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Answers To The $500M Facebook Question

05 January, 2011

 

Facebook has a new friend. Goldman Sachs just invested $450 million in the company. Digital Sky Technologies (DST), a company that already has a stake in Facebook followed through with $50 million. This latest round of funding pushes Facebook’s valuation to an estimated $50 billion.

Now, how will Facebook spend half a billion dollars?

Hire more people around the world: The company currently employes 2000+ people according to the fact-sheet. That is not a very high number for a company that is worth so many billions (Google has 19,835 employees, for example, and Yahoo around 13,500). Facebook has to step up its hiring to keep the momentum going, and to grow, and grow fast.

The company knows this. Facebook is believed to be buying a 57-acre campus from Sun Microsystems that can house some 3, 000 employees in California. It opened a operations center in Hyderabad earlier this year, which was its first office in Asia, and second worldwide, after Dublin. Expect many more. The company believes that by having multiple support centers in a variety of time zones, it can provide better round-the-clock multilingual support. Incidentally, Facebook is also currently hiring in India, not a difficult job in a country that has more than 8 million people using Facebook.

Develop better and bigger products: Innovation is Paramount. So the company says. There are a couple of thrust areas for Facebook. The first is its messaging system. Facebook Messages is not just a slam against Google, it is an attempt to change the way we email. If we have most of our friends and family on Facebook, and can conveniently group them into separate lists, we will probably not go to Gmail (or Yahoo or Hotmail) just to send an email, as long as Facebook can provide a similarly compelling experience. It helps that we can send text messages along the way too. Getting into the messaging business is a really smart move for Facebook, as emailing is one of the major factors providing stickiness to portals such as Yahoo.

If Facebook can get its users to email from within the website, it is not only increasing the time its users are spending with the site, it is also reducing the time users are spending with sites like say MSN.

Another thrust area for Facebook is Search and Social Search. Currently, you search for ‘Apple’ in Facebook, and you are taken to the Applebee’s page. In short, Facebook search sucks. Expect all that to change. Google’s PageRank is by far the most sophisticated search algorithm, which gives Google a monopolistic lead, because the competition is just not as good. Facebook will try to approximate some of that. It is also going to pioneer as a social search engine. Say, you are looking to buy a car. You search for cars (using Google), you also ask around (which you can do now, using Facebook).

Facebook is trying to get us to switch these interactions (asking friend and family members for recommendations) from an offline world to the online mode, and on Facebook.

‘Acquire’ growth – maybe buy Zynga or Twitter : The company is not as fond of shopping as some other companies are (and the name Google comes to mind). It has just got two companies so far, both for undisclosed sums. It bought Parakey (in 2007), a startup run by Blake Ross and Joe Hewitt, co-founders of Mozilla Firefox. In 2009, Facebook acquired FriendFeed.

Facebook is now in a place where it can shop till it drops, metaphorically speaking of course. Twitter has been having a hard time generating revenues, despite being potentially worth a lot of money. The combination of Facebook and Twitter may be more attractive to both the public and the advertisers, if Biz Stone can be persuaded to sell. A lot of users get on Facebook just to be able to play FarmVille.

Zynga has been making a few acquisitions of its own, but it may make more sense for Facebook to buy Zynga, and offer its games as part of Facebook (or as apps within Facebook), in effect choking out Yahoo or MySpace. Currently, Zynga has a five-year contract with Facebook (terms are not disclosed) and is testing Facebook Credits in some games. Besides being an investor in Facebook, DST is also a stakeholder in Zynga.

There are other companies like Yelp or Groupon which can be aligned with Facebook’s long term growth plans, and are thus potential targets for acquisition (Gowalla, and Foursquare, among several others). Facebook can also be expected to be looking out for smaller companies around the world to step up its presence, especially companies that have a multi-lingual component.

Local language Facebooking: About 70% Facebook users are outside the United States. Currently, more than 70 translations are available on the site. Clearly, the world outside, is very very important to Facebook; even the walled parts of it, going by Zuckerberg’s recent China trip. Expect Facebook to be available in more languages, and a step up its international operations. People on Facebook install 20 million applications every day; with local language availability, that number can easily double.

Going Mobile: An estimated 200 million people access Facebook on mobile devices. There are more than 200 mobile operators in 60 countries working to deploy and promote Facebook mobile products. That number is going to go up, as more and more phones become Internet-enabled smart phones, and more and more devices (tablets, for example. Or the television) become Internet-enabled. Expect Facebook to streamline its offerings for various access devices, so that users can have a customized interface, and ease of usage, no matter what the access point may be.

Location-based services: Places has not been a resounding success, but it is catching up. Facebook has got to step up on geolocation services, especially as it will want a chunk of local advertising.

Better Multimedia: Several million photos and videos get uploaded into Facebook every day. Facebook will want to offer basic editing services (like Picasa, on the cloud) and better sharing services (like YouTube for groups perhaps). Again, the comparison with Google just keeps happening.

Facebook is as what Zuckerberg does
No story on Facebook is going to be complete without some thoughts on Mark Zuckerberg. The website gives credits to Dustin Moskovitz, Chris Hughes, and Eduardo Saverin as co-founders of Facebook, but they have fallen along the way; and in the case of Saverin, the right to be billed as co-founder of Facebook had to be obtained legally. The direction Facebook will take then, will be the direction Zuckerberg decides the company should.

Which may not necessarily be a bad thing. In 2006, for example, Yahoo offered a billion dollars for the company, and even though a lot of people felt Facebook should take the money and run, Zuckerberg was the one who held out. Today, the company is reported to be valued at about 50 times that. Zuckerberg’s personal worth is estimated to be at some $6.9 billion currently, but he has also offered to give away a half of his total wealth to charity over the years.

Zuckerberg is known to wear a hoodie, at all times, which has the legend “Making the world more open and connected” printed on its inside. Meant for his eyes only, the statement is considered to be the unofficial vision of the company, and a likely indication of where it is headed. “Hacking is a central part of Facebook’s culture” the company is quite vocal.

In software engineering, hacking has a positive connotation, and Zuckerberg said in an interview on ‘60 Minutes’ that it meant building something very quickly. This is an apt metaphor for a company like Facebook which can increase in valuation by some $10 billion in a year without much tangible physical assets, as opposed to traditional companies, even tech companies inching for growth (Apple is more the exception than the rule).

Facebook is not after money.
It is after the world. This is what makes Facebook both extremely formidable and tremendously vulnerable. The company is on a mission, and takes its mission very very seriously.

Zuckerberg is a tremendously talented guy, he has matured over the years from being the ‘toddler CEO’ as a section of the media had labelled him, and clearly has the smarts; but he is dealing with both business and ethical challenges, the implications of which may be beyond him at the moment. Not to mention several billion dollars in paper to do whatever he may want with.

Monopoly is a game. Facebook is serious business. And the ones who are grading are not college professors. If the company cannot figure out a way to financially charge and get paid from the world it is intent on changing, its investors may be left hanging. Encouraging the users to reveal more information about themselves, and then using chunks of that data as currency will probably not work out in the long run as the primary source of revenue. Facebook Credits, while doing good, and available as gift cards with retailers in the US, is not yet good enough. Talking of the offline world, maybe Facebook will come down from the cloud and buy a couple of data centers or a energy company next.

The Others:
The Goldman side of the deal: Goldman Sachs ranked as one of the leading M&A advisors globally in 2010. The company advised on 346 deals valued at a total of $580 billion in FY2010. While $450 million is not loose change, Goldman can well afford to be indulgent at this stage.

Unless something dramatic were to go wrong, this investment more or less seals Goldman’s deal as the investment bank of choice when Facebook does decide to go public, which it has to sooner or later. This investment also means the bank may get to handle the personal wealth of key Facebook executives, fortunes ranging to the tunes of several billion dollars. Not bad. As part of the deal, Goldman is expected to raise north of $1.5 billion from investors for Facebook. Clients are being given an opportunity to get a piece of the pie, at $2 million a pop.

Facebook’s financials may be a closed book, and the investment comes with catches (investors cannot sell their shares before 2013, unless Facebook goes private in the meanwhile, for one), but for some Goldman clients this may be an investment opportunity not available in the primary markets, and the secondary markets did not amply provide.

Mail.ru has already won
Mail.ru is the publicly traded arm of DST. Shares in the company surged more than 4 per cent on Tuesday in the London Stock Exchange (LSE), as investors hoping to get a piece of Facebook by proxy hurried to invest. The recent deal gives Goldman the right to sell up to $75 million of its stake to Digital Sky Technologies, enhancing its pickings further.

DST bought a 1.9 per cent stake in Facebook at a $10 billion valuation for $200 million in exchange of preferred stock in the summer of last year. The company’s investments in 2009 has grown some fives times since, according to current estimated Facebook valuations.

Incidentally, DST also has stakes in Zynga, creators of the game FarmVille, a major draw for users in Facebook.


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5 Comments
Venugopal . 6 years ago

Hi,

For your info FB acquired Chai Labs sometime in August/ Sept 2010 timeframe. That is not reflected in your article. There are a couple more startups which were acquired. I don’t recall their names though.

Sudarshana . 6 years ago

Hi Venugopal: Thank you for taking the time to respond. I appreciate your interest.

The Chai Labs acquisition was reported in the media, but Facebook did not confirm the reports. There is no official confirmation that FB has bought any other companies, other than the ones mentioned in the article. For example, FB may have also bought Octazen Solutions; but again, there is no official confirmation from either companies, to the best of my knowledge.

I have taken the list of acquisitions from Facebook’s media releases and announcements (http://www.facebook.com/press/releases.php).

Your point however is very valid. I should have mentioned that Facebook is believed to have acquired a few small companies, but it does not want to talk about them or confirm the acquisitions.

Thanks for pointing it out! I hope you enjoyed the article; and I look forward to hearing from you.

Abhishek Shah . 6 years ago

I was recently reading blog of Mr. Ashwath Damodaran, who tried to explain that Goldman’s $500 mn. cannot necessarily be seen as compensation for 1% stake. He very well argued that Goldman shall be looking at income of atleast $200 mn in terms of fees and commissions for various underwriting and wealth management services that they could be doing because of the leverage they’ll have being there on board. So the worth of the 1% shall come to $300 mn. Making the valuation of company $30 Bn..

http://aswathdamodaran.blogspot.com/

Venugopal . 6 years ago

Hi Sudarshana,

Thanks for your response.

Overall I enjoyed the article.

Lets be in touch.

Cheers,

Venugopal

Vengo Ventures

Vishal Verma . 6 years ago

Sudharshana,

Nice interesting read….Thanks

Just want to make a small point here on the note that FB may be looking at acquiring some data centers in future to increase its, may be, marketing or pitching business. It will be a difficult call for FB to do so in India given the regulations on the data confidentially and other related guidelines that safeguard’s customers’ data.

As, 70% of the users are outside US, FB seriously need to think on its acquisition strategy outside US. As far as India is concerned, it is not gonna happen.

Cheers

Vishal

Answers To The $500M Facebook Question

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