really* want and need to communicate with, I’ll simply call, email, or IM. Facebook has absolutely no influence upon this. That’s what I did before Facebook and it is what I’ll do when it is gone. Beyond serving ads, which I don’t click and, in fact, completely ignore, what is the value in Facebook for me? I’ll quit using it when it becomes boring (maybe sooner), or when the ad placement becomes too obnoxious to ignore.”
As an entrepreneur: “Take the money and run (as you pretty much said yourself). We dream of billion-dollar valuations, so if this is really happening, don’t be foolish. Settle on an amount and take the investment. And cash out as soon as you legally can, because this house of cards is in the direct path of a very fickle consumer ‘big wind.'”
Indeed, that wind will eventually huff and puff and blow your house down if you don’t build it well and in a way that is less about valuation and more about what comes after all the hype has died down.
And here’s a certainty: It always does die down, often taking promising companies with it to oblivion.
Please see this disclosure related to me and Google.