VCinJerusalem

19 Comments And Counting: the "power" of Facebook

I have writing a blog now for almost 2 years. From time to time get comments, sometimes an email (or even an old fashioned phone call, usually from Elie Wurtman) complimenting me on a blog posting. The feedback is nice, reminds me that I am not only writing for myself (which I am) but also for others.

While I am not the world's greatest fan of Facebook, or its bloated valuation, it definitely has created a public commons, a place where people feel free to express their opinions. Perhaps, like Wikipedia, it should be turned into a massive non-profit. Throw a search box in there, share the ad revenues with Google et al, will definitely be enough to cover costs of operation (like the Mozilla browser).

What prompts my thoughts on this? Well, was on a super boring conference call a few days ago, and was fiddling around with Facebook and decided to write something in the "status" box. I wrote that I was waiting for President Obama's speech to start, and that I hoped he would "say the right thing." That launched a debate (on my rather vague status update) which currently has more than 19 comments. More than any blog posting I have written, and the comments are well thought out, whole paragraphs, not just a few words here and there.

Incredible. As always, proves that people have way too much free time, but also that a simple to use interface, which will guarantee "exposure" will be enough for many to write and write. And it is somewhat unmoderated. As long as you are a "friend" of mine you could comment to anything I throw up on my facebook page. and yet for the most part the self moderation works...not too much abuse, language is kept in check, little outright digital vandalism.

Facebook has developed as a powerful medium, and I am not sure if it is yet at the peak of its power (we will have to see how its kissing cousin, Twitter, develops), but it certainly is no closer to developing a real business than a year ago. And perhaps that's OK, if Marc Zuckerberg gives up on dreams of billions of dollars, and instead decides to donate facebook to the people. He is young, I am sure he will figure something else out to make sure he gets his riches. And/or he could donate it with the caveat that he gets a $X million a year salary for 10 years, enough to feel that he has real money, but far short of Sergei like riches.

If any of you know Marc, pass this thought on to him. From an ego point of view, he did it. Now he needs to decide where to go from here. Meanwhile I am thinking up my next creative status update....

Locked Out of Facebook: NOT Mission Critical

Received a Facebook message notification this morning through email. Now, this was actually an important message that I needed to respond to in a timely fashion, from someone I became Facebook "friends" with, but did not have his direct contact info (nor he mine, which is why he used Facebook to communicate).  When I tried to respond, received the message below (yes, tried a few times)...obviously Facebook is not ready to be a "mission critical" application. No company is too big to fall. Unless Facebook grows up and becomes a truly always-on app, achieving a 99.999% service level, they will fall.

Come On, Dustin, Enterprise Software Facebook Flavor? Puhleeese.

OK, so I have not been the greatest Facebook fan in the world (but did just check my Facebook account for first time in a week, discovered that a friend's dog died. That was a waste of time). But even I am surprised that Facebook co-founder Dustin Moscovitz is leaving to start a company that...now get this, will be leaving to start a rerun of Lotus Notes (remember that program? It actually ran the majority of Fortune 2000 systems for a period of time). Huh?

According to Valleywag Dustin sent out an email to colleagues at Facebook, in which he said:
    "I've seen us unblock ourselves time and again with new tools to increase transparency and passive     information flow and many times it was the fruit of my own labors. While working on improving         Facebook's tools, however, I came to a very difficult conclusion: doing this for all the companies of     the world was not the same project as doing it for one of them. This idea is one that needs an             organization that was built to do it, with every fiber of its DNA engineered in a way that producing     an extensible enterprise platform becomes little more than the logical consequence of an organism     executing its own nature." [emphasis added]

Wow. A bigger pile of [nonsense] would be difficult to find. Either Dustin is smoking some really good stuff, or five years of being poked finally got to him.

We all knew that keeping good people around would be almost impossible for Zuckerberg and friends would be difficult if the future at Facebook became cloudy, and cloudy it is. No business model, high overhead, and a stock market barely functioning. Moscovitz's stock is not vesting, its his, and I am sure he will have no problem raising big chunk of $$ from silicon valley VCs still starry eyed by Facebook fluff. He will be able to pay himself a nice salary, and dream about corporate organisms executing their own nature. Sounds like VC version of Adult content [read PORN] to me, but hey, if it sells...

Now nothing is impossible, and Dustin could very well have some incredible concepts for better corporate organization, although he probably should spend some time in real corporations that have real products (and things like revenues and profits) before thinking he has figured enterprise nirvana.

What does all this say to me? The consumer social network eco-system has run out of gas. When one of the stars starts talking about enterprise software, means VCs should head for the exit.

Kara Swisher Gets Personal at Demo

For me, anything associated with the Wall Street Journal takes on an air of seriousness, woodcuts instead of photos, distinctive typeface, the whole package commanding authority. Now I know that perception is often far from reality, but the highlight of attending Demo conference last week was a fireside chat (well, without an actual fire) between Walt Mossberg and Kara Swisher, the producers of D conference, and columnists for the Wall Street Journal. And let me tell you, the conversation was nothing like I expected, especially from Kara Swisher.

Before I get to Kara's substantive comments about my favorite over-valuation in the past ten years, I want to dwell for a moment on how personal Kara got in her comments. From her "bite me Comcast" to her reactions to the "other conference" happening up in the BayArea (TechCrunch50), Kara was not at all the reserved Wall Street Journal reporter/columnist I was expecting (Walt stayed more true to pre-conceived notions).

First, in reaction to TechCrunch, Kara said (and this is in front of entire Demo audience, not sure if it was web-cast):
"Getting lectured in journalism ethics by Michael Arrington is like getting parenting tips from Britney Spears."

Kara and Walt then turned to social networks and the grandaddy of them all, Facebook. Again Kara got a little [too] personal, talking about Facebook CEO Mark Zuckerberg as a "twelve year old with stupid clothing choices."

Of course, she did follow that with some somewhat more serious thoughts/questions on Facebook and other social networks like: How do they make money? How do they grow?

Both of those are the key questions, Kara didn't have any answers. Not sure that Mark does either...

Why do I dwell on all of this so much?

For me, a relative outsider, in from Jerusalem to check in on the pulse of technology entrpreneurship, I was reminded how much of an insider game the tech world remains, even in the always on, twittered to death era we live in. What do I mean by that? Well, why do people physically gather in conferences to begin with? Because being there matters, and in the end personalities drive business.

A lot can be accomplished in the virtual world, where things can get personal as well, but in the end physical interaction can't be beat.

Last week TechCrunch passed 1,000,000 subscribers to its RSS feed, which is quite an accomplishment (consider that the Wall Street Journal subscriber base is only about 2 million). Michael Arrington and friends definitely are a force to be reckoned with -- and they know all too well that physical beats virtual hands down. Which is why Techcrunch hosted a competing [physical] conference to Demo.

What does this mean for Jerusalem Capital and our portfolio companies? That we need to get personal as well, we need to be in direct contact with key industry players on a regular basis, and need to show up in order to be counted.

Oh, and regards to the 12 year old with poor clothing choices, well, you all know what I think about Facebook....definitely not worth what Mark and Microsoft think it is/was, but also not going away anytime soon, unless they run out of money. And with Lehman days away from a fire sale, anything is possible.

hi5 Actually Quite Low, Signs of Desparation

Over the past few days I have been receiving more and more of these, maybe you have as well (fill in the blank for some random contact you have in some address book):

___________ would like to be your friend on hi5!

I set up a hi5 profile and I want to add you as a friend so we can share pictures and start building our network. First you need to join hi5! Once you join, you will have a chance to create a profile, share pictures, and find friends.

Thanks,
_____________

Now, I do believe in social networks, so don't get me wrong. But I also believe in fairies and peanut butter, but don't want any of the above to be shoved in my face or sent to be under false pretenses.

After receiving quite a few hi5 "friend requests" I then received this message (from an actual real world friend):

Hi All,

 

I appologize if you got in the last few days an invitation from me to join hi5.  It seems this website acts as a worm - taking my address book from gmail and sending invitation to all.

Now, I am giving the folks at hi5 the benefit of the doubt, and assume that they utilize one of those "next-next-next" approaches that ask for user data and in fine print say they will suck all the contacts out of Google, etc to build your network. i.e. not really a bona fide worm, as my friend above suggests.

But it is a good indication that venture backed social networks have lost all sense of differentiation (TODAY ONLY...FIND FRIENDS....SHARE PICTURES....), and are taking measures coming very close to spam, so that even a relatively sophisticated user like my friend above (a super-smart programmer, just so you know) slanders them with the "worm" label.

One social network that is impressive as a business is LinkedIn, not only because they were one of the first but because they have focused on a few key areas of nice revenue generation that simply work. LinkedIn is quickly turning into a real business. hi5, doubtful.

For sharing pictures I have many good solutions out there by teams who are focused on just that, ranging from Picassa to Flickr (and obviously Facebook has that functionality built in on a basic level). And for finding friends, well, I have my real lfe, and the untold hordes of virtual friends as well who keep sending me hi5 invitations...

Its time for all the social network companies to turn themselves into businesses, and lay off the spam. Forget "user growth," focus on monetization. Unless one of your board members is on the board of a cash rich company that could buy you, then do whatever they say...hey, if you have it use it. End of the day this game is about making money for investors and creating wealth for founders and management. 

 

So Much for Facebook As Mission Critical

Someone told me today that Facebook is their central communication hub today...for instant messaging, not-so-instant, etc. And then when I went to do my weekly check of my Facebook (yup, down to once a week), received the error message below. I guess Facebook is not exactly [yet, if ever will be] a mission critical app. Thoughts?

Facebook Fallout: Nobody Wins, Especially VCs and Start-Ups

You have heard me go on before about why I thought the valuation Microsoft gave Facebook for its "strategic investment" was way out of line (nice way of saying absolutely ridiculous). Below please find analysis by Daniel Primack (of PEHub fame), which I think is spot on, so simply reposting in...bottom line, Dan thinks that "Microsoft’s initial investment may be one of the worst venture capital deals of all time."

Not only do I agree, but want to add that in addition to being terrible deal for MSFT, also sent shock waves through the entrepreneurial ecosystem, even here in Israel, which made entrepreneurs (and some VCs and Angels) silly for several months. All of a sudden every idea for a new social network was deemed to be worth $5 million pre-money...which is one of the reasons Jerusalem Capital did make any new investments since September 2007.

We already see that people have come back to reality, a bit. Anyway, here's Dan:

                                                                

	Dan Primack | 1191 articles posted | contributor since 11/2006         read my column ...
Facebook’s Valuation Problem
Topics: VC Deals,  PE-Backed M&A,  PE Exits		This entry was posted on 05-09-2008

 

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, macro valuation inflation helped scuttle the Internet roll-up envisioned by Ross Levensohn and Jon Miller — as their targets upped their respective asking prices.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cachet. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope he doesn’t mind the pilfering.

And Putting Aside Facebook Itself, What ABout All Those Apps?

For a few months the average VC got used to asking, "and can you do that as a Facebook app?" When the average VC starts asking the question, you know it's too late (average VCs usually lose money....). We all know the history of Facebook itself, and the debate will remain open for some time whether Marc Z and friends will figure out how to make a business out of it. But what of all the people riding on their wave? From vampire bites to voluptuous kisses, there is a Facebook App for everyone. And many of those app companies have raised money.

Is anyone making any money from those "millions" of vampire bites?

See this posting  from Mashable...

How Much Money Are Facebook Apps Making?  Not Much Apparently

January 28, 2008 — 11:09 AM PST — by Adam Ostrow — 

VideoEgg has announced that its ad network for Facebook applications – eggnetwork – has pulled in around $1.5 million in ad revenue over the past five months. 

While the company is touting the news as a “million-dollar pay day” for developers, it actually seems like a fairly paltry figure when you consider the companies on eggnetwork’s client list, which include some of Facebook’s most popular apps like Scrabulous, Flixster, and Vampies. Overall, the company claims more than 150 applications are part of its ad network.

I’ve emailed the company to see if I can get some numbers on how many impressions were served, which would give us some idea as to the CPMs that Facebook application developers can expect. However, given the millions of combined installs that the apps on Videoegg’s network account for, I’m guessing this number is going to come in fairly low – I may even have to revise my estimated value of a Facebook application user downward from $1.40 each.

However, all hope is not lost.  Now that Facebook applications will reportedly be able to run on third-party sites, developers may have better opportunities for monetization by being able to sell their Facebook ad inventory at the same CPMs as their website inventory. Additionally, running the apps on a Web page instead of within the Facebook interface will presumably enable developers to incorporate more traditional ad formats.

The bottom line is that $1.5 million in revenue over 5 months for some of Facebook’s top applications simply does not seem like much, especially when you consider that MySpace is estimated to pull in $800 million of revenue this year. 

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You're No Friend Of Mine: "Friends" on Facebook, Or Bugs In The System

I receive "friend" requests every day on Facebook, as I am sure many of you do. Often I ignore "spam" friends, this time the name was so interesting I decided to ask this stranger was that was asking to be "friend" (see my opening line below). Now, I leave it up to you to figure out how the story below even got started...how does one ask to be my friend without knowing? Unless of course Facebook has been ridden with bugs, viruses, hacked beyond belief, which I am sure is the case. With a few more stories like the one below, Facebook will start to fade, and todays $15 Billion valuation will be tomorrow's Pointcast (for those of you that remember that story). Can Marc Z and his "friends" prevent the downfall? Possibly, but they need to get serious about stopping the friend pollution.

who r u? why r u friending me?

Between Edye Cook-Skidmore and You

 

Jacob Ner-David

2:26pm Jan 25th

<no message body>

 

Edye Cook-Skidmore

7:36pm Jan 25th

Report Message

I have no idea how I requested you.  I am new to facebook.  My son is Seth Cook are you at Aish?

 

Jacob Ner-David

11:17pm Jan 27th

no, not at aish. And I do not know your son...

 

Edye Cook-Skidmore

Today at 6:03pm

Report Message

Sorry I have no idea how I would have requested you. I get to Jerusalem at least once a year to see my son. Maybe we have a friend in common? Take care!

Fred Wilson is at $5-7 Billion...How Much Would You Pay (to acquire) Facebook?

Hate to stay on the Facebook subject, and I promise I will not return to it for some time (say, until Facebook is profitable....) but just saw this short interview with Fred Wilson in Business Week (here)  and caught him saying he thinks acquisition price for Facebook   just now is at around $5-7 Billion. Now if that is the acquisition price, the private round investment should be at much lower valuation...but Microsoft is not really a rational player, I guess. I still think even Fred is over the top, but I guess I he is factoring in all the momentary hype value.

We are going through a round right now for one of our portfolio companies, which we believe is a path  breaking company  in an area where real money is being made right now. There is no hype value, because the company is not consumer facing--which means it actually has to build a real business case before it will have major jumps in value. Thank goodness for us and our investors, we will get a nice bump up in value terms from when invested (little over a year ago)--but nothing like what Facebook investors have seen. But we are still thrilled with our success, and happy for them!

Valuations are a dark art,and acquisition prices of pre-profit companies even more so.

So ask yourself, would you buy Facebook right now for $7 Billion (assuming you had the cash to spare...)??