When You Are A Public Company Without Being Public

This happened a bit with Google early this decade and it was certainly part of their decision to go public (reluctantly). Now it is happening to Facebook, and has been happening for some time.

There has been an active secondary market in employee shares in Facebook for the past year or two. Though I've never bought in that market (contrary to some comments on Techcrunch's post last night), I know a few people who have. That market has been in the $9/share to $11/share range which equates to something like a $4bn to $5bn valuation.

And Facebook's numbers have become public as well, partly because Mark Zuckerberg has made them public and partly because Facebook is a leaky company. Eric Eldon wrote this last night:

Facebook made under $300 million last year, was a little shy of breaking even, and at first expected to make towards $400 million in revenue this year.
But the company said in late March — incidentally at the time that
chief financial officer Gideon Yu left the company — that it was
beating projections by 70 percent. I’ve confirmed that this run rate
has the company possibly breaking half a billion in revenue by the end of the year.

And Zuckerberg wrote this in his letter to employees announcing that Gideon Yu was leaving:

Based on our first quarter results, we now believe we are on track to
see our revenue grow by at least 70% this year. We just completed our
fifth straight quarter of EBITDA profitability. And most importantly,
we expect to achieve free cash flow profitability next year.

So while it is not quite like preparing and sending a 10Q or 10K to the SEC every quarter, Facebook is letting the world know the basics of their financial situation. We also know, apparently, that Facebook has over $200mm in cash on its balance sheet.

And now comes the news that Facebook is finally receiving offers for more funding (they have been seeking to raise additional capital for some time). And we are getting to see that play out right in the public. Arrington says the price offered is $2bn. Eldon says the price offered is $4bn.

Who knows if either of these stories is correct. I've learned from personal experience that you cannot believe much of what is written in the tech blogs, particularly about deals. When you are in the middle of these deals and you read some of the stuff that is written about them, you just have to wonder sometimes.

But when there is smoke, there is usually fire. I suspect that Facebook is getting offers to invest and they are coming in at prices that the Board doesn't like. And they are coming in at prices that are substantially below Microsoft's $15bn. That should not be surprising to anyone. First, the public markets are down 40-50% since then. Second, we all knew that $15bn price was a premium based on the strategic relationship the two companies have.

Is $4bn (the more credible number) the right price for Facebook? I don't know. It's in the ballpark. I suspect if they are EBITDA profitable now and if they will be cash flow positive next year, it's a reasonable call to wait for a better price.

Say what you will about Facebook, and a lot of people are trashing the company these days, it has 200mm users worldwide. It is building the social graph of the world. It is a very valuable and important asset. And apparently it is profitable.

It is also essentially a public company now. There is a market in their shares. The company's basic financial information is available for our consumption and analysis. And we even are getting to see it's financing play out publicly.

I suspect that Facebook is seriously considering doing what Google did and biting the bullet and going public. The IPO market is coming back (that's my gut). And at this point, there isn't much cost (other than finacial costs of being public) that Facebook isn't already paying.

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Comments (Archived):

  1. Prokofy

    Re: “we are on track to see our revenue grow by at least 70% this year”You know, I’m looking at Facebook from the butt end here, as a singleton user without any big power list of friends or fans or anything, and I’m wondering…but what on earth is FB going to do to get cash in the door to the tune of 70 percent more by the end of 2009?! Don’t they have a big burn rate to keep up the servers and staff to wait on all those 275 million users? If anything, I personally pulled back on my small expenditures for “gifts” and game spacebux on FB even with bunches of 3-D and 2-D games uploaded on there — just because, well, it’s a recession.So they’re going to make this cash in ads? Am I the only one who wonders who’s clicking on ads served to me demographically that are absolutely hilarious, like “attractive 50-year-old single males* and “teach English in Russia” lol. I never click. Does anybody? Well, they must, I guess, but 70 percent worth?!BUT! If FB would make some facebux available that I could buy and use not only on little birthday gifts but to tip bloggers who post their blogs and videos and photos on FB, I’m there. I am so there!What do they have up their sleeves, do you know?

    1. fredwilson

      I believe they are working on virtual currency but I have no inside knowledge. Just what I read on blogs and as I said in the post, you have to discount that big time

      1. Prokofy

        Yes, I hear you about blogs. I have talked to API devs who are busy trying to work this patch on FB but they could be OBE’d if Facebook makes its own Facebux. There is a certain body of opinion that says micropayments don’t work, virtual currencies don’t work, etc. and that they can’t sustain the dying mainstream media. But…I think they do work, I see them work in settings like Second Life, there are 2-D very easy to use flash applications coming up to work with social media like Facebook, such as Metaplace, and I think we will see not just games generating currency and the World of Warcraft gold thing, or the handful of Second Life millionaires, but cash sustaining UGC – this is the corner to turn now when the moment presents itself, and not spurn it as it was spurned on Web 1.0 and Web 2.0 by demanding that everything be free and copyable and that everyone be browbeaten into giving content away for free.It is time to inject cash back into the Internet everywhere, in the form of micropayments with virtual currency. It will work.

        1. fredwilson

          You and Kid Mercury see the world the same way, from a different placeAnd yes, virtual currencies do work

          1. bernardlunn

            Do you mean a currency that is convertible to US$ or other national currencies? That is a truly radical idea. Like a new nation state. I assume there are big regulatory hurdles, governments tend to like their role as guardians of currency.If it is just a token to entertain people within FB, like playing poker with chips but no cash, it strikes me as a fad.

          2. fredwilson

            Its gotta start somewhere

    2. kidmercury

      IMO virtual currency is the best route to go, but in my opinion facebook does not have the governance system in place to effectively manage their currency (i.e. create monetary policy). it would be revolutionary if they could do it though.

      1. Prokofy

        They’re no worse than Linden Lab, which literally coded their LindEx in two weeks, when they finally swung into gear to compete with a third-party currency exchange, Gaming Open Market, which they put out of business when they couldn’t buy them out. Of course with a virtual currency you struggle with all kinds of issues of fraud, chargebacks, VAT, legal concerns. And yet, Linden Lab met those challenges, without any particular banking licenses or skills. Project Entropia has done the same.

  2. stone

    Fred,Compared to their hardware cost growth their revenue growth is actually terrible.

    1. fredwilson

      Yeah, but hardware costs are not the largest part of their costs

      1. Prokofy

        How many servers do they need to hold those 275-300 million users and their stuff?

        1. fredwilson

          A shitload. I honestly have no idea.

          1. Adrian Palacios

            this video gives you a glimpse into how much “stuff” they have to store http://bit.ly/E3ooN

  3. Scabr

    Facebook is interesting that it’s probably the future web leader.First,it’s traffic,then cash is. http://scabr.com/facebook-v

  4. kidmercury

    there are public organizations that put out lies (i.e. public govt, public companies on wall st) and then there is a new crop of public companies that are truly transparent and literally put the camera on themselves (blogs, independent media). which one is facebook?

    1. Prokofy

      Well, wait. Let’s not get too giddy here. Fred has done some digging in their public statements but he has qualified his blog with terms like “apparently”. They do not have an open balance sheet published on the Internet. And there is a lot we don’t know about their plans, or about why Gideon Yu really left, and so on.

      1. kidmercury

        right, i tend to view facebook as a deceptive company, not transparent enough. if they were willing to view themselves as a country, rather than a private corporation, i think they would ironically make more money for their shareholders and be better positioned to pursue the virtual currency route.

        1. steveplace

          Flashes of Epiphyte(2) from Cryptonomicon are going through my mind.

        2. Prokofy

          Oh, I’m all for crazy wacky online things that aren’t real calling themselves “countries” (like Second Life) .But then you need a social movement in them to fight for real democracy. So far what Zuckerberg has put up is faux grass-tops democracy, where he controls everything, like Putin’s “managed democracy”. The question is whether to participate in this very flawed and incomplete user-feedback program that they are calling “governance,” or create parallel structures around it. I think the latter.

          1. kidmercury

            agreed. and i think the global turmoil is going to fuel the rise of virtual communities, virtual money, virtual governments that end up competing with their “real world” counterparts.

          2. JLM

            An interesting consideration will be whether virtual governments will have virtual SECs? When companies become governments it is probably inadvisable to allow them to regulate themselves.

          3. kidmercury

            yes, i think we will have virtual governments — organizations that essentially manage the standards independent businesses use, so as to maintain data portability. right now data portability is a real obstacle, i don’t think we are going to solve it without the creation of a “government” of sorts. the government can then establish whatever other standards it wants, and rival governments will emerge.

          4. Prokofy

            I’m not for data portability in some abstract fashion. Whose data? Who gets to port it? To do what? Scrape my data to sell your stuff? So that an army of widgeteers can tap into it and get consulting fees? Data portability is not some unalloyed good. The people demanding the porting of it are often not the ones who in fact produce it or own it in the first place. Please don’t tell me about how Scoble “needs” to thousands of FB friends to some other setting unless he wants to market something or broadcast to them. Portability *for what*?Your idea of government seems to work like this “Whatever is the strongest wins, with whatever whims it has”.The purpose of virtual government won’t to port data for your whims, it will likely be the opposite, protecting data from being scraped and widgeted to death by others, like yourself.It’s instructional to note that when an SL SEC was made in Second Life, it consisted of all sorts of anonymous and accountable avatars and some downright shady characters, some of whom were then accused of bank or stock market fraud and some of whom disappeared. There were lots of foxes eager to make an SEC merely so they could steal the chickens with impunity. The “Better Business Bureau” also constantly meets the same fate in SL, groups of people wishing to make a whitelist of themselves, and a blacklist of their competitors.There’s an idea rampant on the Internet, with all the Seth Godin’s tribe junk and other collectivist ideas that governments should be “just any pickup game of whatever group of kids get together to do something”. But the results, over and over, show that this isn’t government, it’s merely an interest group or a set of bullies.Real governments are establishment by constituent assembly and draft constitutions. That’s an arduous and difficult process, but that’s what you have to start with. FB laughably provided only 30 days for this, like it was some sort of focus group experiment.

          5. kidmercury

            i agree with most of what you’re saying, though i think data portability will be demanded by users, because that is in their best interests. right now facebook does not let me download any of my own data. lame.i envision a government in which i can download my data from one virtual world, and because it shares standards with another virtual world (that is in the same government), i can easily download my data from one virtual world and import it to another, if i so chose. so i view data portability as what keeps virtual worlds honest; they know if they try to cheat you, you will just up and leave. of course, governance is always a tricky issue, which is why all governments — online and offline — are prone to death by corruption.i agree that FB’s efforts have been pretty lame on this front, but the issue is that anyone serious about this issue needs to be willing to break out of conventional ideas of law, nation, corporation. As FB is a product of silicon valley, i don’t think they will have the mentality needed for the virtual world revolution — which is the direction they need to go in, IMO, and why i’m a bit skeptical of them in the long-term (doubly so when considering macroeconomic factors)

  5. Richard Forster

    I think the largest potential “cost” may be in terms of human capital that leave once the current employees have a formal market place to trade their shares and also in the type of employee that institutional investors will want to see hired to be at the helm of the company once it is public.I would be very surprised if the creativity of the company was not stifled by going public. Yes there is already enormous pressure for Facebook to perform financially as a private company but that is nothing in comparison to what it will face once it has gone public.

  6. mikegero

    Fred:Despite all the positives – the buzz & hype around Social Media, the incredible user base, the reasonably solid financials and theoretical projections – are the badly bruised public markets, which still seem to be shifting with the winds and perhaps not yet hit bottom, really ready for IPO’s like this? It’d be great to see a rejuvenation in the Internet IPO market, but is it just great fodder for rumors for now? I know your gut feelings (which I take as pretty credible) are that the IPO market is coming back, but do you really think the broader market of investors feels the same?

    1. fredwilson

      I think investors want things that are relatively simple to understand, are relatively small, are growing fast, take advantage of the new environment (globalization, technological innovation, etc).They get that with IPOs of venture backed companiesThis is certainly somewhat wishful thinking but I also sense it based on things I am seeing and hearing

      1. Prokofy

        Does Twitter fit that description. I mean, it’s dirt simple, but not “relatively small” anymore, no?

        1. fredwilson

          twitter has a ways to go before it looks like facebook. there’s one thing in particular that facebook has that twitter doesn’t – revenue

      2. greenskeptic

        “…things that are relatively simple to understand, are relatively small, are growing fast, take advantage of the new environment (globalization, technological innovation, etc)….”Hmmm, that sounds like StockTwits…

        1. fredwilson

          I think howard is writing the S1 right now 🙂

          1. greenskeptic

            I bet he delivers it to you at Josh’s bar mitzvah! (Congrats on that, by the way…my son Jasper turned 13 last Sunday and we have half a dozen boys coming over this weekend to celebrate…wish us luck!)

  7. Jonathan Betz

    Won’t Facebook soon be required to start filing with the SEC as a result of SEC section 12(G) anyway? At that point, they’d be bearing almost all the costs of being public without the benefits. This same thing happened to Google in 2004, and was a big factor in triggering the IPO. If Facebook passed the limits in 2008, April 30 would be the deadline for filing, so we might hear something very soon.More details on Google’s history of going to IPO as it relates to 12(G): http://en.wikipedia.org/wik

    1. Fun Dump

      No one seems to remember this:Facebook Gets SEC Stock Exemptionhttp://www.businessweek.com…

    2. fredwilson

      I am sure they have lawyers working on this for them, but yes, that was one of my points that I may not have made very well in the post

  8. Shaun Abrahamson

    Its funny. When I saw the title, I thought you were going to talk about how much stakeholders are involved in operations and key decisions (or sometimes, how little).Shareholder activity is one thing, but stakeholders have a real sense of ownership in FB, too. So in this sense FB has felt like a public;y owned organization from the start.I wonder, as there is more money involved how people will feel, who feel like they had a hand in building facebook. It’s true that google harvested everyone’s links to build their service but there is no sense that you helped build a search engine (and that you are being exploited).But with FB the harvesting is likely to feel different because so much of FB is visibly user contribution – so it seems reasonable that they are careful and exploring monetization options, carefully. Curious to see how the virtual currency works. Refers via FB Connect could also be monetized. In some sense it might work like an inverse version of Amazon Associates program.As usual – thanks for sharing your impressions and observations.

  9. stone

    I think it would be great for the industry if Facebook could go public but I sincerely doubt they will. Why? because they do not have a monetization system figured out. Why did Google wait so long? They wanted to have a few years of AdWords revenue data to show the markets. Their AdWords numbers were beyond impressive. Their revenue per search query was climbing rapidly.As for Facebook, their headcount and server expense are out of control compared to their revenue growth of 70%. They have NOT figured out how to turn their page views into money. It’s taking too long. I am part of the market and have a very sizable investment portfolio and I would not but their stock unless it was at a sharp discount to the real valuation, whatever that is.For those of us that have been in this wonderful industry since the beginning we must be able to separate the hype from the reality. Facebook is an amazing growth story. Their traffic numbers are almost hard to believe because they are so good. But, their business model is not so good. That is a fact. Despite what Mark Andreesen says they do not possess the ability to turn their traffic into money. This is why their entire senior team has turned over so many times over the past few years, all without making a dime. They know the truth.

  10. Steven Kane

    $4BN is the “more credible” number? Why?Personally, Im going to ignore intentyionally leaked “internal” documents that claim the company will exceed forecast by “70%” only 90 days into the year. I ignore corporate dissembling in general; Facebook in particular has been hamfisted about rosy public pronouncements, and they are in desperate fundraising mode right now, never a good time for reliable forecastsSo what do we actually know? Not much. Fred, your post quotes other pots which themselves quote other posts or hearsay. (Eric Eldon wrote “Based on a budget the company set at the end of last year, it is on track to make a little less than $400 million, I HEAR.” Heard? What? And from who?)One thing we do know is, Microsoft is paying FB $200MM/year just out of love. That deal is almost certainly going away at the end of its term. So even if they do post revenues of $500MM this year, it will be essentially break even – which really means they lost $200MM, when MSFT takes away its gift revenues.So what’s a public-type valuation for a company losing $200MM on $300MM in revenues? $4BN? More like, well, zero. There is no public market for any such company any more, and likely will not be for a good long time.I love FB — great smart product, thoughtful (maybe too thoughtful) sense of public responsibility. But the days when massive but social networking concerns are worth huge valuations may have ended in the web 1.0 era of geocities and tripod acquisitions. sure, youtube seemed to resurrect the marketplace for that kind of deal, but that was a dead cat bounce, i think.

    1. fredwilson

      All good points steve but there is an active private market for facebook common at 4bn to 5bn. So that’s why I think the 4bn number is more credible

      1. Steven Kane

        InterestingIn what sens eis that markt “active”? Is there a market maker? Or a tradingdesk of some kind? Who matches up buyers and sellers? Etc…

        1. fredwilson

          Second Market (that’s a company in NYC) makes a market “by appointment” in facebook stock. There are several others as well. My friend Martin, who passed away recently, was a very active participant/broker in the facebook secondary market.

      2. Mark Essel

        All this information is pretty fascinating but feels shakey.Where do all the costs come in? Server leasing and bandwidth? Are the ads effective enough to bring in enough revenue?It’s usually in a private businesses best interest to keep their financials close to their chest.I suspect that Facebook will lower their overhead by moving from expensive leases to their own systems (somewhat like Google).

  11. Mo Koyfman

    totally agree on the public markets coming back — been feeling that myself for some time. and investors are certainly hungry for simpler, cleaner, compelling growth stories as opposed to the complicated conglomerates (financial and otherwise) that dominated the past two decades. that said, i would not underestimate the ‘costs’ of being a public company. the process and procedural burden imposed by sox far outweigh the actual dollar costs. and more importantly, dealing with public market investors is a flat out bitch…especially in the fast money hedge fund world (a bit slower these days, but still very fast). sure facebook has a board to deal with today, but it is nothing compared to dealing with public market investors. it is very difficult to build a public company with true long-term shareholder value in mind when you’re managing quarter-to-quarter as demanded by the public markets. the only way to somewhat mitigate this is through a super-voting control structure (what Google ultimately did that allowed them to get comfortable with a public listing). but i’m not sure whether Zuck is in the position to pull that off today. and the market is frowning (rightfully so) upon companies without *real* public market accountability. if he did maintain control, owning facebook stock would be a big bet on Zuck more than anything else. i’m rarely a fan of this kind of control structure and am especially squeamish in his case given what i’ve read about his increasing stubbornness. so, net net, i think you’re probably right that they will be a public company sometime soon. and it’s a great thing for the market. but it remains to be seen whether it will be a great thing for facebook…

    1. Prokofy

      If Zuckerberg really thinks it’s such a damn country, he should be issuing stocks not only to his employees, but to users. They provide him with his bragging rights. Users should fight for a piece of FB stock, too, as we provide free content for his content empire that sells ads.

      1. Mo Koyfman

        You will get your wish when they go public. Or at least the ability to buy in.

        1. Prokofy

          No, I want free stock like the employees get. I provide content for free, that helps the service, I bring in my friends, I want stock. This must be the law of socialware.

          1. Mo Koyfman

            Employees have to work for stock my friend. It aint free. You provide content in exchange for their service – it’s a pretty fair deal.

          2. Prokofy

            Nope, I work hard, providing all those pictures of my cat and updates on my relationship and interesting clips and stuff. I also keep lots of widgeteers in business. So I deserve to be let in on the deal of the century.We who put our sweat equity into social media are not venture capitalists, but adventure capitalists, and our hours and the currency of our attention matter, and they have value. We deserve stock. P.S. We also deserve some seats on the board.

          3. fredwilson

            What we get is social capital in return. Howard Lindzon has been the ace on that concept.

          4. Mo Koyfman

            A shame you don’t feel you get enough back from the service itself. Go get em!

          5. fredwilson

            That’s not right. They are providing a huge infrastructure for all of us. To suggest that their infrastructure for our content is not a fair trade strikes me as nonsense.

          6. Prokofy

            Social capital doesn’t buy groceries for my family. Its an abstraction favoured by philanthrocapitalists.I work hard on social media, all day long. I get paid peanuts, not even subsistence wages.Your confusing the actors here, Fred. You VCs pump money into their infrastructure, and they provide an interesting tech start-up that you see as useful *for you*.The rest of us downstream are working in the long tail, supply the overwhelming bulk of content, and for nothing. At least on Predictify I could earn virtual points. At least they have real money in Second Life! On FB, I even have to shell out to send someone a birthday gift!Zoom out, Fred. 300 million people using something is a collossal, available, needful work force producing great gobs of content, and the infrastructure that you paid for and they coded simply does not offset it.It’s social media. It has people in it. They want to get paid, too.Trust me, this is the key to monetarizing this stuff, when you can stop thinking you all are doing us a favour by providing infrastructure. When you can start thinking about how we get paid, *too*.Here is the communists’ motto:”We pretend to work. They pretend to pay us.” As soon as you can pay a living wage throughout the system at least for the 10 percent in the power curve that produce high quality content, then people will stop pretending to work, too, and they won’t leave these services in droves.

          7. fredwilson

            That’s not true. Social capital can feed your family. But you gotta do more than participate in social media. It’s not the end. It’s a means to an end. Etsy sellers, for example, get most of their traffic and purchases from social media. Google only drives about 20% of the visits to Etsy. Robert Scoble is who he is because of his blog. Ashton Kutcher just took his career in a new direction because of twitter. I could go on and on. You monetize social media with what you do outside of social media.

          8. Prokofy

            Fred, what you are saying is foolish, because again, you are focusing on *oligarchs*.1. Etsy is great, but it’s a very niche sort of service for people who make crafts. Not everybody can make crafts as their content. There’s a halo effect that takes place with these kinds of new services, too, where people enthusiastically buy and contribute more because they like the idea than because they need the craft. It takes the crafts sale in the parish hall and moves it online. It’s a Tupperware party. It’s not a solution for an entire modern, complex economy and I’m surprised that you keep touting it as some kind of magic bullet — it’s good for what it is, but can’t save everybody. Do you want everybody to go on being like Third Worlders weaving and selling baskets?2. Ashton Kutcher? Are you kidding? His “career” took off when he married Demi, and it is *old media* that is driving his attention factor — if Yahoo news and everybody else didn’t cover this clash of the titans, and if Larry King didn’t use the power of old dinosaur CNN to draw attention to it, Twitter couldn’t work its magic. It’s like a ton of other one-off hypervents where old media made new media seem magic — let me now try to get a million followers and uh, take my career in a new direction lol — not something we all can do, even with brains : )3. Social capital is an abstraction that social entrepreneurs/philanthrocapitalists love to invoke because it makes voluntarism and free labour sound like it is a repository of value. Well, it is, I’m all for it. But it isn’t convertible. It’s like the currency of Uzbekistan.4. Robert Scoble’s blog wouldn’t have all those visitors if he didn’t have “Microsoft” in front of his job title for years, so again, and old dinosaur helped a new dinosaur who is just copying the broadcast model win.5. No, social media has to pay out within its own system, too. Otherwise, it will burn off and die. People become surprisingly casual about abandoning faddish social media in droves and droves and leaving it unattended. Social media is a tool to use in other careers, but then, let’s not pretend that reputation on it and social capital feeds families, it’s labour inside an organization or as a sole proprietor that then actually does the feeding. You seem to want social media to be a tool where things happen outside of it, but yet turn around and claim magical properties for it inside, too.I’m actually all for magical properties. I earn hundreds of real US dollars off renting virtual space and selling crappy little content in the virtual world of Second Life, even being a dummy. So I push this model not because I have “no life” but because putting micropayments into systems of social media works to pay people.The task is to see how you can replicate Etsy or SL or anything that is monetarized through social relationships and “social capital” — and I think it’s hard — but it’s especially hard with an attitude that says Mark Zuckerberg is doing me a damn favour just because he lets me put my rolladex and photo album on his damn servers. Meh.

          9. kidmercury

            competition amongst virtual world will lead them to compete on the economic dimension — paying participants in virtual currency, letting them shop in your virtual store, so that you have a full blown virtual economy. i think we’ll even get to a point where certain positions in facebook/virtual worlds will be “elected” positions. zuck and sandberg might not have the job security they think they do! :)we need more competition amongst virtual worlds. also, i think we will see facebook stagnate as a destination site unless they can start to embrace and develop a virtual economy. though facebook has enough users and user data where they have multiple business options, perhaps even too many.

          10. Prokofy

            I was just thinking. You went from saying “they provide a huge infrastructure for us all” to saying in fact we only cost them a few pennies a year for all the iron and staff they need to hold our stuff. So which is it? If we cost only pennies, they don’t provide us anything, as it only costs pennies. Still, their offering this for free, and our getting nothing out of it either, is a deadend.Jeff Jarvis is wrong, links do not pay out except in the sense that they do with Ad Sense, and he himself with all his buzz stuff only made $4000 off his blog last year. Not an economic solutionhttp://www.youtube.com/watc…

          11. fredwilson

            Facebook is barely profitable so for one dollar of revenue they get, they spend most of it.But I suspect they do not spend as much on infrastructure as people think. They are also spending a lot on developers, product managers, bus dev, sales and marketingThat in its entirety is the infrastructure I was talking about.

          12. Mark Essel

            Always look forward to your comments Prokofy. I have big hopes for social media design companies that have strong value sharing with content developers. There are a couple of examples:1)YouTube invites it’s big movie posters into an ad hosting program.2)squidoo starts from square one by giving developers 50% of affiliate money’s earned (they negotiate a higher base rate from amazon as well)I’d love to play in virtual economies, if it could earn me enough to play in real ones.

  12. JLM

    Fred raises some very interesting but different issues here — is there a “market” for FB shares and are they, in fact, trading? Does this trading make the company, in effect, “public”? And, if so, what are the implications for FB as a “public” company?Anybody can sell or buy anything at any time in today’s marketplace — witness Craigslist — simple, anonymous, caveat emptor — but a real marketplace nonetheless. People can always “get shares to market” but that is not the same, even remotely, as being a public company.I run a little public company and am intimately familiar (not nearly as much as I should be, I am sure) w/ the regulatory implications of the 1933/34 Acts, Reg FD, SOx, market regs and corporate governance requirements. Not a huge fan of the public framework but not throwing bombs either.It is a boatload of “stuff” but in an odd way, it is a primer in how a company should assess its business — not to the detriment of just good business practices by a competent management, board and shareholders — but a pretty good framework in which to run and evaluate a business. The disciplines required are “good” disciplines for serious business folks. The requirements to issue a “reviewed” 10Q, an “audited” 10K and to hold an Annual Meeting are good business practices — time consuming, sometimes tedious, sometimes overly cautious but “good” nonetheless.Because we operate in a wildly litigious environment and the disclosure requirements for public companies are so extensive and most companies err on the side of overstating the risks while almost failing to note the potential upside — public filings are mostly insurance policies. But they require huge and many times useful disclosures of basic information (e.g. detailed capital structure, management compensation, segment performance, etc.) which serve to dampen the rampant speculation which is an inherent characteristic — an exciting and a good characteristic for the industry — of a frothy industry like social media.One of the most important considerations in regard to “valuing” a public company is who is doing the valuing. A Microsoft, printing shares in the basement, motivated by STRATEGIC considerations prices things quite a bit differently than a public market investor who is evalutating alternative cash investment opportunities and will not be integrating FB’s business capabilities w/ some other business. A VC has an entirely different view of the world as he is looking over the horizon.The strategic valuer cannot place much premium on liquidity of the investment because once it is wound into existing operations it may not be able to be unwound while the stock picker wants to be able to change his mind with literally a touch of a key.Having watched FB a bit, I would say that just now the company is a bit undisciplined in its communications — a not unreasonable outcome of such a bleeding edge marketplace and maturing product — and I would be very, very cautious as it relates to evaluating the value of its stock using a public company lens. The wide and wild range of valuations also strikes me as a not unreasonable reaction to the changing capital markets — who ever saw “C” @ $1/sh?I would be shorting the crap out of a stock which had $300MM revenue, a modestly mature product, substantial market share/penetration, no profits and a market cap (perceived or otherwise) of $4-5B.

    1. stone

      I totally agree that I would be shorting this company from the very first day that it traded. Their revenue model doesn’t come close to keeping pace with their hardware/bandwidth/headcount costs, which is why they keep having to raise money and why they cannot keep a CFO for more than 2 years.

  13. MartinEdic

    I think this discussion is too granular. Revenue models aside (I know, that’s a very blase statement!), we have to look at what Facebook has accomplished. I am middle-aged and have 160 active friends on Facebook, most of whom have joined in the last six months and are not techies. Virtually none of them Twitter for example (I have posted guides to Twitter at the request of some). What does this mean in the real world? Facebook, as a platform, has crossed the chasm. No other social media platform, including blogging, has done this. This means the market they are creating is not demographically techies, young people, niche interest groups- it is everyone.When you are reaching everyone your revenue models don’t have to be earthshaking innovations. They not only reach a broad swath that is growing, they have a lot of data about everyone- much more, for example, than Google has. They not only know our demographics and interests, they know our range of people who share those interests. Our ‘influence’ in other words. From a marketing POV, we only need to focus our Facebook buys on the influencers and we exponentially increase our reach with relevance. This is huge.

    1. Mark Essel

      Great viewpoint Martin (breaking out of the tech market), you just have to sell the tops of the social trees in facebook to create massive need for your product(s). But any social media is going to have to keep users engaged. That’s a tough job. Facebook has to make our social lives not just easier, but better for it to keep people coming back.(I removed some of the excess out for now, may put together a blog post on it later)

    2. fredwilson


  14. Guest
    1. fredwilson

      I love that last line

  15. jrh

    This is slightly off topic, but I wanted to throw out an idea I’ve been mulling, called “sponsored freemium.”The strength of the Facebook platform is building relationships, but their current revenue model doesn’t exploit that very well. The banner ads are faceless and random.Instead, every user could choose a sponsor advertiser, who would pay that user’s annual membership fee, be identified with that user in some way, and have some type of regular communication with the user.Facebook currently has revenues of about $1.50 per active user per year. If they’re breaking even, then their costs are in that range also. So let’s say an advertiser would pay $5 per person per year to be in the program. That’s 70% gross margin for Facebook. It seems like a cheap expenditure for an advertiser, to get a user who is choosing to have a relationship.People who want to opt out of sponsorship could pay $10/yr. The first few months of membership would be free to all. Total gross margin on this part of the business would be even higher than the sponsored side.It seems like Facebook has the size and credibility to get a solid list of sponsors right out of the gate. The most natural participants would be companies that already have a big fan base on the site.The model could also work with other sites that have a good user base, where advertisers want a long-term relationship.

    1. fredwilson

      Cool idea. I’ve thought of that a bit too over the years.I like how you drill down into ARPU. I know how much it costs to operate some of our social media companies and its pennies per user per month.So all these people claiming that facebook is going to get killed by server and bandwidth costs may be barking up the wrong tree.Hosting images and video may change that equation for facebook, I don’t know by how much, but I am fairly sure that if you can make an ARPU of $1/month, you can make money hand over fistfred

      1. Prokofy

        If it is only pennies for user, that apparently explains why they don’t charge users even what World of Warcraft charges, which is $15.99 per month. But they will go nowhere due to the costs of scaling up unless they get some revenue in the door from subscriptions or sponsorships as indicated.Second Life has about 8000 servers and 750,000 repeat log-ons last month, but because they have an interactive streaming 3-D world with a billion pieces of inventory dynamically user-generated, their costs are pretty intensive, I would think more like a dollar per user. And FB is going more in that direction of more interactivity, more applications, more videos, etc.

        1. fredwilson

          The other interesting sector where this is playing out is social gaming. Zynga’s numbers are interesting too

          1. Prokofy

            Here’s the Second Life economy numbers, Linden Lab to their credit is the most transparent of these services:https://blogs.secondlife.co…even so you can see I drill on them in the comments as do othersBut it’s impressive, because it means that in this economy of 124 million user hours this quarter that generated $120 million dollars, you get paid $1 an hour while in this world, so to speak. Now, that’s poverty-level wages, but when you think that I don’t get paid to Twitter unless you count the ad sense I sell by driving followers to my blog, and I don’t get paid on Facebook but FB is only a cost center to me for birthday gifts, it matters.

  16. Paul Johnson

    Great post Fred – I think from a communications standpoint it points to the new transparency companies are embracing – public or not. Facebook understands that they benefit in the long run, and engage potential shareholders, if they are as transparent as possible from the start.

  17. Eric Rosser Eldon

    Thanks, Fred :)I’m quite confident in what I reported on this one — but of course, private company valuations can be renegotiated and who knows what’s happening inside of Facebook right now.Imho, regarding IPO, they’ll need to prove that their experimental ads are working. That seems to be happening although probably still early stages. I would be surprised to see an IPO this year (but yeah… who knows what’s happening inside of Facebook right now).

    1. fredwilson

      The skepticism I cited on “tech blogs” was not aimed at you Eric. I should have been more clear about that.

  18. Duh

    How about combine Ning and Twitter to compete with Facebook and sell it to GOOG.

  19. Phanio

    Given your thoughts here and Googles somewhat successful Dutch Aution – what is you opinion of the article “Why Wall Street is unnecessary” – http://articles.moneycentra

    1. fredwilson

      I think we still need wall street but not all of the functions they have provided over the years