Facebook is an amazing success as a social network. Anyone who can get 500 million people to connect, share photos, and click on little cows in Farmville deserves major kudos.
But the bullshit monopoly-money valuation merry-go-round has to stop. It’s getting beyond ridiculous and when even serious publications like Forbes jump on for a ride. It’s time to take deep breath and take a look at reality.
Minority investment valuations aren’t real
Facebook is now supposedly worth $33,000,000,000, but that number is entirely based on what star-struck minority investors have paid for a tiny slice of the company.
The company has supposedly taken just under a billion dollars in venture capital and small secondary-market sales of stock. So the actual money that has changed hands is just 3% of the total valuation of the company!
In other words, the valuation is resting on the flawed assumption that Facebook could actually ever get 33 times as much money to change hands if they wanted to. There’s just no way, no how that’s happening right now. If it could, they’d IPO tomorrow.
So the Facebook valuation based on minority investments is in my mind a complete joke in the sense that there was $33,000,000,000 dollars on the table. Irrational investor exuberance indeed.
You’re only worth something if you can make money to keep
If you boil it down to what valuations really should be about, discounted future cash flow, it gets completely bizarro-world funny. The rumor is that Facebook will be generating a billion dollars in revenue. That’s certainly real money, right?
Wrong. Real money is what’s left over after you pay your expenses. If the supposed billion dollars Facebook is allegedly pulling in this year was happening at anywhere a decent margin, they wouldn’t have needed a series E round of $120 million from Elevation Partners just three months ago.
But let’s be charitable. Let’s imagine that Facebook miraculously made $200 million this year — a 20% margin. (I don’t think that’s true, otherwise why take another $120 million from Elevation Partners, but hey, let your imagination roam). That would put Facebook’s P/E at some 165.
That’s about 7.5 times as much as Google, the golden cash cow of the internet world. Would you seriously think that Facebook is 7.5 times as good or as promising a business as Google? Get outta here.
No outrageous profits after seven years and half a billion users
Oh, well, but maybe Facebook just needs to mature, you say. If we give them just a few more years, the profit fairy might drop by and sprinkle her billions all over Facebook and its shareholders. I call fat chance.
Facebook has been around for seven years. It has 500 million users. If you can’t figure out how to make money off half a billion people in seven years, I’m going to go out on a limb and say you’re unlikely to ever do.
Now this was all fun and games until somebody promised the Newark schools $100 million in stock based on the fantasy valuation of his under-profiting company. But now it’s real. They’re selling the skin before they shot the bear or peeing their pants to get to the hut or whatever you want to call it. It’s just not good, alright?
Related: 37SIGNALS VALUATION TOPS $100 BILLION AFTER BOLD VC INVESTMENT
Related: Don’t believe BusinessWeek’s bubble-math
Brian Cardarella
on 23 Sep 10Do you think this same idea applies to Twitter?
Jimmy Chan
on 23 Sep 10Facebook is Facebook. Yours is yours. How much they have, it doesn’t matter.
Mark Holton
on 23 Sep 10Refreshing point of view. This sure feels like a bubble in this case. They are a great company in many ways (scaling a site for 500M users, the viral user growth rates, etc – impressive), but valuation doesn’t makes sense or seem equitable on a few levels. Strange times.
Paul
on 23 Sep 10Couldn’t agree more.
Seth
on 23 Sep 10It’s kind of bizarre that Farmville makes more money than Facebook does, just from micropayments of people purchasing tractors, cows, or whatever else they buy while playing that game.
Hey Facebook, here’s a free revenue idea on me. Charge the game companies that run on your platform to access your huge user base.
Next one will cost some cash – but you’ve got enough to spare right?
At least Twitter made a little bit of “real money” from striking search content deals with GOOG and MSFT. Who knows, perhaps Facebook struck a similar deal with the DOJ. /tinfoilhat
Derek Organ
on 23 Sep 10You have to wonder how the current minority investors expect to get there money back and more?
I wonder what the sales pitch is on that..
Put in X now and in Y years you get this back based on … projections which we can back up with … numbers currently.
You fill in the blanks..
Christophe Maximin
on 23 Sep 10I think we should just wait for the IPO, a more realistic value will emerge. Or not. Maybe it will be even crazier, around $50b, because who learnt from the 2000’s IT bubble ?
Donna Winter
on 23 Sep 10Great read and it’s about time someone gathered the numbers and laid it out.
Mostly, I’m glad to know that there the profit fairy is real :D
Don Schenck
on 23 Sep 10This is all going to be fun to look back on, say, ten years from now. Remember when OnVia.com was over $500 per share (it’s at $2.94 this morning)?
David Spinks
on 23 Sep 10Thanks for shedding some light on this. I actually didn’t realize from the articles I read that the donations to Newark Schools were based in stock…
When I read the valuations of the company, and Zuckerberg today, I was skeptical. Now I know why…
Could they ever get there? Perhaps… If everyone in the world starts playing farmville and buys facebook credit before they buy groceries.
Same idea probably applies to twitter. There is this perception that with great traffic comes great revenue. Twitter is talking about offering business options now…for free. I’m not sure that it will ever reach it’s valuations either.
David, Scribnia
Gregor
on 23 Sep 10word.
Collin
on 23 Sep 10@seth Zynga and Facebook made the credits deal.
It’s the Facebook business model. Get in-between customers and providers, grease the wheels. Then milk the cash cows.
Robert
on 23 Sep 10I agree completely about facebook’s valuation. Either the number is completely bogus or they’re hinding where their profits are coming in. (selling personal information to 3rd parties)
The amount of people willing to go to facebook, give away their personal information without a thought is staggering.
Derrick
on 23 Sep 10And yet this is exactly how the stock market works – some fraction of a percent of a company’s stock trades for whatever reason and then we multiply by the share count to come up with a market cap.
Devlin Dunsmore
on 23 Sep 10From all the sources I’ve read Facebook is cash flow positive and revenue next year is projected to be over $1.1B. How is that NOT monetizing 500M users? Now that still doesn’t add up to a $33B valuation….however…one would have to be EXTREMELY short sighted to not see the very real potential in Facebook that is being realized every day.
I’m sure it can’t be forgotten that Google wasn’t always the “golden cash cow of the internet”. In reality, they created a business model that had never existed before. Same goes for Amazon (how long did they operate in the red for before becoming a solid staple business). I’m sure if this were 10 years ago you would be writing the same thing about these companies.
It’s easy for people to dismiss Facebook as not as promising as some other web businesses simply because they are in a market that, at least in North America, has never been monetized effectively. It’s easy for naysayers to say it can’t be done because it’s never been done before. That’s why those naysayers try to take as little risk as possible by making their web business as much like a brick and mortar business as they can. They make products, they sell products, revenue comes in, profit is made, repeat. Pretty simple right?
Truth be told “simple” and “unoriginal” never changed the world. Some companies exist to serve customers and make a profit, others exist to change the game and create entirely new markets that never existed before, which in turn leads to revenue and profit. Same business principles apply, only these businesses require some foresight and creative leadership because the path they are on isn’t only unbeaten, it doesn’t even exist.
Steve Brewer
on 23 Sep 10I generally agree. On the point of raising 120MM recently – they let employees cash out options – I don’t care how much money I were making, if someone was willing to buy my stock at that price, I would sell it to them.
Jon Druse
on 23 Sep 10Amen! I’m getting tired of the Facebook hype and this sums it up perfectly.
Kristian Andersen
on 23 Sep 10I think you mean Valuation… not evaluation.
But in any event, your comment that Facebook would have to get 33X the amount of investment capital they raised to change hands in order to justify their valuation is also flawed.
Now I don’t think that 33B is realistic valuation either, but your definition of “real money” and use of words like “under-profitting” call your authority into serious question.
huh
on 23 Sep 10a) Facebooks revenues are said to be in excess of $1.2Bn this year [1]
b) I believe that elevation partners stock was mostly on the secondary market – primarily buying stock off early employees who wanted some early liquidty.
c) You don’t think Facebook is as promising a business as Google? The 21st employee of Google thinks otherwise [2]
Facebook can and does make tons of money. Your ranting against private equity funded companies is getting old. Learn that no companies IPO without taking on external funding and some entrepreneurs wish to change the world in a fundamental sense – and to do that usually requires capital, time and determination of epic proportions.
It took almost 8 years for Amazon to turn a profit [3] – its revenues in 2002 were $1.12Bn – about the same as what Facebook is expecting to make this year. By the way, thats a year faster than Amazon. So maybe you should offer to sell equity to Mark Zuckerberg to take him on as an advisor rather than Jeff?
And stating it’s “not good” that Mark has donated $100M of Facebook stock before they’re fully liquid is retarded when you have no idea what the deals were. Hows your shiny new super car?
Stop ripping on successful entrepreneurs.
http://techcrunch.com/2010/03/03/facebook-revenue-2010/ http://techcrunch.com/2010/09/23/google-facebook/ http://news.cnet.com/2100-1017-819688.htmlAnonymous Coward
on 23 Sep 10It took almost 8 years for Amazon to turn a profit [3] – its revenues in 2002 were $1.12Bn – about the same as what Facebook is expecting to make this year.
Amazon’s business model is clear. Sell products for a price. Profit on the difference between what Amazon pays and what the customer pays. Retail is a solved problem and Amazon is solving it better than most.
Drew
on 23 Sep 10Go back 2 or 3 years and Myspace was “worth” 2.7 Billion (pdf)
It’s a shame that the “Bizarro-world” wall street industry eventually ends up ruining everything, including applications that harness real power for social change.
Tom Simnett
on 23 Sep 10A wise man once said: “Turnover is vanity; profit, sanity; but cash is king”
A
on 23 Sep 10I hereby pledge 1 gagillion $ to them starving kids which makes me the biggest philanthropist of all time. BTW my gift is in the form of stock – its for a company I just founded that I estimate will be worth 100 gagillion $ soon – we make a perpetual motion machine that I just know everyone in the world will want. Seriously, WSJ should know better than to put a $ amount on the possible future valuation of an illiquid asset that needs to be financed through the secondary equity market. The burden of proof should be on current valuation regarding p/e – otherwise we can all be very generous.
I mean, for this to be factually correct, it would require Wall Street and Main Street to believe all the hype about FB and to have forgotten about the last tech bubble, and to push considerations such as profitabilty aside – ohhh wait.
Tobau
on 23 Sep 10And stating it’s “not good” that Mark has donated $100M…
NolF
on 23 Sep 10There is a problem with “just 3% of the total evaluation of the company”. It assumes that all the transactions have happened with a valuation of 33b which is definitely not the case.
Darien
on 23 Sep 10SalesForce (CRM) has a P/E of 210 with a net profit margin of 3%. MarketCap is 15billion. You can call FB’s estimation irrational exuberance but the argument is ignored when there are exceptions to everything that would otherwise make perfect sense.
Jon Pynn
on 23 Sep 10500M users is nothing to sneeze at… but a $33BN valuation would imply that each user is worth $66.00. I’m not sure what that measurement means, but I don’t think a User who has a login on a free site is worth $66.00.
DHH
on 23 Sep 10Drew, perfect example. You can wait around so long to turn on your profit faucet that by the time you get to it, there’s no more water. Or more likely, there never was.
Tobau, donating $100M in a usable currency that could be spent would be amazing. Donating $100M in stock off a bubble valuations is slightly less so.
NoIF, I was comparing the amount that have traded hands to the amount that would need to change hands for that valuation to be true. For something to be worth X, someone else has to be willing to buy it for X. I challenge that anyone is willing to buy 100% (or even just a big chunk these days) of Facebook at a $33B valuation.
Ruben Berenguel
on 23 Sep 10I like @Jon Pynn way of measuring: every user should be worth 66$... And how do you squeeze 66$ out of a free service? Ads? On average, a internet user does not generate 66$ out of ads. Never, ever.
Cheers,
Ruben
Madhav
on 23 Sep 10David, good perspective, nothing new, most people share this point of view. However, I must say the key thing going for FB is that it is about people, you and me. One of the first technologies after WWW to have made technology that is more about people and less about technology.
The moment you look at FB as a Web OS where many applications and app vendors can floursih I am sure you will agree that it is worth a lot more, of course, the underlying assumption you make about FB being a photo and link sharing site is not accurate, you and I know that.
FB is less about technology and more about people, that is the biggest strength they have that GOOG doesn’t!
DHH
on 23 Sep 10Darien, Salesforce is imo another company that’s grossly overvalued, but at least it’s happening on a public exchange. But so did Netscape and pets.com.
Sankho
on 23 Sep 10David here is trying to point out that “evaluations” do not equal real money. This is a joke when it’s in Forbes, but he’s right – it’s downright scary when it affects the real world.
It’s REALLY scary when it comes to schools – I grew up very close to Newark and it’s not a fiscally sound gov’t.
FB is not donating spendable cash – just stock. All this does is give the school “leverage” to add more money to their budget from the main municipality.
What happens IF the FB stock doesn’t turn into it’s value in cash? It probably never will – $1B in revenues is nowhere near $300B.
All of a sudden, that stock isn’t worth $100 M, it can’t repay the extra debt placed on the education budget. This will happen in a few (3-5) years and has the potential to totally upend a student’s career (which spans over 15 years.)
That’s why this is so dangerous. It’s about the kids.
Rubem
on 23 Sep 10A quick google search (http://www.google.com/search?q=facebook+revenue) show lot’s of results stating that Facebook’s revenue in 2009 was about 800 millions and estimates the 2010 revenue in 1.2-2.0 billions. Too bad they don’t publish the profit. But if we assume that their Net Income ratio is similar to Google (since their both have business model based on web advertising), their Net Income would be around 300-500 millions.
Of course we are totally assuming a lot of things. But even so 33 bilions does seems unreasonable, even if we compare their revenue/net income/market value ratio to other companies.
One
on 23 Sep 10Sigh, where do I begin? Oh wait, Joel already did it for me – http://news.ycombinator.com/item?id=1719975
Sam
on 23 Sep 10I couldn’t agree more with “huh”.
Seriously, there are no public numbers of facebooks revenue, but consider that Zynga buys essentially 1 dollar in advertising to facebook to make 1.5$ in revenue. Now consider Zynga’s revenue is 2 billion or so.. not to mention the fact facebook also charges them on the credits system.
This is one company, out of a whole group of Social games companies who spend big on facebook. That is just ONE market (granted a massive one), Facebook are already killing it, we just don’t know how much.
They are the Social Ad Sense. They only difference is, Facebooks users spend FAR longer in front of the ads than Googles.
Jon
on 23 Sep 10I agree that Facebook’s valuation is crazily over stated at the moment. However to say that they will never make serious profits is also unlikely.
Personally, I think selling super-targeted ads can be as profitable as the Google Adsense model.
No Facebook will never be 5-10 times bigger than Google. But I feel they can get to a similar size/profit level with great execution.
Justin
on 23 Sep 10@DHH, Thank you for pointing this out. You however are missing what FB is profiting off of, and is the best in the world at. Hype. Facebooks business model has always been Hype and it always will be.
Remember when they sold a 3 year ad contract for $250 million dollars to Microsoft, and oh, gave away %3 of stock to make it look like the company was worth billions.
Facebook has never been honest and never will be.
Isak
on 23 Sep 10They do have a standing offer of $15 billion from Microsoft.
Anonymous Coward
on 23 Sep 10I love you DHH!
MH
on 23 Sep 10...applications that harness real power for social change
steven
on 23 Sep 10DHH – totally think you hit the nail on the head.
I see only one other strategy that might change this and that is Facebook’s technology.
If they can become like a phone company or cable company with FBML and FBjava then they can be the only game in Facebook to reach their supposed 500MM visitors.
MH
on 23 Sep 10...wait, I thought we were talking about Facebook.
Takahisa Hasegawa
on 23 Sep 10One thing to keep in mind is that a couple of years ago, companies like Yahoo! were willing to buy Facebook at $15 billion. So if Google keeps on thinking of Facebook as a legitimate threat, I think a valuation of $30 billion is not out of the question.
Say for instance Google had a chance to buy Facebook at $40 billion right now, will they? Why not? They could get the users, some good cash flow, get competition out of the way, and acquire some quality employees (some of whom left Google to join FB). I won’t even get into synergies.
Anonymous Coward
on 23 Sep 10I wish there were a way to profit from this ridiculousness. When everyone overvalues stocks, you have sort sales, etc to keep things in balance – to some degree…..Can we have short sales on private valuations? lol
DHH
on 23 Sep 10AC, I’d put some good money on shorting Facebook at $33B.
Andrew Paterson
on 23 Sep 10Finally someone credible has the guts to say it – thumbs up !
I’d add, that when 500 million people finally realize that they’ve wasted upwards 10% of their waking hours “filling the void”, they too will move towards other “collectives” which provide greater value to them (these will be, in my opinion, smaller and more intimate).
Ian
on 23 Sep 10I’m not sure what’s the point talking about others money.
Mauricio Gomes
on 23 Sep 10I think it’s impossible to argue your position. It’s the equivalent of me saying an Audi R8 isn’t worth $150k or that you get paid too much. Both of those things are decided by the market. There is no inherent value in anything. There is only what someone else is willing to pay for it.
The difference between your fake evaluation (Bold investment article) and theirs is that someone put up “real” money. If Bob Smith gave 37s a couple million dollars in investment money for a 2% stake in your company, then your total evaluation is $100mm. Is it worth that? No one knows for sure, but that isn’t relevant. The real question is whether or not Bob can sell off some of those shares for the same, or higher, price than what he paid for them.
Anonymous Coward
on 23 Sep 10Hi David,
I’m not even on Facebook and I don’t know a huge deal about their business, but I occasionally read news about it, and what caught my eye is that Facebook is trying to become go to place when people need something, ie Facbook is trying to replace Google. Investors seem to bet, that FB will be able to change user behavior, so instead of going to Google to search for something, people would turn to their ‘social graph’ on FB. In that case FB could take a big chunk of Google revenue, and become as valuable. So, present valuations are really (speculative) bet on that. It’s a high risk bet for potentially high reword, and that is how investing works.
DHH
on 23 Sep 10Mauricio, if someone pays $150K for 100% of a car, that’s what that car is worth.
If someone pays $1M for 1% of a company, that doesn’t mean that someone is willing to pay $100M for 100% of the company.
That’s the difference.
jared
on 23 Sep 10Yahoo paid an outrageous amount of money for GeoCities way back in the day.
Facebook will go down in the same way, mos def, unless they can diversify into something that actually makes money.
Derek Organ
on 23 Sep 10I have to say I do see a lot of potential for facebook being a platform for others to sell on; be that games or what ever. Similar to the way iphone apps work.
As for a 33 billion valuation that does seem a bit much but the argument it hasn’t been done before isn’t really a good one. This might be the first to create an economy around it on the web bigger than google. At some point someone will.
I suspect regardless of silly valuations that facebook will continue to grow for some time yet.
Blake Ross
on 23 Sep 10Great job writing an article about other people’s alleged delusions and then basing it on delusions of your own.
Facebook didn’t raise a Series E from Elevation Partners; that firm purchased secondary shares.
Seriously, you can’t ride in on a high horse of fact and reality and then get the basic tenets of your argument so wrong.
PC
on 23 Sep 10I may not agree with the $33B valuation but your analysis is poor.
First of all, a blind comparison between Facebook and Google is foolish. How fast is Google’s market share growing? Oh wait it isn’t. What about penetration? Saturated. Facebook went from 100MM to 500MM users in a little over two years. Not only that, their growth is still accelerating. They’ll hit a billion global users in less than a year. Google can’t even make it in China.
Yes it’s still a private company so information is limited but this alone tells you a comparison of the two companies is foolish.
Secondly, based on the prior argument, comparing their P/Es is also ridiculous? Why arbitrarily pick Google’s which today sits at 22 and change but was easily 40/50/60+ before the downturn? Why not pick Amazon’s (sitting at 64) or another random internet company? When companies are growing (and that growth is still accelerating), high P/Es are quite common.
John
on 23 Sep 10From all the sources I’ve read Facebook is cash flow positive and revenue next year is projected to be over $1.1B. How is that NOT monetizing 500M users?
KG
on 23 Sep 10I would say it will be worth more after these FB functionalities are available in mobiles. FB created a people market place where all the others can come and sell any thing.
It will worth more if it will be a win / win for every one.
Jack
on 23 Sep 10Where’s the part where you use real data (Facebook revenues or profits) in your argument?
Maybe they’re making a lot of money, maybe they’re not. I don’t know (though every rumor I’ve heard is they are making a lot and it is increasing quickly). The fact that you don’t state any of those numbers means you don’t know either.
The only thing worse than not having actual data is using rumors and grumblings to support an argument.
Kevin Burton
on 23 Sep 10It’s the same BS math that Business Week used to say that Kevin Rose made $60M in 18 months.
http://www.businessweek.com/magazine/content/06_33/b3997002.htm
It sells magazines but it’s far from reality.
rafski
on 23 Sep 10The 100 million for schools is a preemptive publicity stunt ahead of “The Social Network” film premiere.
It will be interesting to see how hundreds of millions of people seeing a mainstream film (on- and off- cinema screen) – supposedly depicting shady roots of their favourite website – will react.
Most likely, with a “meh…” but let’s wait and see.
Ian
on 23 Sep 10@Jack – good point!
Scott
on 23 Sep 10What do you mean by “not good”? Are you saying Zuckerberg is not going to be able to come up with a way to turn some of his stock into $100 mil in order to fullfill the pledge?
Adi
on 23 Sep 10From all the sources I’ve read Facebook is cash flow positive and revenue next year is projected to be over $1.1B. How is that NOT monetizing 500M users?
rafski
on 23 Sep 10@Jack You are proving the point. You can assess a company value based on their current and predicted profit.
Nobody outside knows how much money facebook makes and their business model is not that clear yet, so these huge figures are more of a speculation than valuation.
fo.unta.in
on 23 Sep 10I think the point you are missing, is that valuations are more about the future.
There are two mistakes in your argument.
1. The percentage of Facebook shares that would be IPOed will not be 100 percent.
2. You dont need to collect 33 billion dollars in cash to prove the valuation. If unconvinced investors stay away (not short), IMO, Facebook will trade upto 50 billion in valuation.
dave mcclure
on 23 Sep 10I’m sorry David, but your analysis here is incredibly far off-base, and not based on rational perspective. not sure why you guys feel the need to hate on FB so much, but the aggressive valuation is legitimately based on several things:
1) phenomenal growth—@ 500m users already, FB is headed towards 1B users in next few years. that’s about 10-15% of the planet, and about 25-50% online users depending on how you count them.
2) wrong engagement & retention—whether it’s games, photos, videos, gossip, grandkids, flirting, or ego-stroking, FB has proven that it gets extremely frequent use (both on site, and off via FB Connect & Like buttons). even on just advertising monetization alone, the frequency of repeat visits and extended session behavior is very meaningful to brands that spend lots of money.
3) the current business model (ads) is likely to change and/or increase in value per user. even just on FB ads, spend is accelerating dramatically in last 12 months. furthermore, with broader adoption of FB Connect (off-platform login), and FB Credits (payments), and other business model innovations, there is strong possibility that current $1-5/user monetization could increase to $10-50/user in the future, or perhaps even more. this would dramatically increase cash-flow & valuation.
all 3 of these factors - massive growth, frequent usage, and increasing revenue/user monetization - point to incredible opportunities to increase the value of the company, even beyond the already-substantial revenue it’s generating right now (rumored at $2B run-rate in 2010).
while you’re certainly entitled to your opinion, the analysis above sounds a lot more like sour grapes than a reasoned financial or technical perspective on Facebook future revenue.
dmc
Derek
on 23 Sep 10I’d like to know why someone isn’t seriously questioning FB’s user numbers. We all know that Zynga game players use multiple FB accounts to level up. It’s also got to be true that people who network on FB have a personal account and a work account, so how many users are there really?
Dave mcclure
on 23 Sep 10(sorry that wasn’t a Freudian slip in #2 above… should say “strong” not “wrong”... or maybe my iPad is just channelling the EFF this morning ;)
Brad Gessler
on 23 Sep 10I’d really like to see a 37signals valuation on Facebook. Are you guys up to the challenge?
trav!s
on 23 Sep 10i don’t think he’s missing the point at all, these valuations are irresponsible.
maybe they’ll make 300 million/year off the rights to that “awesome” movie…
Lou Kerner
on 23 Sep 10Facebook is worth more than $33B. As a former analyst at Goldman, I started blogging and writing Wall Street style research about companies like Facebook and others at SecondShares.com. By the macro analysis I did in March, I valued Facebook at $50 billion, and the traction has only accelerated since then. I got hired by Wedbush to be the first social media analyst on Wall Street.
There’s a mis-perception that buyers in the secondary market over inflate the values. With a far higher percentage of sellers aware of the private market than potential buyers, aren’t things likely skewed to under value the shares??
Scott
on 23 Sep 10I’m not worried for Newark schools. I have a hunch that Zuckerberg will have no problem coming up with the $100 mil. At only 26 years old, he’s got lots of years ahead of him to fulfill the commitment.
Jeswin Kumar
on 23 Sep 10David, great article. While many have pointed out a few inaccuracies, it doesn’t change the fact that a free user is not worth $66. If that were true, there would be so many interesting business models built around that number.
Maybe 37Signals should build a Social Network. If I were Zuck, I would be terrified at that prospect.
Steve
on 23 Sep 10Author of this article has no clue what he is writing about! Facebook is an awesome advertisement platform that has not reached its potential. They will make 10ns of billions in advertisement in next 5 years!
Romain
on 23 Sep 10Great post. Glossing through the headlines I thought that Zuckerberg’s donation was $100M CASH. So, for all the headlines of Zuckerberg’s wealth he does seem to be somewhat cash-strapped.
@Steve
on 23 Sep 10Sure… just like myspace did… er just like AOL did… sorry… just like Netscape/Geocities/Alta Vista/Excite etc. etc. did… whoops I mean just like Compuserve did
Facebook will be just like Myspace, AOL, compuserve and bell bottoms… cool for awhile.
Rurik Bradbury
on 23 Sep 10When it IPOs it will be worth much more than that. It occupies 25% or more of all browsing time in the US (just think about that). And they can microtarget people very accurately for advertisers.
Abdu
on 23 Sep 10I think DHH is jealous that 37Signals is not growing/valued/profitiing as fast /as much and so he’s pissing on FB’s parade.
Jones
on 23 Sep 10@Abdu – and I’m jealous of DHH and his $3M car.
Anonymous Coward
on 23 Sep 10Ben Graham is rolling in his grave.
Facebook, MySpace, et al.. Are only useful to people when their friends are using it too. When people start going to the next big thing, it will fall off a cliff. I stopped using it once my mom started. There is ripe opportunity for Facebook to start making money though… They could do a Groupon clone, etc.
Al Brown
on 23 Sep 10The US has injected so much liquidity to make up for the vacuum created by the housing bubble collapse that it is leading to other bubbles. Facebook is just one of many of these.
And we’ll keep seeing more bubbles until policymakers wake up or lose their ability to waste trillions.
Jeremy Burns
on 23 Sep 10I don’t really care what FB is worth. I wouldn’t pay $33b for it. I got the bug about two years ago, went on it a dozen times a day, hooked up with anyone I could think of, got bored of the “Just having a cup of tea” status updates, began to understand that it was wasting time I should be spending making myself money, started getting embarrassed that I was participating, started de-friending people I realised I didn’t really like and now go there perhaps once a week – just in case I miss something really important. I haven’t. And in that time I never (i) spent a penny through FB, (ii) reacted to an ad or (iii) even noticed they were there. So what am I worth to FB? Exactly. I use their service for free and am worth zero revenue. Sure, they can sucker someone into believing I could be worth something, but I’m not. Let’s face it; it’s just something you have to do. Every company has an FB badge on their website. Why? Why send people off of your own site and on to someone else’s? Talking about getting 25% of the planet participating is ridiculous too. If they really are headed that way, why oh why oh why do they need external money? I wouldn’t give away a slice of that cake. It’s a temporary phenomenon that will pop when the next big thing comes along. I’m pleased I don’t own any shares.
Marc Love
on 23 Sep 10Facebook’s biggest weakness is that its core value proposition to users is that everybody you know is on it. Any business whose core value proposition is that “everyone is doing it” is likely (or likely to become) a fad.
Sure its a decently designed site that makes sharing your photos, videos, comments, links, etc. easy. But that’s not hard to replicate (the backend scaling parts are hard, but invisible to the end user). When people find the new social network that all the cool kids are using, they’ll flock to it and abandon Facebook in an instant.
Google on the other hand has developed revolutionary technologies that other companies find nearly impossible to find the talent & resources necessary to replicate and improve upon. They provide a real, unique, non-fad value proposition to the end user. Same with Amazon & Apple.
Max Niederhofer
on 23 Sep 10...I’d put some good money on shorting Facebook at $33B.
Max Niederhofer
on 23 Sep 10DHH -
...I’d put some good money on shorting Facebook at $33B.
You’re on. I’ll sell you a put option on Facebook at $33B strike maturing in three years. Let’s make it $100K. What’s my premium?
Max
Scott
on 23 Sep 10Looks like Facebook took David’s prediction that – they’ll never make monty – to heart and simply shut down and gave up.
http://downforeveryoneorjustme.com/facebook.com
Scott
on 23 Sep 10BradM
on 23 Sep 10I’ve noticed more and more people using FB as a sort of Classified Ads. More and more people in on my Friends List are starting to sell items on FB before going to Craigs List or our local online Classified Ads.
I’ve also noticed a lot of people looking to FB for quick answers such as, “What new DSL Camera should I get” or “Should I go Bell or Rogers for my next phone (Canada)”
Justin Jackson
on 23 Sep 10I’m with DHH on this one.
What worries me about Facebook, is the (relatively short) history and decline of other social networks: MySpace, Friendster, etc…
As Warren would say, it’s not like Facebook is selling razors (like Gilette) where it’s fairly easy to forecast demand. They’re selling social media: an intangible, digital, form of entertainment.
Entertainment is a fickle industry. On the internet, it’s even more fickle.
FB could be a profitable company (maybe it already is?), but this valuation is ridiculous and reeks like a bubble.
Darren Negraeff
on 23 Sep 10Great read once again 37signals. These fantasy valuations are completely out of hand. The basic mis-education of the public that is happening is a crime. I was just reading on TNW today about how Microsoft raised their dividend today, and the analysis of yield that followed was completely ass-backward. (A high dividend yield is indicative of shares being over-priced, not under-priced, as was reported, and vice versa). Kudos to you guys for helping set things straight.
james
on 23 Sep 10Nike’s chief marketing officer, says Facebook “is the equivalent for us to what TV was for marketers back in the 1960s.
FaceBook IS the new TV. Don’t you get that?
ryu ramirez
on 23 Sep 10I think the biggest middle finger here is not the valuation, but Zuckerberg playing “the game” so early in his career. Actually brilliant.
A lot of rich people like to set up charities and dump their stock as donations to avoid taxes on capital gains. He’ll save millions in taxes to the government and keep getting richer.
The perfect time to do so if he’s getting a valuation of 33b.
@JoeHobot (CEO of MWD)
on 23 Sep 10This is great post and I like the fact you took some time to think this all through for yourself and others.
Thing is that Facebook does not have 500.000.000 users they might have 1/3rd of that.
How many of people have duplicate,trippled accounts? I bet Octomom has 8 accounts her self! o(_)o
Facebook was built on self promotion so is Mark Zuckerberg, there was and is so many web apps like Facebook but just wrong people marketing it or they did not have goal to succeed in life like Mark does.
Anyway I started rambling so ill just quit writing…
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Jeff
on 23 Sep 10Facebook has done an amazing job staying relevant. Regardless of their valuation they rule the social web. Any other site pales in comparison to FB’s growth and user interaction.
Until it’s easy for people to regraph their friends on trusted sites Facebook will continue to dominate, allowing them to make up whatever numbers they feel like until an IPO.
Besides, there’s no need to sound jealous of unknown numbers. Money is just money, nothing important.
@JoeHobot
on 23 Sep 10Facebook was built on self promotion and so is Mark Zuckerberg. There are so many web apps like Facebook but never made it ot the top. They either didn’t have right marketing people or connections to Michael Arrington. Or they did not have goal to succeed in life like Mark does.
Shubbar
on 23 Sep 10So, smart guy, what do you think Facebook is worth? And based on what are you making your valuation? Because our valuation of companies is based on their future incomes, which will come in the future! and we forcast that, because we don’t know the future, yet. And Facebook is not yet making any profits, so we are talking about a more volatile distant future. But a good guess is better than nothing.
BF
on 23 Sep 10Some people in the 1980s valued Japan’s Imperial Palace grounds more than the value of all the real estate in California.
Polo
on 23 Sep 10Facebook is worth this money. Soon they’ll be announcing a merger with Time Warner.
Sukh
on 23 Sep 10Not a Facebook regular but still disagree. They will do allright.
Bob
on 23 Sep 10Remember when Friendster turned down $1B from Yahoo? This world moves to fast to hold onto that sort of cash.
Anonymous Coward
on 23 Sep 10Think you are mistaken this time – After reading “the facebook effect” (http://amzn.to/cDl00O ) I got much more respect for Zuckerberg strategi and execution of facebook reach; The focus has been on user growth and expansion – as for generating the income streams – current facebook income is just the tip of the iceberg. There is a reason why google is more or less worried about facebook, facebook pretty much own the social graph and that graph is becoming more and more important.
Kim Hjortholm
on 23 Sep 10LoL – forgot the name and URL in above post -> anonymous coward
Anonymous Coward
on 23 Sep 10Think you are mistaken this time – After reading “the facebook effect” (http://amzn.to/cDl00O ) I got much more respect for Zuckerberg strategi and execution of facebook reach; The focus has been on user growth and expansion – as for generating the income streams – current facebook income is just the tip of the iceberg. There is a reason why google is more or less worried about facebook, facebook pretty much own the social graph and that graph is becoming more and more important.
...and like so many other comments here, this one is devoid of sound reasoning why Facebook is worth $33,000,000,000 today. “User growth and expansion” or “the social graph” is not an answer.
Seth
on 23 Sep 10DHH you broke Facebook dude.
Jonathan
on 23 Sep 10If you’re argument were clear, succinct and logical, there would be no need for analogy. Most of the above analogies are terrible anyhow. Per usual, someone makes an analogy and it makes no sense, so they quickly try to make another, usually even worse.
Who cares what Facebook is worth aside from you apparently? They may be grossly overvalued and the market will, or will not, support that when they IPO. Strange things happen every day – especially in financial and equities markets. Case in point, 3Par.
I think it’s best to stick to what you know….Ruby, small startups, design, that sort of thing.
HammerTime
on 23 Sep 10Facebook is worth maybe 13 million yes Million. Here’s why:
Most of those 500 “million” accounts are fake, spam related, auto created by bots or dormant.
The intentions of a founder have a whole lot to do with the value of the company and it’s “technology”
Facebook founder = calls its users “dumb [ fill in the blank ]” Google founders = do not call their users “dumb [ fill in the blank ]”
Facebook = easy to duplicate web page Google = very hard to duplicate algorithmic technology
Do the math. Learn from the history of temporary and hyped valuations.
Relevance and quality in Search is difficult to do. Building a social networking site is not.
There’s a psychological reason why people “want” facebook to be more valuable than Google. As a technophile they have no idea how Google works from an algorithmic and technical points of view and never will. It’s easy to explain how facebook works and this speaks to its fleeting, easy to duplicate technology. They follow the same path as Compuserve, Prodidy, AOL, geocities, friendster, myspace…
I find it interesting that most of the worlds advanced software engineers really do not like talking or “socializing” – they’re busy building companies like Google that make billions upon billions and trade in real markets.
Anonymous Coward
on 23 Sep 10Things could change from now until the time Facebook goes public and the value could be more or less than the $33 billion current estimated value. But the market Valuation is what the market will pay. They based the market value of Facebook on what people have historically paid for shares in the company…...very recent too. There are companies out there like Google and Apple that people pay 20x their 12 month trailing earnings for shares in the company. There are also companies like Exxon that people pay 12x earnings. Ford trades for under 8x earnings. Earnings are only a part of the equation, people pay for expectations and potential earnings. And what people are willing to pay is how the market value is determined. But there are also companies out there trading at excessive PE ratios. Hell Apple traded at 50+ earnings a few years ago. Look at Rackspace, who trades at 80x. People are willing to pay 80x earnings for Rackspace right now thus valuing the company at $2.9 billion. There are pharmaceutical companies that have yet to turn a profit that are valued over a billion dollars, and according to this article these companies would be worth zero.
He brings an interesting point but fails to understand what “market value” means.
Leon
on 23 Sep 10Heh, this morning I had an argument with a friend about Facebook. We wondered how a “Geocities on crack” can be worth more than companies with real products and real substance.
Where our opinions differed was the future of Facebook. I sincerely believe that Zuckerberg should have sold Facebook for the $1 bio he was offered for. $1 bio is imho a shitload more money than the site’s real worth.
Polo
on 23 Sep 10Facebook could very well be worth some absurd amount based on the whims of the free market. But it doesn’t mean it’s rational, the market never has been.
Real estate, IT, telecom, all of these were fueled by irrational assumptions. And this VC/start up world led by people who were lucky enough to get a dumb large company to buy them out for an insane amount of money reinforces an absurd set of values. Is Facebook valuable because it builds connections, or because it’s a great platform to sell me shit I don’t need since it knows everything about me.
I just want to see more people building something real.
MM
on 23 Sep 10Of course it is worth $33B! No, I mean that.
What is a credit default swap worth? What is a discounted Greek bond traunch worth?
Money is just an idea about how to measure future value of something that somebody wants. It is not real.
Yes, yes it is real to you if you are starving. But only insofar as a group of bond traders value US treasury bills that China owns. If those people thought like you do then the entire world trade system would collapse and you would be trying to buy latte with $1000-bills issued by local banks in local cities, towns, and states.
There is nothing irrational in the valuation of Facebook if the investors and bond holders can hedge their risk somewhere else for what they say it is worth.
There is no basic “true” money anymore than there is any basic “true” religion that is more real than any other.
Why is a glass of ice with a drop of coffee and a pinch of sugar worth $4.95 at Starbucks, anyway! ;-))
Hub
on 24 Sep 10If we counted world population as we count facebook users, we would state that there is 100 billion human beings on this planet.
Don Wilson
on 24 Sep 10This post reeks with jealousy.
Jamie
on 24 Sep 10Simple as this: Tencent has also 560 million active users and is worth $37B. That does not take into account income disparity between Chinese users and American/European users.
Jerry
on 24 Sep 10I think the VCs who are really in control of the company have made the decision to spend several years investing in growth rather than try to turn the company into a going concern to early. If you look at the history of Facebook’s VC investments, it is clear that these are what propelled facebook to 500 million users. Management of their feeds system takes something like 60,000+ servers and nearly 1,000 engineers, not counting the outsouring relationships. Facebook’s focus has been on technology development and to be the best at that first before aggressively looking to monetize that technology.
I have purchased ads on Facebook for my own web business and the return has been great. It is only a matter of time before others start to catch on.
Rob
on 24 Sep 10Did you read your article? Google’s market cap is 161 BILLION and that’s not even the total net worth of the company. Facebook is in no way rated larger than Google. Did you even read your yahoo finance article you linked? Google’s net income was $6.5 BILLION compared to facebook’s measily $200 million. GG man.
In 2007, Microsoft bought 1.6% of facebook for 240 million, making their estimated value of the company around $15 billion. FB had 50 million active accounts, according to their own website. Now they have 500 million active accounts. Doubling the value of the company at that point is a bit conservative. I guarantee you MS has better financial analysts than yourself.
bonelyfish
on 24 Sep 10“You have to wonder how the current minority investors expect to get there money back and more?”
VCs speculate on stock valuation instead of profit. And get their money back when either the company goes IPO or acquired by competitor. The problem with Facebook is that it is too big to swallow.
Dan
on 24 Sep 10If you do the simple math then each user is worth $66 under that valuation. That hardly seems unreasonable given the amount of time people spend on the site. True they need work out how to monetise better as noone clicks those ads. But this is some pie in the sky social network, it’s integrating itself into the rest of the web and ensuring it stays relevant via it’s API and facebook connect.
Nick Campbell
on 24 Sep 10The problem that everyone seems to make is that value doesn’t = worth. Many of the CDO’s that collapsed with the economy had a value of nearly 40x their worth. (Some as much as 114x.)
500 million users =/= 500 million unique users.
Revenue =/= Profit.
The point David and Jason consistently make is that you can’t except a valuation at face value, because it’s typically optimistic. It’s part of the leveraging process to generate more income off of it. The other point they typically make is not to take money, which is a credit issue nearly. If you owe money, you really aren’t making any are you? Sure you bring in revenue, but your total liabilities aren’t resolved so nothing truly gained.
If the numbers are wrong, that’s fine. They don’t really make the overall argument about value being deceptive and not taking money.
Dan
on 24 Sep 10But if we looked at things this way, it would ruin the fantasy of ROCK STAR FOUNDERS and INVESTORS and VC money meaning entrepreneurs have struck it rich overnight and built billion dollar companies without needing to earn a drop of revenue…
Anonymous Coward
on 24 Sep 10Facebook, as well as any company, is worth exactly what people are willing to pay for it. These VC’s are investing at a $33 billion value. Hence, regardless if you agree with it or not, BUYERs are valuing the business at that price.
han
on 24 Sep 10the thing about unrealized revenue (called ‘worth’) is like owning a portfolio of Madoff and Lehman Brothers provided the music never stops, certainly making $66 on each facebooker by selling him and his friends to advertisers is plausible.
the mere risk of the Web alone should whittle actual estimates by at least 10% to $6b, though I’d reduce it personally to $600m (cf Zappos was worth $2b and they had real revenues)
of course this is not what ‘uckerburg and his ‘vestors want you to think *~8-)
Dan
on 24 Sep 10True I definitely agree with the idea of the article, but I think the jury is out on this specific headline being true or not only time will tell. History would tell us it’s correct and it’s not worth that much.
The future of the internet is not defined by history though and neither is the future of facebook.
youre dumb
on 24 Sep 10facebook advertising pulls in 1 million dollars a day.
Charles Groce
on 24 Sep 10Your analysis is correct, I think. What makes Facebook’s purported value pure fantasy is that it’s not directly tied to the production of any type of real wealth.
Advertising is only worth something in so far that it is directly connected to the production and selling of real goods or services. Does enough advertising take place on Facebook to justify $33B in projected sales of actual goods and services over the coming year or years? Give me a break. It ain’t worth the bandwidth it surfs on. It’s only a matter of time before market forces realize this.
Anonymous Coward
on 24 Sep 10Another biggest assumption in the valuation – LTV per use = $66 ! for social networking business, this is extremely stretched.
facebookdater
on 24 Sep 10yes, if they IPO’d, they wouldnt fecth enything NEAR this amount
Duncan Bannatyne
on 24 Sep 10That is a ridiculous valuation – I’m out.
Michael Sliwinski
on 24 Sep 10Yesterday I read the Forbes 400 list and the headlines went like this:
Zuckenberg is worth more than Steve Jobs!
Well, this is funny. They based Zuckenberg’s valuation at this ridiculous Facebook valuation… and they said he’s worth more than his Steveness…. and it’s Steve who runs two companies that actually have real revenue in Billions… and Apple has $30B in the bank in real cash – not in over-valued stock of a company that hardly makes money.
Yes, even if they do have $1B revenue this year, they have really high costs of all these engineers on board…
So comparing value of Steve and Mark is really like comparing apples and oranges….
Tim
on 24 Sep 10For comparison, Hamburg, Germany-based XING already went IPO a while back. Their current market cap is EUR 150M. They have about 10M users and are on track to making EUR 50M in revenue and EUR 5M in profits this year (round about).
That’s a EUR 15/user “valuation”, right?
Given Facebook’s overall dynamics, a per-user valuation of $60 ($33B/550M) does not seem entirely surprising.
Kwyjibo
on 24 Sep 10@DHH
“Mauricio, if someone pays $150K for 100% of a car, that’s what that car is worth.
If someone pays $1M for 1% of a company, that doesn’t mean that someone is willing to pay $100M for 100% of the company.
That’s the difference.”
Only, that’s not how stock prices and valuations work. In fact, when someone does want to pay for 100% of the company, the valuation usually goes up.
Here is 3PAR trippling in value due to a bidding war. A $2 billion market cap without making a profit.
http://www.google.com/finance?q=3par
Whether you think its “worth it” or not, which I guess, your entire post was about is irrelevant. What the people buying and selling the stock think its worth is whats relevant – it’s called valuation.
Deal with it, because crying from the sidelines isn’t helping.
Anonymous Coward
on 24 Sep 10So comparing value of Steve and Mark is really like comparing apples and oranges….
Cesare
on 24 Sep 10A friend of mine noted that FB might be 33b worth … of wasted productivity :)
Mark
on 24 Sep 10FB might be 33b worth … of wasted productivity
Dan
on 24 Sep 10huh,
Forgot the revenue, the article clearly states that it is the profit that is important. So where is the profit?
Rick
on 24 Sep 10Finally someone who calls bullshit! Great job DHH I fully agree Facebook needs to stop being the media’s darling and start becoming a real business eg. Profits
Richard
on 24 Sep 10David, you just don’t UNDERSTAND, man! It’s EYEBALLS! EYEBALLS! It’s solid gold, man! You can’t lose if you have eyeballs!
Joe
on 24 Sep 10You really think facebook has operating expenses of $800+ million?... Wow, their employees must have huge paychecks.
ash
on 24 Sep 10This is my favorite svn post… of all time.
Mia
on 24 Sep 10This is a great debate. As much as I personally don’t like Facebook and I am cringing as I write this, valuation in the billions for this site may not be a stretch. The underlying reality of the valuation is that it’s not users who are going to help Facebook monetize…it’s big brands with large advertising budgets. These are the same brands who pay millions of dollars for a 30second super-bowl spot, and delude themselves into thinking that’s it’s good for their business and their CEO’s ego has nothing to do with it. If we believe Facebook is the online parallel for a television & entertainment network, then ask yourself, what is a major network with no viable competitors, with (supposed) 500Mil viewers worth to an large advertiser? The major ad agencies are probably already selling years of advertising on Facebook to their deep-pocket clients based on the hypothetical eyeballs/impressions/etc. and they’re the ones who will keep the site profitable and valuation super-high, for the foreseeable future.
Anonymous Coward
on 24 Sep 10i have to say that when i followed the reuters link the author included regarding the recent facebook stock sale, i was disappointed in his self-serving misunderstanding of the difference between a Series E round and a non-diluting share event. where is real evidence that facebook’s revenue stream is too anemic to support its own weight? did the original stockholders have give all the proceeds to the company to keep it running? imho, in his haste to be the first to sound the alarm publicly, and his sluggishness to retract a bad call, he has revealed motivations that hurt the credibility of all his other assertions. especially the one where facebook’s enormously charitable donation means nothing to the world, so we should hold them in proper contempt.
i agree the reason we all care about this issue is that there have been numerous cases in this decade where .coms have disastrously claimed overly optimistic valuations. i agree we have the benefit now of hindsight in all those situations and can apply them to new ones. and i believe a company as old and as large as facebook has surely revealed indicators that might give rise to valid suspicions of such a large, large number. so i wish the author would do some more research and expose a real issue or two that no one else has considered (perhaps after having a market professional review the “evidence”). then instead of the debate being all about how people are just jealous of facebook’s success, it can be on how much to adjust a potentially mythical valuation to arrive at a realistic number.
in today’s blogosphere, we should have to earn our told-you-sos.
Richard
on 24 Sep 10Does anyone know how many of those 500 million facebook accounts are even active? About 3 years ago I wrote a script to create myspace accounts. It was to add dummy links to some thing my friend was doing to try and win a contest or something, I don’t remember. But I ran that script and over the course of about three days it created over a thousand accounts, photos and random profiles details included. So when myspace said they had x number of users, I would know that over a thousand of them were mine – and I don’t even use myspace or facebook. Not under my own name anyway. I have about 6 facebook accounts that I created by hand just to mess with people. I don’t even remember the logins. If I wanted to see someone’s details I’d have to create another dummy account. Do they count those? Forever? I imagine they do.
itdirector
on 24 Sep 10[my previous comment wasn’t meant to by anonymous, here’s me again]
re: mr pynn’s ”...$33BN valuation would imply that each user is worth $66.00. I’m not sure what that measurement means….”
it bothers me that even though jon invited it, no one is offering up a grain of salt on this simplistic calculation. if there were two competing facebooks out there, you could use this metric to compare their relative values, but there aren’t. so a stand-alone statistic like this is just a curiosity and not a valid condemnation. here are some reasons why.
one problem is the calculation proposes to somehow average the value of Web 2.0-style content and user activity over total number of potential contributors. believing that is like asserting that the only shelf in a library that is really worth anything is the popular one that houses the bestsellers. since all the books in the library have the same average cost, by comparison all the non-bestsellers are losers. and thus we conclude the library is ridiculously overpaying for most of its books.
the calculation is also ignorant because it fails to acknowledge the interconnectedness features and growth model of social network hierarchies. previous comments seem to assert that the only assets here are a user’s profile and usage metrics and revenue from purchases through ads. but even if User A generates less than a penny of revenue in his life, he’s potentially responsible for a whole lot more income than that. that’s because his network of friends and his occasional contributions enhance the loyalty of existing users and attract new ones. the kicker is that this benefit from him potentially multiplies geometrically.
one last observation about the debate here is that i haven’t seen anyone discuss what may be the largest current potential revenue source for facebook. (i’m not talking about the wilder conspiracy theory stuff, like selling private info in violation of TOS.) somehow we’re forgetting that with monetized services, revenue is generated by “passive activity.” people seem to think that facebook only makes money if someone clicks through an ad and buys something. but passive usage, like simple user pageviews, spins ads. those wee bits add up to real money when you have 500,000,000 users.
Spicer Matthews
on 24 Sep 10While I agree with the concept that people are paying way too much for companies. A company is worth what people would pay and I think if Facebook IPO’ed tomorrow they would have a valuation of 33Billion. Not based on today’s P/E but based on forward P/E’s
Salesforce.com is a perfect example of this. Guys with tons of money under management need growth and that is why they look to a facebook or a salesforce. The Googles and the Microsofts of the world can not give them that growth.
I think it is crazy to pay that type of money but people do and that is what sets the value, what people will pay. David’s 3% example is interesting and is a good point. Just think once the hedge fund community has access to a public share of Facebook they will bid it up.
mostmodernist
on 24 Sep 10While yr at it, write up how facebook doesn’t have 500 Million users. That’s just as imaginary of a number. They may have 500 million accounts created, but accounts do not equate to “users”, people who actually use the system.
Omar Ting
on 24 Sep 10David—don’t get all butt hurt just because someone else’s company is worth more than yours.
Lucas Schneider
on 24 Sep 10@Omar Ting, and others who seek to discredit DHH’s assertions by claiming jealousy: the man is a partner in a firm which earns millions of dollars of profit every year. He has made it. Stick to the facts.
Nor are the attacks on David’s understanding of market valuation fair or entirely relevant. I don’t think he’s saying that FB wouldn’t hit 33 b. in cap if it went public tomorrow; he’s saying it shouldn’t because it will never generate any freaking profit. That’s the point, not what the hedge fund and silicon alley may or may not do to create investor frenzy when FB goes IPO. He said “worth”, not “value”.
The “100 million” donation is worth 3 million at best.
David
on 25 Sep 10I totally agree with you. Things are only worth what someone is prepared to pay and no one will pay $33Bn for Facebook.
lgj
on 25 Sep 10دردشة سعوديه شات سعودي شات كتابي دردشة شات
cj ramone
on 25 Sep 10Did anybody else read this and think “dip dip dibble?”
Frankf
on 25 Sep 10Maybe we are all overrating the meaning of 1 US$ (or any other currency). If private equity and VCs silently agree on this, no wonder it is that they are tradeing ridiclious amounts of their “money” for shares.
Christiaan
on 25 Sep 10Not only that. Facebook are history if someone can pull off a popular decentralised alternative.
Adam
on 25 Sep 10Gennerating $66 dollars per user from ads, specifically facebook ads, sounds doable to me.
Plus, when they hit 1 billion users they will only need $33 per user.
So yeah, 33billion sounds high, but who knows. So many things that work today were considered impossible a few years ago.
hehehe
on 26 Sep 10well…..with 500 million users …..you only need one good idea to make it a billions dollar worth company . They seriously need me ! I hope they give me a call before it is too late :)
Budi
on 26 Sep 10A van gogh painting is worth $50 million because ONE guy bought it at that price…
Mark
on 26 Sep 10I came late to this conversation, but I can only giggle at the original post. The current “worth” of Facebook is literally only set on these private, illiquid markets. The fact that worth has been rising steadily for the past several years says a good deal about its accuracy, but no matter.
Let’s just take the low end of Facebook revenue estimates for 2010—$1.3 billion. At a “frothy” 25x revenues, Facebook would be grossly overvalued by any traditional company metrics. But this is a not a traditional company.
This company has nearly 1 in 10 people in the world using its service not to “digg” the latest news story (what was that business every supposed to be?) or merely to plant a fake wheat crop, but to communicate with friends, family, colleagues.
Could Facebook go the may of MySpace? I suppose it could, but it sure doesn’t seem likely to be going anywhere. It’s got an awfully low customer-satisfaction index and yet virtually no “defection index”. So if Facebook doesn’t go the way of MySpace and continues to monetize its customer base merely decently, it would seem likely it could generate somewhat more revenue per user than it currently does.
Again, the low estimate has current revenue per user at about $2.50 annually. This is pre any real adoption of Facebook credits, with just one advertising product that is about as mature as AdWords was in 2003, and with no real payments coming in as Facebook-ness is syndicated around the internet (they may make something from that, but rally not very much—yet). If they could grow to a billion users (and maybe that’s a cap, who knows?) and they could grow to say $10 per user, they’d be making $10 billion in revenues.
If they are “only” as profitable as Google and net just 25% on that, well the net would be $2.5 billion and the $33 billion valuation would be on the order of correct. If they happen to, say, grow to a $20 billion business over the next 5 years - like Google did from when AdWords launched - then they’d probably be worth something like, I dunno, Google? That puts the valuation around $180 billion and makes the current numbers seem paltry.
The trick in investing is trying to figure out where something is going, less what it is. For 10 years, you needed to overpay to make a fortune owning Microsoft. For the past 10 years, the company has minted cash and all it’s really done is un-done that 10 years of overvaluation. They have also basically invented one new way to make money in that 10 year period - Xbox - and haven’t made all that much from it.
The Facebook you see now is the tip of the iceberg.
Beautiful Article
on 26 Sep 10hats off dude. the emperor has no clothes. you said it.
GROUPON is kicking FACEBOOK’s ASS. Wiping them all over the place.
Facebook is trying to pretend it gives you BRAND ADVERTISING because nobody is clicking on the links
advertisers are just losing money on facebook
John Gallagher
on 26 Sep 10“Facebook is not worth $33,000,000,000”? Fuckin’ A.
When I read that number I went cross eyed – I missed a 000 group until I realised it was 33 BILLION.
For me, when something strays so far from reality, it becomes hilarious. This is just silly – I almost feel like someone is playing a trick on us all. There’s no way that any company like Facebook can possibly be worth that much, or even a thousandth of that figure. It’s absurd.
It’ll be interesting to see what happens in the next few years. I genuinely hope Facebook crashes and burns as quickly as possible, then we can hopefully get over this ridiculous monopoly money game, although with investors still acting so insanely, I don’t think that point is going to come any time soon.
Thanks for a great post.
Mary Adams
on 27 Sep 10Real money is what’s left over after you pay your expenses.
Mary Adams
on 27 Sep 10You say: “Real money is what’s left over after you pay your expenses.”
But no one has any idea what Facebook’s true earnings are. Current accounting practices mix current year expenses with investments in intangibles like systems, processes, IP, training branding, user relationship development—in short, the investments necessary to build the knowledge infrastructure that is the core of the Facebook business model.
Michael Langer
on 27 Sep 10Ultimately I believe that a company is worth what someone is willing to pay for it…..question is what that would be if it would be the sale of 100%.....
Farhan
on 27 Sep 10who cares. Seriously. I miss the good old days of the SVN blog where you guys actually gave entrepreneurs really interesting ideas on building kick ass businesses. Forget about what twitter and facebook are doing, their founders are building things and they’ve managed to convince users and investors that they’ve built useful + valuable services. Would be nice to see less hate and more focus on helping the community.
Michael Kagan
on 28 Sep 10See today’s front page of the the New York Times Business Section: The Value of a Piece of Facebook by Andrew Ross Sorkin (http://www.nytimes.com/2010/09/28/business/28sorkin.html?_r=1&ref=business). DHH is quoted.
Farhan asks “who cares”? In one sense I agree: we are all out there building what WE build, creating value as WE see it, for ourselves, employees, investors and community. Whatever the Facebook and Twitter founders do and have managed to portray to investors, users and employees should not concern us. Let’s stick to our own concerns of building business that are profitable and make a positive difference in the lives of all who interact with us.
Yet, the world is not that simple and it is in this sense that I disagree with Farhan.
I found this conversation exactly in synch with SVN’s “good old days” in that it has not only inspired a mostly thoughtful debate, it also raises the consciousness of us all in the sense that we exist in a marketplace and what passes for “worth” or “value” as distinguished by the likes of Facebook, Twitter, hedge fund, money managers, etc most definitely impacts us all.
Whether we like it or not, the world is, for the MOMENT rewarding businesses like Facebook. Our choice, then, is how do we “move” with this reality. I suggest that 37signals - and some of us - have chosen to be responsibly and intelligently engaged in the conversation by not only sharing our ideas and offering alternative points of view, but also by doing more that talking: structuring our businesses, our offers, ourselves so that we can continue generating profits (and great lives) regardless of the current situation and ultimate fate of these celebrity-like companies.
Thanks David and 37signals for being a stand for clear thinking, open and honest debate and sustainable profitability.
vivzizi
on 28 Sep 10SO true! I was thinking the same thing.
I also remember just how quickly Altavista the number one search engine disappeared when Google came along and how quickly MYspace became unwanted by it’s users when Murdoch bought it.
I predict that after the movie “the social Network” comes out and more people realize how untrustworthy and how much of a jerk Zuckerberg is they will quit Facebook in droves and the assumed valuation will NEVER materialize. Already most facebook users talk about how their interest is declining.
Face book is being talked about by everyone now. In my experience that is the sign of a peak.
There is nothing that can change as quickly as the userbase of an internet site.
It’s as fast and easy as choosing to click more on something else tomorrow.
facebook
on 28 Sep 10To my mind, facebook is going to disapear in a few years.
C. Blair
on 29 Sep 10DHH, I truly understand what you’re saying, but, I have a question for you:
Why do you care? I mean, 37Signals is REALLY profitable, have a means of truly generating revenue outside of advertising and the sale of user information, and your products help to bring real value to your customers.
Your business model is the one lots of us strive for because not only is it attainable, but you get to keep your company. I mean, 37Signals could be just as big as Facebook and become worth $100,000,000,000 very easily if you were to decide to start selling portions of your company to venture capitalists.
To me, I would be happy with what you have and wouldn’t worry about what Facebook is doing because you aren’t competing with them!!!
Let’s face it, you’ll probably be around MUCH longer than Facebook will be…
Plus, you own Rails – - case closed—You automatically WIN!!!
Roman
on 29 Sep 10There is something very powerful going on when you consider the compounded connectivity of social networks, smart phones, mobile apps, location based services and the social web. Facebook is the social network everyone hangs out on today and the potential is immese.
Michael Madison
on 29 Sep 10Actually, I thought the Microsoft partial purchase was brilliant! The purchase was not to fairly value fB, I believe it was to prevent MS competitors from purchasing at a low/fair price. You have to respect such an awesome strategy. That said, fB has grown into a good chunk of that valuation.
You can’t be crazy and eliminate revenue based valuations in favor of EBIT multiples expecially for a relatively young company; that’s crazy. Most of their time was spent on user acquisition with an understanding that viewership generates income eventually.
Remember when Michael Jackson died, well I watched the funeral online with the CNN/Facebook ui and so did all of my friends the power they can wield around viewership is amazing. People spend hours and hours a day on facebook and minutes on Google (unless you’re an apps user).
Anonymous Coward
on 29 Sep 10http://www.youtube.com/watch?v=T7NqrekcC4w
hendri indra
on 29 Sep 10There is something very powerful going on when you consider the compounded connectivity of social networks, smart phones, mobile apps, location based services and the social web. Facebook is the social network everyone hangs out on today and the potential is immese.
Robert Thomes
on 29 Sep 10I bought a website from CoMergent a few months ago and they have been awesome! Very good support after the sale, they manage our marketing and SEO and our site gets tons of great traffic and converts visitors to sales consistently. CoMergent Acquisition Group is pretty expensive but they are worth it. I was recommended by a friend who used them a nd it’s the best thing I have ever done. I worked with Robert Thomas there and Yuris and they were absolutely great to work with.
Robert V. Thomas
on 29 Sep 10I have been in Internet Marketing and I have never seen a company produce better results than CoMergent Acquisition Group. I have increased my traffic from 250 Visitors a month to 12500 a day with CoMergent. Their SEO is very expensive but there is a good reason for that. They are who they say they are. I’ve been to their office in Jacksonville twice now and have developed a great working relationship and friendship with most of their crew… even their interns lol. Anyway I cant say enough about these guys. They produce consistently!
Nicolas Sauvage
on 29 Sep 10Just to add to Jamie’s good point earlier, you can check this interesting comparison between Facebook, who derives the majority of its revenue from ads, or tencent (did you hear of this company before? #3 biggest web company) at http://www.slideshare.net/greatwallclub/chinnovations-on-chinas-new-media
Really worth the 10 minutes to go through this presentation to learn about web and China.
Would you invest in Facebook, or Tencent?
Nicolas Sauvage
on 29 Sep 10Just to add to Jamie’s good point earlier, you can check this interesting comparison between Facebook, who derives the majority of its revenue from ads, or tencent (did you hear of this company before? #3 biggest web company) at http://www.slideshare.net/greatwallclub/chinnovations-on-chinas-new-media
Really worth the 10 minutes to go through this presentation to learn about web and China.
Would you invest in Facebook, or Tencent?
ben
on 29 Sep 10I couldn’t agree more. Long term I see Facebook as more of a global rolodex than a service platform. The next few years will likely not be very good to Facebook as they try to monetize it to justify the valuation and ultimately end up ticking off users.
Faddy McLaddy
on 29 Sep 10Fuck Facebook. Seriously.
Faddy McLaddy
on 29 Sep 10Facebook can’t be trusted with information. Consequence? Populate the database with a mix of lies and truths. Half truths are easily filtered, right?
http://www.eff.org/deeplinks/2010/04/facebook-timeline http://www.nytimes.com/interactive/2010/05/12/business/facebook-privacy.html
Where the hell is the value in this ? Social.. yeah, right. http://www.youtube.com/watch?v=nrlSkU0TFLs http://www.youtube.com/watch?v=kFKHaFJzUb4 http://www.youtube.com/watch?v=pHm-zcFI8P0
Gregorio, from Management&Finance International Blog
on 30 Sep 10Hey guys, it’s difficult to understand the risk of no liquidity for the people/companies who invest buying just less than 50% of the shares of a company, in general terms, for non quoted companys (in the way to take the control or not). It’s not the same for the case of FB, but it seems that they over-valued this financial option.
In this case, they base on the expectation of future benefits or direct earnings with a potential run of FB for the stock market.
In my country, there is a case of a non quoted company which offer (“sale”) suscription of new capital from just 1,200€, in a traditional business, vinculate with alimentation sector. In my opinion this its a sure example of non-sense long term investment. Perhaps just especulate… no more.
Good post.
This discussion is closed.