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?
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:
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| 1191 articles posted | contributor since 11/2006 |
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| 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.
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...
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.
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...)??
Last Thursday I gave my annual lecture at the Entrepreneurship and Technology course at Hebrew University . This a wonderful "joint venture" of the Business and Computer Science schools at the university, and I have been participating for 8 years now. While I have yet to invest in a company "born" in the course, some companies have been created and received funding, and I have recruited team members that I met through the course.
While obviously I do this as a volunteer, I do get a lot of it, as it brings me in contact a few times a year with actual university age students...and I learn a lot.
This past week I asked how many in the room (there were about 100 students) have a Facebook account--every hand in the room went up!! I asked how many check Facebook once a day, most hands stayed up. More than once a day? Half the hands stayed up. More than five time a day? One guy with a laptop with 3G access card kept his hand up.
Then I asked the critical question: How many would pay $1 a month for Facebook...almost nobody raised their hand (ok, the guy who checks five times a day did).
As this post will also go up on Facebook, I put the question out to all: How many of the more than 50 million Facebook users would pay $1 (or more) a month to continue the service? Keep in mind, many of us pay $50 (or more) a month for wireless voice access [cellphone service], $50 (or more) for video content [cable or satellite TV], and another $40 a month for broadband at home. What's another $1? But most of us would not pay it for Facebook. Why?
Well, we look at Facebook as a cool application, very trendy, very Web 2.0 (even though I think the interface is more reminiscent of DOS). But it has NOT reached the level of mission critical utility, it is NOT an operating system. We still pay for SMS, but we would not pay anything for "Funwall" posts.
As you have heard from me before, the "ad supported"model only goes so far, and some point people need to start paying for things. Google has succeeded because they leveraged advertising in ways that nobody had done before...and they had first mover advantage. Difficult, but not impossible, to challenge them at their core game (search). Facebook is no Google. It's not even Yahoo!.
Unless Mark Zuckerberg and friends can start to charge for something, or come to market with radically new ad paradigm, their financial health is in danger. But hey, I thought Google was a short at $100....;-)
While I already posted this to Facebook , some people are still not there yet (Thank God), so also using this medium to shout out about a job opening at MEET . MEET is one of my favorite NGOs, MEET stands for Middle East Education Through Technology. Started by a group of MIT students, MEET is an example of doing, not just talking (or even worse, complaining).
When faced with the multi-generational conflict between Zionism, the State of Israel, and Palestinian nationalism, it is quite easy to get overwhelmed, frustrated, and burn out (believe me, have experienced all of that). And trying to "solve the conflict" can lead sometimes to disastrous consequences, such as the failure of Camp David II back in 2000. While we pray that the Annapolis ceremony will lead to actual progress on the macro level, true peace and coexistence will only come from programs like MEET.
I have watched MEET grow from idea, to pilot, to early stage start-up. Now they are moving to the next level, and if I was not otherwise engaged right now I would jump at this opportunity. It's that exciting. If you want to make a difference, or know someone like that, please urge them to be in touch with my friends at MEET. Details below.
CEO for MEET
Leveraging on MEET's expertise in technology and proven educational model we are looking for a CEO to lead the organization during an exciting period of growth, enhancing MEET's impact. The CEO will report directly to MEET's executive board and will be stationed in Jerusalem.
Position Summary
We are looking for a passionate leader with strong, performance driven management skills. The CEO will focus on developing and strengthening the MEET program and organization, preparing it for future growth.
For immediate consideration please send resume with both "CEO for MEET" and full name in the title to: joinus@meet.csail.mit.edu
Responsibilities
Requirements
Role's Critical Success Factors
The field of social networking is an Israeli/Jewish art form...we have been perfecting it for thousands of years. Jews in general, and Israelis in particular (one can look at Israelis as super-Jews[both those that consider themselves Jewish and even those that do not], but that is a whole other conversation...), love to talk. Israelis also love to travel, mainly to find new people to talk to!
No surprise that Israel is a center of communications technology development and commercialization, ranging from IM to VoIP to wireless to [next thing to come]. I have had the honor to be in the center of a lot of this action over the past 12 years (yes, that long since we founded Delta Three (NASDAQ: DDDC), soon after the introduction of [the original] iphone from Vocaltec.
The new buzz on the block is of course social networking, with the somewhat friendly face of Facebook. And Israel has taken to Facebook in a big way. A very big way. As of yesterday (last I checked) there were over 200,000 Facebook members who identified themselves as originating in Israel, i.e. self-identifying as Israelis. That is a lot, especially given the fact that there are only 7.2 million citizens of Israel, according the Israel census bureau. If we take the numbers on face value, 2.7% of Israelis are members of Facebook. Remember, this in a country where a good 10% are ideologically opposed to the Internet.
Are a lot of Israelis using Facebook? Yes. 200,000? No.
So how to make sense of the numbers being reported?
Well, a few ways. First of all, when signing up for Facebook, and even after joining, one can set any country as your home "network." For example, my good friend, the uber-social blogger and all around tech-guru Jeff Pulver listed his home network as Israel. Now, many of us would love Jeff, Risa, Dylan and Jake Pulver to spend more and more time in the Holy Land, and while they are, formally Jeff is not [yet] a full fledged Israeli. But he makes up one of those 200K+ Israelis on Facebook. And he is not alone.
So Jeff is utilizing a very light form of identity theft. Without altering his real world passport, he has created a virtual identity that is not 100% accurate. But since we love Jeff, we are honored that in the virtual world he has thrown in his lot with Israel.
Lets move on to a more serious form of Facebook identity theft...over the past few months I have been friended by some well known political figures....and lets just say that while I would be happy to be friends with [some] of them, something tells me that these virtual friends are something other than they appear. For example, one of my "friends" is Shimon Peres. Now, I happen to like Shimon, and actually am in communication with some of his family members, but Shimon himself...but even that is welcome. I actually like Shimon, so even if not really him, proud to say I am friends with him. Now take another "friend" of mine: Yasser Arafat. Now, him, I didn't even like, especially when he was alive. Now that he is dead, a real stretch to say he is a friend of mine. But there he is, listed as a friend (for the record "he" friended me). [For more info on all these friends and more just peruse my friends on Facebook, itself a dangerous feature....]
Bottom line: it's the Wild West out there, a new frontier, and the rules have not yet been created. But they need to be, and quickly. Because while the above examples are humurous, and we love to brag about the intense interest of Israelis in social networking (after all, we are the "people of the [Face]Book"), very soon, if not already, we will see some bad stories, criminal uses of false Facebook identities, and worse. Lets hope that Mark and friends over at Facebook central will start to develop some controls in the system. Because if not pretty soon Facebook will become faceless.
Amidst all the buzz about $10 billion, $15 billion, and event the legendary no to Yahoo!'s $900 million, I have been thinking, how can we approach a semi-rational valuation of Facebook?
Disclaimer: do I use it? Yes, mainly because I am a lemming and followed some of my friends and family members. It has not changed my life, or even made it slightly more productive. Facebook does provide some entertainment, and reconnected me with some long-lost acquaintances, but they were long lost usually for a reason...
Looking at start-ups all week, we at Jerusalem Capital spend a lot of time asking about business models. And I am VERY tired hearing about advertising. After all, eventually someone needs to actually buy something. If Facebook had been pitched to us, would we have invested? Probably not. Our lives have so much risk, we tend to look for some solidity regarding business model.
Back to Facebook: ok, so maybe there are tens of millions of users, but so far the only "business model" is ads, and here I have some difficulty judging, because I am signing in [most of the time] from Israel. To date there has been one advertiser.One company, on all the pages, same company all the time (they must have unlimited ad budget!). It is an Israeli company helping with finding jobs outside of Israel. Not a helpful ad for me (I think my kids and LPs would be upset if they heard I was clicking on websites for finding a job outside of Israel). So based on my limited sample of me, I have to say that Facebook lacks any of the bells and whistles of the dozens of context based ad platforms I have been pitched. They are serving ads based on IP address only. And they only have one "customer."
Now, could Facebook switch to a subscriber model at this point? Maybe. I wouldn't pay, but maybe my oldest daughter would (yes, as of now that's the same as me paying...sigh). And if they did get a few million people to pay some nominal monthly amount, maybe one could argue the company is worth a few hundred million dollars. But $10 BILLION? I think not.
Google is a different story...they have actually proved they are a cash machine. Still overvalued, but they do have billions of greenbacks in their bank account from running their business.
So yes, I think Facebook is worth far less than the various number being thrown around. I would have taken the $900 million offer from Yahoo!. Only time, and the moves of Facebook management, will tell whether I am right, that with all the buzz, they could be headed for some tough times, as the WOW factor subsides and they need to show a business behind all those annoying notifications that some "friend" just blew her nose [I am sure there is a Facebook app for that already].
