Memo to Mark: BoomTown Is Baaaack and We're Still Dubious!

Published on October 25, 2007
by Kara Swisher

Please see this disclosure related to me and Google.

Well, we’re glad it’s done, our conflict of interest shoved aside by the hey-big-spenders at Microsoft and we can again resume our incredulous analysis of the insane $15 billion valuation of Facebook.


No matter who would have gotten to make nice with founder Mark Zuckerberg in the hefty ad-investment deal–Google or Microsoft–we will be sticking to our guns on this ridiculous roundelay of hype and circumstance.

That’s because this valuation, while a paper windfall for its investors and those currently employed at Facebook, has exactly no meaning until the company actually performs financially to keep up with the lofty figure and then, presumably, goes public in a great rush of glory.

Of course, that does not mean this bump–which could only happen in a very bubbly Silicon Valley–will not help the company pick up some tasty acquisitions now using its overpriced stock, as long as targets are willing to play along with the still-questionable dream of future riches.

And, of course, in the here and now, Facebook will get an even bigger slug of guaranteed ad dollars from international as well as U.S. markets from Microsoft, which will be losing a giant amount of money in the arrangement.

As a plus to Facebook and an important element in Microsoft signing this deal, by the way, sources confirm that the start-up got much better terms in its U.S. ad deal that basically lets them control the whole partnership without any hooks for Microsoft.

Does any of this really matter? From a perspective of big, cash-rich companies throwing huge dollars at hot start-ups, it is, as one investor told me last night, meaningless.

“It’s trivial to Microsoft to spend this money and worth the gamble,” this person said.


Because while execs at both companies talk about the potential–and there is a massive amount of it in the Facebook business model–both Microsoft and deal-loser Google, too, were willing to bankroll a loss leader in the hopes of later return, a whole lot of important education about the social-networking space and also likely solid returns in an IPO scenario.

And for Microsoft, that is OK, given that the software giant needed to land this deal for all sorts of reasons (seeming relevant in the fast-moving Web 2.0 space and, of course, the sweet-sweet feeling of actually beating out Google) and has more than enough money to burn.

That’s obvious too with the $240 million cash investment (with more to come from other greedmonger private investors, of course, in another round now being arranged by Facebook) that bought Microsoft exactly 1.6% of Facebook.

That puts Microsoft behind Greylock Partners’ and Meritech Capital Partners’ 1.7%, Founders Fund’s 5% and Accel Partners’ 11%–Accel partner and Facebook board member Jim Breyer also has a personal 1% stake, now valued at $150 million–and Zuckerberg’s 20% (not the 30% that has been widely reported), which is now worth $3 billion.

So what can we say but: Party on, Garth!


But let’s not lose sight of the fact that for all the fabulous growth, Facebook is still a very small business now carrying a very large valuation on its slight shoulders. So far, it has only $150 million in annual revenue, half of which comes from its guaranteed ad deal with Microsoft, and is break-even on a cash-flow basis.

So more cash in the kitty is a good thing, allowing Facebook, as one of its execs said yesterday, to double its work force to 700, jack up its international business and better service its 50 million active users.

This is all well and good for turbocharging a business that is growing like gangbusters. But while Facebook executives argue that all trends point upward, I still maintain that potential is not actual.

As I have previously written: “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.”

So excuse me for being worried about this deal and what it might do to the business discipline and attitude of Facebook, making it sit too long on the laurels of being able to gin up an investor frenzy and not focus on making the service one that is consistently innovative and useful to users and, of course, building a truly different kind of advertising business.

Frankly, while spending on social-networking sites is supposed to triple this year, I have still not seen a breathtakingly groundbreaking new kind of advertising from Facebook (or anyone else) that merits this valuation.

All the rich data Facebook collects and parses back out is amazing, but I still need to see actual ad programs and results that blow the mind and change the game.

I have talked to Facebook investor Jim Breyer many times about this concern related to this cart-before-the-horse valuation, so let me quote him directly about it, from one of our conversations:

“Companies always need to separate valuation from strategic and performance issues, and this is obviously a valuation we need to grow into and we hope we will,” he said. “But we know it is an aggressive valuation.”

That’s what you might call an understatement, Silicon Valley-style.

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