Facebook is not worth $33 billion

http://37signals.com/svn/posts/2585-facebook-is-not-worth-33000000000

by malbiniak • 16 years ago

315 245 16 years ago

jacquesm6• 16 years ago

What facebook is really worth we'll know when they IPO and they sell off a majority portion of the stock. Until then it's anybody's guess.

I wouldn't buy their stock at any valuation, there are much more solid ways of investing than speculating on something that already feels over valued. And if I would want more risk then I'd rather put my money in start-ups than facebook.

The next bubble is here, and it will go the same way as the previous ones.

Remember what netscape was supposed to be worth.

edit: sorry, that 'majority' was meant to be 'major'.

spolsky5• 16 years ago

That's not correct. There is a secondary market for Facebook stock which is plenty liquid (see Sharespost, et. al).

jacquesm6• 16 years ago

Ok, point taken, but compared to the total number of facebook shares I would imagine that is a relatively small amount traded? (the site requires registration for any data to be even visible)

photon_off• 16 years ago

"In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value.

...

Another elegant definition of liquidity is the probability that the next trade is executed at a price equal to the last one. A market may be considered deeply liquid if there are ready and willing buyers and sellers in large quantities.

...

The liquidity of a product can be measured as how often it is bought and sold; this is known as volume."

I don't think any sane investor would consider private shares of Facebook "plenty" liquid. The volume of Facebook trading is so low that when a large trade of it does occur, as in this additional investment that valued it at $33b, the price jumps wildly and it makes news.

As per the secondary market, Sharespost shows the last contract traded on their system being over 3 weeks ago, and that there are only 3 people willing to sell and 5 people willing to buy right now. Those are pathetic numbers.

Granted, shares are not entirely illiquid either. You could sell your shares... but it's a necessity that the more you want to sell, the lower your price is going to have to be to attract enough buyers.

rmah• 16 years ago

Companies rarely "sell off a majority portion of the stock" when they IPO. More typically, they sell an additional 20% to 30% new shares to select investors.

jacquesm6• 16 years ago

Sorry, I meant to write major... apologies.

adw• 16 years ago

The Betfair IPO about to get off (at a roughly $2bn valuation, which is pretty fair for a category killer in a huge business like sports gambling) is entirely insider sales, no new issues, and will be something like 10%-15% of the company.

ericb• 16 years ago

I agree, but as an aside, is it possible Netscape merited that valuation? Was Netscape's a squandered opportunity, or the most likely outcome.

I mean this in the sense of odds--was the valuation wrong because the odds of success were really so slim, or are we calling the die roll of a hard six inevitable after the fact?

I bring this up because I had a similar feeling to what you describe about Google around its second stock offering, but it has done extraordinarily well since then. I second guess these judgments because in hindsight everything seems inevitable.

jacquesm6• 16 years ago

Google at least has a business model, I can't say I can actually detect one in the case of facebook.

As for netscape, yes, in part it was a lost (or destroyed, more likely) opportunity, but at the same time even if they had continued to be successful their valuation at the time was right up there with far future science fiction.

ulf• 16 years ago

"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."

This is a strawman. If they wanted to make money right now they would. But they also observed many examples of turning-the-faucet-on gone wrong, especially with the whole privacy issues, that they are moving very carefully in that space. But they will make a lot of money if they decide to start.

Andrew_Quentin• 16 years ago

what exactly are they waiting for? They have half a billion users. You know, that is more than America and Russia together, or comparable to the entire population of the geographical Europe. They can only go down hill from here I think. Therefore, personally I certainly would not wait.

The truth is really that they do not know how to monetize themselves effectively

mrtron4• 16 years ago

While the exact numbers are obviously not available - something like 500 million was spent on FB ads in 2009 and in 2010 that number is likely a billion.

I don't take David's flawed 'they wouldn't raise money if they were making good revenue' as a valid statement. The revenue they make is all profit - there is no middle man or hidden expenses. They have operating costs which are sizeable, but it as they grow and mature their business and revenue - their profit will grow.

pclark4• 16 years ago

No offense but have you taken more companies public than:

* Marc Andreessen

* Jim Breyer

* Peter Thiel

because they are some of the directors on the Facebook board, and I think they know their stuff.

bl4k4• 16 years ago

My best guess is that they are waiting to book an entire year of platform revenues - which will give investors a better idea of what their business model actually is.

This time next year they will have 12months of ads + platform revenue to show off. Their business model hasn't been complete up until now.

That is why they opened and sanctioned the secondary market, because of employee pressure and because they had to buy time before going public.

Besides companies prefer to remain private, esp because of the amount of overhead being public adds (esp after Sarbanes Oxley). The role of CEO completely changes when you are a public company.

If anything the reluctance to go public is a good thing, since it means that Facebook are thinking it through and establishing themselves - not making a dash for cash.

Google was also very reluctant to go public, but the SEC and their own employees forced the issue.

This is going to be one hell of an IPO.

mrtron4• 16 years ago

Facebook makes a sizeable amount of revenue now. Why does everyone talk about them like they don't make a dollar?

Retric• 16 years ago

To be worth 33 billion they should be pulling in ~1.5 billion in profit a year with a reasonable expectation that they will increase over the next several years OR they are going to make significantly more than 1.5 billion a year fairly soon. I suspect FB could start making 1 billion a year fairly soon, but suggesting they are going to be make 3+ billion each and every year within 5 years seems like a significant stretch.

dabeeeenster• 16 years ago

"In other words, the evaluation 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."

This is simply not true. There are many reasons why a company may want to stay private.

ZachPruckowski• 16 years ago

> "There are many reasons why a company may want to stay private"

True. But there are a billion reasons to be looking for an exit - all those VC investors are eventually going to want to close out their funds and get real money for their institutional clients. Not to mention all the employees.

Most of these shareholders are going to want to cash out in the next few years, and $200 million in profits won't go far towards making that happen. They've got to exit eventually, and $33 billion is a lot for a major company to pay for Facebook when they don't have a clear monetization strategy. I mean, that's twenty times bigger than the YouTube sale. So IPO it is.

pclark4• 16 years ago

There's no doubt Facebook will IPO eventually.

I imagine a lot of the employees could and probably have cashed some shares out in previous rounds. I'm sure VCs are happy to wait for their IPO (they can probably raise funds just by saying they own Facebook stock)

spolsky5• 16 years ago

I hate to leap in with what seems like an ad-hominem attack on the 37 signals, but their utter and complete misunderstanding of all the basics of business is starting to grate on me, and I'm wondering if it has anything to do with Chicago. Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the groupies? How else could you explain just how far they seem to have drifted away from basic reality?

First of all, David: The word is VALUATION, not evaluation. KTHX.

Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is valued by taking the last share traded and multiplying by the number of shares outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL.

The whole section "Minority investment evaluations aren’t real" is so economically bizarre and incorrect that I don't even know where to start. It's like you wrote a blog post arguing that it is incorrect to refer to a 5' tall boy as 5' tall because he's often sitting down. Every single day every single public company in the world is valued by the last share traded, usually for a tiny fraction of the company.

Finally, to the main point. Facebook has certainly figured out how to make money off of 500,000,000 users. And as they optimize, they will make a lot more money. When they figure out how to make another DIME off of every user, they will instantly be making another $50,000,000 a year... in pure profit. How much profit will 37signals make if you figure out how to make another dime off of every customer? Eh David? Facebook works on the theory that when you have a lot of people, you don't have to make as much per person, because the amount of money you make is the number of customers times the amount of money you make off of each one. Again, that pesky multiplication.

It's weird, it's like in Chicago they don't have multiplication or something.

_delirium• 16 years ago

I agree mostly, but it is true that in private equity, it's not always taken for granted that you can take a small stake's buy-in price and multiply it out to get a valuation. It depends on why that investor bought in, what the prospects for similar investors are, etc. It's taken with much bigger grains of salt than the standard (share price * shares outstanding) valuation for public companies is, anyway.

seldo• 16 years ago

A dime per user is nice and all, but they need to make 20x that for a billion dollars in revenue. That's still only $2 per user, but a lot harder.

spolsky5• 16 years ago

They're almost certainly making $2 per user. Another dime is gonna be easy.

nadam3• 16 years ago

My gut feeling is that Facebook is somewhat overvalued at $33billion. (This is $66 for their average user.) But I don't think it is overvalued by orders of magnitudes and I think the 37signals article is very demagogue.

dhh6• 16 years ago

1. Thanks for the word correction, updated.

2. Publicly traded companies have instant liquidity on many more shares, which makes using "last share sold" an meaningful metric.

3. When only 3% of the money a company is supposedly worth has been moved around, it's a poor indicator of what the other 97% would go for.

4. They haven't figured out how to make much profit yet. And it's still questionable whether they will. MySpace supposedly also just needed to turn on the faucet, but apparently the water ran out before they got to it.

5. Oh, and New York smells. (take that!)

dhyasama• 16 years ago

I can verify point five. New York does indeed smell.

edw519• 16 years ago

It's weird, it's like in Chicago they don't have multiplication or something.

Oh, and New York smells. (take that!)

Two of my heroes dragging discourse on hacker news into the toilet. What's the world coming to?

danielnicollet• 16 years ago

it's "a meanningful metric" not "an meaningful metric". Please spell people. This is not SMS!

spolsky5• 16 years ago

2. That's just not correct. Spend twenty minutes talking to anyone who trades in bonds or equity before you make assumptions about what liquidity you need to get a good price... it's not much. Facebook trades all the time on sharespost, certainly enough to be liquid and to reach a market price. Google itself only has a tiny fraction of the shares available to the public (10% if I remember correctly) and far less than 1% of the outstanding shares trade every day. That doesn't mean that the market doesn't find a market price.

3. Also not correct. When entire companies are bought and sold that had a previous market in the shares, the price for the entire company is usually a PREMIUM ON the the market valuation. "PREMIUM ON" means MORE THAN. Somewhere in Chicago, I understand that there is one market of some sort, I think they trade corn and pig bellies, surely SOMEONE there can explain it to you...

4. Also, just not true. They are very profitable and their profit is almost certainly growing at a rate that will make their valuation reasonable.

angilly2• 16 years ago

I was impressed (surprised?) at how civil this response was. Probably because it was a response to Joel and not randomHNuser9 :)

I was also surprised that it didn't really address the question of whether or not you (37S, dhh) are "stewing in their own witty ideas, listening only to the adoring comments they get from the groupies"

Do you have any thoughts on the "bubble-ness" of Chicago. Think it's a totally invalid point?

joelhaus• 16 years ago

Such arguments should be left to professors of financial theory. Here's a balanced analysis:

  In the real world, markets cannot be absolutely efficient or wholly 
  inefficient. It might be reasonable to see markets as essentially a 
  mixture of both, wherein daily decisions and events cannot always be 
  reflected immediately into a market. If all participants were to believe 
  that the market is efficient, no one would seek extraordinary profits, 
  which is the force that keeps the wheels of the market turning.

  In the age of information technology (IT), however, markets all over the 
  world are gaining greater efficiency. IT allows for a more effective, 
  faster means to disseminate information, and electronic trading allows 
  for prices to adjust more quickly to news entering the market. However, 
  while the pace at which we receive information and make transactions 
  quickens, IT also restricts the time it takes to verify the information 
  used to make a trade. Thus, IT may inadvertently result in less 
  efficiency if the quality of the information we use no longer allows us 
  to make profit-generating decisions.

Source: http://www.investopedia.com/articles/02/101502.asp

points2• 16 years ago

I'd bet they make a lot more profit than 37signals.

grandalf4• 16 years ago

If you take #3 to its logical conclusion, any company's shares, if sold all sold at once, would be worth far less than the price at the nexus of supply and demand (the market price).

Price is simply a function of supply and demand. It's not customary to use a fire sale price as the sole basis of a company's valuation.

http://en.wikipedia.org/wiki/Valuation_(finance)

carlton• 16 years ago

David's point 2 is a good one. It is the reason why bourses insist that a large percentage (IIRC >25% for the LSE) of share capital is in public hands at all times. (Where "public" means people or organisations not associated with the directors or major shareholder.)

Nonetheless, Joel's post is quite funny.

sachinag• 16 years ago

37signals != Chicago

scorpion0322• 16 years ago

http://en.wikipedia.org/wiki/Synecdoche

> "The city posted a sign," means that an employee of the local government (but not the geographic location or all of its residents) posted a sign

ryanwaggoner2• 16 years ago

their utter and complete misunderstanding of all the basics of business is starting to grate on me

Their linkbait really grates on me as well (though I happen to agree with this post's conclusion, if not the methods), but I think it's pretty unfair to say that they misunderstand all the basics of business. They seem to be doing pretty well for a shop their size. In fact, I'd say there's a good chance they're doing better than Fog Creek. Maybe misunderstanding the absolute perversion of what too often passes for "business basics" in Silicon Valley isn't such a bad thing.

jonpaul2• 16 years ago

Considering their success, how do they misunderstand the basics of business?

timr• 16 years ago

"Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is valued by taking the last share traded and multiplied by the number of shares outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL."

Indeed. And Pets.com was worth $100 million on the day of its IPO. And tulip bulbs were worth more than a man's annual salary in 1637. And that house down the street was worth a million dollars last year. Someone paid for those, too.

You don't have to have a different definition of "valuation" to see that a small sample of the most eager investors in the private market doesn't guarantee a reliable estimate of value.

kwamenum864• 16 years ago

Value is determined by what someone- anyone- will pay for something. And it makes sense if you think about it. The goal is to find out how much you can sell that something for and it is the exact same problem as figuring out how much someone will pay for that something.

Company valuations are messier than tulip bulb valuations though. With tulip bulb valuations you are saying that since someone will pay x the bulb is valued at x. With company valuations you are saying that since someone will buy 1/n of the company for x then the company is worth n*x. This makes sense because people really want a piece of facebook and valuations do a great job of setting that price. But the price is also used to determine how much the entire company will go for, which is how the number is often thought of.

As long as the valuation goes up and you have the opportunity to sell for a net gain then it is a good investment. DHH's thoughts here are important beacause they call attention to a valuation bubble. I think the main controversy lies in his creative use of words.

raheemm2• 16 years ago

What does Chicago have to do with FB valuation? KTHX. DHH makes a good point though - what are FB's profits/profit projections? No one knows. Assuming its $200M, how the hell can FB be worth $33B? That's all...

iampims• 16 years ago

It could well be that "only" $200M in profits is the result of spending $$$ on R&D and product development (FB Questions, FB Places, FB Credits), which could lead to a massive amount of cash flowing in shortly.

They've massively invested in infrastructure, which has certainly lowered profits. They could very well start benefiting from this as soon as next year.

Without information, though, it's all speculation.

biznickman• 16 years ago

37signals is great at understanding the laws of small business, however arguing with those same laws doesn't always work when scale is involved.

This would have been a valid argument 2 years ago if Facebook was trading at this valuation, however Facebook has a reasonable valuation given their rapid revenue growth. They may surpass $200 million this year and their user base is still about to double (yes, to beyond 1 billion users).

They haven't even begun to open up the revenue faucet. 37signals should stick to providing advice to "lean startups" who want to build small businesses.

lovskogen2• 16 years ago

What if there's not faucet to open?

latch• 16 years ago

I remember a documentary on Walmart where someone said they succeeded by realizing that a small percentage from a very large number is still a very large number.

johnzabroski2• 16 years ago

Joe Walton wrote a book about it.

BenS• 16 years ago

There is a relevant difference between valuations derived from secondary markets and public markets. Investors in secondary markets rarely have clear understanding of real financials or the capital structure of the company. This is a good writeup: http://www.homethinking.com/brontemedia/2010/09/17/secondary...

Also, Chicago has lots of smart people, and I agree with you that FB is well positioned to make lots of money.

tofumatt• 16 years ago

I'm not sure a company doing as well as 37s can be accused of having a "complete misunderstanding of all the basics of business".

mrtron4• 16 years ago

Given fb's current position - would it not be incredibly stupid to NOT do everything possible to continue their growth and try to become more widespread as a necessary layer of the internet?

Assume they want to continue growing. Growing both the number of total users and the number of places they grab the users' attention (mobile is the next natural play). Of course they would continue raising money and not worry about profit margins right now as they are still driving money back into the company's growth.

There are two factors that influence your 'multiplier theory' given their advertising model. Number of users and the amount of attention you have from those users. They still have a lot of potential upward growth in both areas.

If facebook made a billionish dollars this year on ad revenue - they could double it with twice as many users. Double it again with twice as much user attention from being a core part of the mobile web. They are still growing their ad platform, so that is another multiplier.

elblanco• 16 years ago

Of course doubling their user base twice is something like 30% of the human species. I'm not sure that's realistic.

danieldon• 16 years ago

    Is the problem that they're sitting there in a city 
    without any other Internet industry

orbitz, groupon, careerbuilder, peapod, everyblock, skinnycorp, grubhub, the onion, ars technica, to name a few

flyosity• 16 years ago

And Google since they bought FeedBurner a few years ago.

earle• 16 years ago

Last I checked one of the most profitable "internet" businesses (Groupon) in the last decade is in, and founded in, Chicago.

cynicalkane2• 16 years ago

It should be immediately obvious that they're comparing intrinsic value vs market valuation, so no, it's not tautological at all.

Everyone who invests should know that market value does not necessarily predict intrinsic value, and it becomes more problematic when there's illiquidity, and when only a small fraction of the company is being bought and sold. These are basics, going back to Ben Graham's famous book on value investing, and probably much further back than that.

Even if liquidity and size didn't matter, it's still a basic error to go by last share traded and claim that that represents the actual value of the company.

kj12345• 16 years ago

Exactly. While the technical sense of valuation might be tautological, it's also nowhere near the average person's definition of economic "value" or "worth". A good test in the every-day sense of those words might be if company X were given 3 months to sell off everything and end up with a stack of cash, how much would they have? Apple could stand a chance of getting reasonably near their valuation whereas I'd be shocked if Facebook could.

corywilkerson• 16 years ago

The Chicago dig seems really, really unnecessary.

gamache• 16 years ago

It's as valid as when people refer to the Valley as one big techie circle-jerk. Or as the most fertile technological environment in the world. Location, location, location.

sbaqai• 16 years ago

The present valuation isn't as important as intrinsic value if you're talking about the long term. Of course the valuation is a multiple of its trading price. With that definition, its worth whatever people are trading shares think its worth. But that's only 3% of the shares.

But what I think the 37signals post is addressing is how directly tied this valuation is (or isn't) to the company's intrinsic value. price-to-earnings, a guess at its margins, durable competitive advantage etc etc. In that sense, is facebook truely worth $33B? That's a different question than what's its current valuation. Its subjective, to be sure, but its still fundamentally different.

Its a private company. I doubt many outside the company know its financials. Information scarcity leads to pricing inefficiency. For all we know, speculators might be driving up the price to cash out sooner.

Another point I mentioned before: Everyone is incentivised to see the valuations go higher. The VC's, employees with shares, the founding team, etc. They can cherry pick talent from the competition with such valuations. Since I don't think you can short SecondMarket stock, there's no way to bring negative information into the market to keep prices rational.

To your last point, facebook has certainly figured out how to make money off its current users. But it has radically changed the underlying user-conventions to get there. It started out as a college-yearbook and photo storing site with no profit-motive. In order to become profitable, its iterated on that simple concept with such a pace that the majority of users have yet to catch on with how things have changed beyond photosharing and posting on friends walls. The majority of people have no idea what is being tracked. For them to squeeze out further revenue, it follows that more fundamental changes must take place to get there.

Whats one thing that could absolutely destroy facebook? Overnight? If they started making public which users were viewing which profiles, and with what frequency. That could kill it pretty easily, I think. Of course, they would never do it, but I think if a terrible scandal or crime occurs, involving sensitive user data, and people are compromised in such a manner, that would be a problem for facebook.A billion dollar company shouldn't be so easy to kill.

CallMeJeffrey• 16 years ago

I don't entirely disagree with your points here, but as someone who is from Chicago and spent many years helping to build a very successful Chicago-based business (Threadless), I take offense to the notion that David's misconceptions have something to do with Chicago.

First of all, he's from Denmark – he just lives in Chicago. Secondly, ever heard of a little startup called Groupon? They're from Chicago and I'm assuming they have a few people there that excel at multiplication.

The location of 37signals has nothing to do with it, and you're clouding an otherwise clear and well articulated set of points with the asinine notion of "no one outside the valley understand business".

weezer• 16 years ago

"The cynic knows the price of everything and the value of nothing." -- Oscar Wilde

Disregarding the technical usage of the word valuation in investing, I see three ways of interpreting the terms in the argument here. The price of Facebook is 33B, simply extrapolating from the price of tiny percentages of Facebook.

The value is related to the price people are willing to pay, but is actually unknown and only exists as a prediction of future cash flows.

The worth is a more nebulous concept and related to how much Facebook improves the world.

It seems like spolsky is talking about the price, and dhh is talking about the value, and making illusions to the worth.

m104• 16 years ago

Seriously, Joel, Facebook just needs to "optimize" a bit and they'll be more profitable? Really? With a valuation of $33 billion, Facebook needs to make a bit more than a dime or two extra from their users. They need a ton of real dollars from each and every user or (more likely) dozens or hundreds of dollars from some users and nothing from the rest. How are they going to do that, exactly?

How will Facebook change its platform to convert its hundreds of millions of users, who signed up for a free party, into billions of dollars per year without spoiling the party? No one likes getting invited to a party with their friends only to find that the beer isn't free after 11:30, or worse, they've been tricked into attending an MLM meeting. If Facebook could convert eyeballs to dollars the way Google can, there was no reason not to do so when they had 50 million users, or 100 million, or 200 million... It hasn't been done, though, because it would spoil the party and stop that lovely flow of VC money.

I am just gobsmacked that, within just a few years of the US housing market bubble popping and the financial empires getting caught with their pants down, you would continue to support the speculators' fantasy of pre-IPO tech valuations. These types of valuations aren't just irresponsible or insane, they're scams! The consumers have no money or credit left, so the easy money is going to come from gullible investors.

stretchwithme2• 16 years ago

Perhaps it is more correct to say that the potential revenues from this thing don't justify the valuation. It wouldn't be the first company to be overvalued and the fact that many owners of this stock cannot sell is certainly relevant.

scottymac• 16 years ago

On behalf of

Groupon.com Orbitz.com Feedburner.com CareerBuilder.com TicketsNow.com Peapod.com Apartments.com Restaurant.com ShopLocal.com Legacy.com GrubHub.com EveryBlock.com Apoolicious.com Threadless.com Newser.com Songza.com ViewPoints.com Timelines.com SitterCity.com BlockShopper.com CarePages.com SurePayroll.com OneWed.com

...and many other Chicago-based internet companies

Fuck off.

jkratz• 16 years ago

You forgot cars.com, viewpoints.com, and navteq ;) Clearly no internet here. Oh...and no financial companies either (I wont start a list of the many)

indiejade• 16 years ago

Facebook is not (yet) public, which is a massive factor relative to the calculation of its book valuation. Presumably, at least on the surface, all of this facebook hype of late would indicate that what used to be a closely-held entity is quickly becoming ripe for the IPO market. What the actual valuation is (or will be) cannot be determined until the free market goes to work on it.

But then again, speculation, anticipation, and fear . . . these have all been attributed to major market fluctuations, crashes, overnight millionaires . . .

Jeema• 16 years ago

It's TAUTOLOGICAL.

I think you are talking past one another. He's saying that he does not think that their valuation is merited. You are saying that his assertion makes no sense because valuation is, by it's nature, defined by the current trading price.

You are I think technically correct, but the market isn't always perfect in judging the value of something, and I think he is saying that this is one of those cases.

"The whole section "Minority investment evaluations aren’t real" is so economically bizarre and incorrect that I don't even know where to start."

I don't think that's so bizarre to say. If there is huge demand for something and only a very very limited supply, then doesn't it stand to reason that price will go up more than it would have otherwise if there was more supply?

mta• 16 years ago

There are numerous methodologies for valuation. "last share traded" is by no means the ONLY method. Markets by definition are made up of actors who independently value commodities in various ways, none of which are definitively the only valuation method. Is that tautological enough for you?

Perhaps a little more humble thoughtfulness, rather than indignant ignorance, would do you some good.

bernardmoon• 16 years ago

Sure, but I would hardly call secondary markets for startup shares a valid market or even try to compare it to public market. Come on, Joel!

So you would agree with the valuation of Slide or Ning a few years ago? Maybe. Would you now? No. Valuation of private companies is not a science but an art. That's startup 101 stuff. Do you really call Sharepost a market most investors would call credible? Please.

jasonadamyoung• 16 years ago

Here's my issue after reading all of this. Who the hell cares? I love minutiae as much as anyone, but this is worse than arguing about text editors.

This sounds like a bunch of privileged people arguing about something that that doesn't make a damn bit of difference to what's really needed in this world.

I thought I was going to learn something. But now I just feel a little ashamed that I read any of it all.

markdascoli• 16 years ago

Actually Joel, your assertion that dhh simply needs to look up valuation in the dictionary is absurd. Valuation is not neatly defined. It's hugely subjective -- especially for private companies.

>It's like you wrote a blog post arguing that it is >incorrect to refer to a 5' tall boy as 5' tall because >he's often sitting down.

It's not like that at all. It's more like comparing a 5' tall boy with a 5' tall light pole and deciding that valuation is based on height alone.

>It's weird, it's like in Chicago they don't have multiplication or something.

Yeah, good point.

vseloved• 16 years ago

The only correction is that in this phrase "Facebook works on the theory that when you have a lot of people, you don't have to make as much per person, because the amount of money you make is the number of customers times the amount of money you make off of each one" you confuse customers and users. Facebook users are not their customers. The customers are advertisers, and there ain't 500m of them. So, although their profit hugely depends on the number of users, it's not the only component in the formula.

runako• 16 years ago

Users who aren't spending (at the moment) are better termed "product" since their presence on the site is being sold to others.

foljs• 16 years ago

"Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the groupies?"

As opposed to being located in a circle-jerk of similar minded companies and VCs, responsible for the first internet boom?

"The whole section "Minority investment evaluations aren’t real" is so economically bizarre and incorrect that I don't even know where to start. It's like you wrote a blog post arguing that it is incorrect to refer to a 5' tall boy as 5' tall because he's often sitting down."

If he's ALWAYS sitting down, then it's accurate to argue he's not really 5' tall ―not for any practical purpose, that is.

But not only "minority valuations" are not real, but majority valuations are not real either. Valuations are based on guesses, feelings, estimations and some facts thrown in for good measure. A declaration of fact, they are not. Some time they are even complete BS.

"Finally, to the main point. Facebook has certainly figured out how to make money off of 500,000,000 users. And as they optimize, they will make a lot more money. When they figure out how to make another DIME off of every user, they will instantly be making another $50,000,000 a year... in pure profit. How much profit will 37signals make if you figure out how to make another dime off of every customer? Eh David?"

And how useful is David's products to customers, eh Joel? How possible it is that they jump ship en masse when something trendier comes along, compared to Facebook? That is, which business is based on a solid offering, and which on virtual smoke and manure?

Yahoo could once milk 500,000,000 users too. Nowadays, not so much.

"Facebook works on the theory that when you have a lot of people, you don't have to make as much per person, because the amount of money you make is the number of customers times the amount of money you make off of each one. Again, that pesky multiplication."

Yes, many a business failure was based on that theory. It's the old, "we lose money on each product, but we'll make it up on volume" idea, adjusted as "we make a tiny fraction of money from each user, providing no real benefit or substance, and he can jump ship tomorrow like he did on several of our predecessors, from Frienster to MySpace, but we'll make it up on volume".

"It's weird, it's like in Chicago they don't have multiplication or something."

Most likely it's like NY has no manners...

But the real question is, should someone even partially responsible for Visual Basic even be allowed to talk about tech?

HowieSPM• 16 years ago

Of course Facebook is not worth $33bil. Fact: The Facebook engagement numbers for users suck. The data is inflated. That all is fact BUT forget that. Apple shares cost $6 per dollar of revenue. At the same valuation Facebook is worth $9bil. Would you really pay $25 per dollar of Facebook revenue knowing in 2-3 years they could be the next Myspace? They sell nothing. They are actually the Seinfeld of Networks. No loyalty. Nothing preventing anyone from jumping ship. If you think I am wrong people invested way more in their Myspace experience...photos, blogs, video, tricked out pages etc. And then just left. Gone. Bye. See ya.

Remember a sucker is born every min and Elevation Partners has been a sucker over and over in many investments. Would you spend $6 per dollar of Apple revenue or $25 for a dollar of Facebook? Case closed.

pitbear• 16 years ago

y so serious?

-The last executed price times shares outstanding is market cap. Valuation is dcf or guideline; there's a big difference between capitalization and valuation.

-Sharespost can not be considered liquid as all of its securities are governed purely by regulation D and are by definition on hard to borrow

-Facebook will not continue its current exponential rate of revenue growth for the standard 5 year assumption DCF

(jk, but maybe not) Its most avid core user base will graduate with their faggy liberal arts degrees, find out they can't earn for shit, advertising revenues will peak and decline, at which point Facebook will file a timely SEC S-1, followed by a record oversubscribed ipo mostly bought by parent(sponsors) of said faggy liberal arts graduates, then get basket shorted down to 50% of offering price. IB, instl. trading desks, and VC will already have gotten rich long before this; everyone else loses. Same deal with carbon/ECX emissions futures.

-NY owns Chicago; Chicago is the guy on the merc floor shouting hundreds of open outcry bids while one trading desk at 200 west st. takes every bet against him using one single macro on Rediplus. (jk, respect to all veteran floor traders)

-I'm sure everyone will decide their bets based on their own risk-reward/due diligence anyways. Nothing we say to each other will have a huge effect; in the end, the bids and offers we provide will do all the talking for us. That's why the market exists so let the games begin.

points2• 16 years ago

Bless the 37signals guys. Always fun for a laugh.

Keyframe• 16 years ago

Sure it is, it is called Speculation http://en.wikipedia.org/wiki/Speculation Just because there is no real value going on for proper financial analysis behind it yet, doesn't mean prospective valuation couldn't be derived. Obviously, people that invested worked on a model that derived said valuation. Maybe it's a bubble, maybe it's not - but valuation is here. That's how speculative market works, without it there would be no investments.

My take is that Facebook is transitioning into a phase where they will try to monetize their user base by a large factor. Vector of their approach is widely speculated in media (they'll take on google, they'll make phone, they'll do this, they'll do that). The fact is that we don't know for sure what and where will they hit, but certain fact is they must hit somewhere. Speculation is fed with that fact.

Google had a 5 year span before it hit Adsense. Amazon was in the gutter for quite some time... I really see no point in this article from the arguments perspective.

I see a point in subjective matter where one who understands only a traditional commerce model (http://en.wikipedia.org/wiki/Commerce) would have trouble with speculative nature of business like this. From the tone of the post it looks like the message here is the messanger's emotions rather than fundamental aspect of point being made (since there isn't any to begin with).

danielha• 16 years ago

Not saying Facebook is worth $33B, but these justifications to why Facebook isn't worth $33B are at least as tenuous.

bl4k4• 16 years ago

1. 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 evaluation of the company!"

Not true. Sure they have raised $1B themselves, but a lot of stock has changed hands on the secondary market. Facebook sanctioned employees being able to sell stock up to a certain amount, in lieu of going public (employee pressure was part of what prompted Google to go public).

2. "In other words, the evaluation 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."

Again not true. When you IPO you don't float 100% of your shares. In the case of Facebook, an IPO may not even see 10% of the company listed - ie. not a lot more than what is already being traded in secondary markets.

Most listed companies do not exchange 100% of their stock - not even close. By this reckoning then, no company in the world has a real valuation because at no time is all of their stock available for purchase. The author needs to go to Google Finance and lookup any of the Fortune 100 and see for himself that most have a lot of stock outstanding or not listed.

3. "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."

You should have read the link you posted, because the story is that Elevation bought $120M of stock from private holders. ie. Facebook didn't raise that money. The last money they raised was $200M (on $10B) from Digital Sky in May of 09[2]

(btw if you did read the story at the link you referenced, the 4th paragraph mentions that Facebook revenue for '09 was $700-800M, not the 200 'best guess, being generous' that you work on).

But anyway, the recent (cheap) money they raised went into CAPEX (building datacenters to lower your overheads) and cashing out some stock holders for a very high valuation for non-voting stock.

Facebook is still at the growth stage so every dollar is (wisely) re-invested in the company in ways that will improve the bottom line. $100M is a drop compared to the cost of building datacenters (the new Google datacenter in Iceland cost 250M - without servers).

Having their own datacenters will reduce their infrastructure costs over time. While it is a lot of money - it will pay itself off within a few years because atm they are leasing space and bandwidth. Not a bad use of what is 1% of their company.

4. "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."

How about we Get Real(tm) and say $1.1B this year[1], and that is before they start booking platform revenue from Facebook credits, which will be 30% of everything Zynga et al make (and Zynga made over $500M+ in '09). $700+ in 99, $1.1B+ this year, and at least an extra billion in the first year of Facebook credits. Not bad.

Each time they double revenue you can halve the PE - which is why it is so high atm.

"No outrageous profits after seven years and half a billion users"

They are profitable, and on a trajectory that will see them reach ridiculous numbers. See the more sane and informed discussion about Facebook revenue projetions and the business model here:

http://news.ycombinator.com/item?id=1718512

(if you are actually interested in learning why Facebook is valued so highly, what the business model is and where it is going - check this link, the conversation took place earlier today and it will save me re-hashing a lot of the points here)

Facebook has reached every corner of the world in short time. We can all agree that their ads suck - yet even with this shitty advertising, which is mostly for Russian brides, they have managed to hit a cool $1B - without even trying. Imagine if they had some real ad technology behind that site. They will do something that Google has failed to do, that is, have two sources of revenue. 1. the ads. 2. the platform - both of these are billion dollar businesses.

What is more depressing than just how mis-informed and terrible this article is? The number of fans in the comments who eat up every word and cheer them on.

(Edit: updated)

[1] http://techcrunch.com/2010/06/22/facebook-revenues/

[2] http://www.crunchbase.com/company/facebook

richcollins• 16 years ago

> Facebook sanctioned employees being able to sell stock up to a certain amount, in lieu of going public

Does Facebook approve the sell price? If so then it's likely biased up.

bl4k4• 16 years ago

They do not approve the price, but they have to approve the transaction and it can only take place within one of the allowed trading windows (Facebook has non-trading periods leading up to major events to prevent insider trading).

They also have to make sure that they remain within the 500-shareholder rule, which would otherwise force them to go public (which is what happen to Google).

pchristensen2• 16 years ago

when dhh says "make $X", he means profit, not revenue.

bl4k4• 16 years ago

I can't edit above so I will add it here:

* '09 spent $400 on $700M of revenue ($300M profit)

* profitable since Q2 of 09

* one of the only social networks to ever reach profitability

* 55% of US retailers present on Facebook

* 20% of global social network ad revenues

* 550,000 approved apps, 1M developers

* 20% of users have logged into another site using connect

* Zynga revenue is over $40M a month. Up to $10M of that goes to Facebook for advertising, while Facebook then take 30% of what Zynga make through Facebook revenue. So Zynga first pay Facebook to get the users, then pay Facebook again when they make money from those users. Great model.

sources: * http://www.sharespost.com/research_report?filename=facebook-...

* http://www.sharespost.com/research_report?filename=100702_GS...

(both reports source from SEC filings and other sources)

sabat• 16 years ago

Troll.

parfe• 16 years ago

I agree completely. The blog post was poorly written and reeks of the same style of Rush Limbaugh or Glenn Beck. The point isn't to be informative or insightful, but to get the 37signals name out there by saying anything. 37signals has put out some decent software that serves a purpose, but I feel they're fairly hype driven and I think they're starting to jump the shark.

proee• 16 years ago

Getting a valuation on this asset is interesting because it's hard for me to understand what 1-Billion dollars buys in today's world.

I often use the tallest building in the world as a reference for the value of 1.5 Billion dollars. So FB is worth about 20 of these.

http://en.wikipedia.org/wiki/Burj_Khalifa

The sad thing is hearing how much our government loosely throws around a billion dollars. 50-Billion here, 100-Billion there... No biggie.

jfager• 16 years ago

For a little more context, a 33B valuation is ~1/5 Google's current market cap, 1/8 Apple's, 1/6 MS's, 1/4 Oracle's, 1/2 Disney's, 1/2 Amazon's, 2x Yahoo's, 15x AOL's, etc.

It would make Facebook the 79th largest company in the US, and 226th in the world. It would be right behind the likes of DuPont, Dow, eBay, Metlife, Time Warner, and Target, and right ahead of the likes of DirecTV, Lockheed Martin, Texas Instruments, Dell, Fedex, and Nike.

zacker• 16 years ago

Google IPO'd with a market cap around $23.1B which went up to $33B very quickly: http://www.google-ipo.com/

Google's revenue in 2004 was $3.1B: http://bit.ly/bOQZeZ

Facebook's revenue for 2010 is rumored between $1.2B and $2B: http://techcrunch.com/2010/03/03/facebook-revenue-2010/

VC investment rounds and secondary market transactions are probably not the best way to price a company, but they seem to be in the ballpark.

mtrn• 16 years ago

In the past, FB's focus was almost solely on growth and they making planet-scale progress. If you reach some natural border in growth, you can throw your resources on sales, ads and novel revenue models, we haven't seen before.

dmillar• 16 years ago

I don't want to put words in his mouth, but it sounds like David is arguing that should Zuckerberg decide to just walk away from Facebook today, he would have a very difficult time coming up with $6.9B in cash in exchange for his equity. (Not to mention if other equity holders wanted to liquify at the same time.)

It is important to point out however, this a valuation does not make. Liquidity is not part of the equation.

bherms2• 16 years ago

I agree that this valuation is absurd and that Facebook will never really be worth this much. I also really like the 37signals guys and a lot of their opinions.

HOWEVER, one thing that has been bugging me is the thought, espoused by 37signals, that not generating a large profit as a business is a bad thing. We're forgetting that these businesses that don't make huge profits are still employing large amounts of people, creating new jobs every day, and giving back to the community in many ways. Facebook has over 1000 employees. Granted they may not be making 33bil in profits (or even revenue), but that's pretty cool that they were able to create 1000 new jobs that didn't exist before, while also improving the lives of many people who use the service--eg, helping people keep in touch with friends and loved ones, helping people find old friends, etc. If they break even for the rest of the existence of the business, they're still doing pretty damn well IMO.

jbarham2• 16 years ago

> If they break even for the rest of the existence of the business, they're still doing pretty damn well IMO.

Presumably Facebook's investors are hoping for more than to merely "break even".

bherms2• 16 years ago

From an investor standpoint it'd be disappointing to not get a big payoff, but 37signals sometimes frames it as a failure to not be a huge profit machine. They don't consider the positive repercussions of operating a sustainable business (jobs, quality of life, etc). As I said, I'd be more than happy to make an average salary and be responsible for creating jobs that allow others to support themselves and their families. I'd like to make killer profits too, but there's value in breaking even too.

frzl• 16 years ago

With respect to traditional brick-and-mortar businesses the skills required to successfully build, grow, and manage a small business are different from those required do the same for a big corporation.

That is, successfully running a neighborhood cheese shop requires different skills - and attention to different metrics - than successfully running GE.

One is not 'better' or 'worse' than the other. They are simply different.

37signals is a small business. This is not a knock against them.

The knock against them is that they readily forget (ignore?) this when they point fingers at other, large corporations for operating differently from them.

stevefarnworth• 16 years ago

Argue about it all you want, but I will never accept a company's valuation based on second market stock. Only when the stock is publicly trade-able and market forces determine the price to be paid will I accept a valuation.

And a valuation at, what, 33x revs (on a good day)? I'm sorry, but gambling that hard on a web company on the basis of "potential" profits is not good business (I don't know whether it's a Silicon Valley thing or not), if you know, they can be bothered to monetise it before the next website du jour comes along.

YouTube was "valued" at $1.6bn, and has really struggled to make money. I'm not denying that it wont pay off for Google in the long run, but when Facebook floats, you think that investors will stick around if they struggle to monetise and fail to bring profits and revenues to a 1/5 or a 1/10 of valuation in 4/5 years?

paul• 16 years ago

I bet it's worth more than that.

far33d• 16 years ago

Facebook is one of the few companies in the world with unbounded potential. It's a cultural phenomenon that has changed the way people use the internet and, more importantly, has changed the way people interact with their real friends. Very few companies change culture and daily interaction like this.

Is it worth $33b today? Not sure. Could it be worth $200b someday? Could Facebook be bigger than Microsoft? Bigger than Google? Bigger than Exxon? Maybe. I can't think of any other company for which "maybe" is a reasonable answer.

That's why investors value it so highly.

code_duck2• 16 years ago

I've heard this same thing about AOL, MySpace, etc. and really, who knows. People who have come to the internet and use nothing but Facebook will discover there are actually other sites out there, or they may get tired of Mafia Wars spam. Someone could create something more innovative. I think Facebook will continue to become more valuable, but they're not going to take over the entire world.

riffer• 16 years ago

And unlike most of these jokers, you actually have the bet on.

vessenes3• 16 years ago

Thanks for saying this -- I think it's interesting that the comments here boil down to:

. Disbelief that FB is worth that much, or

. ad-hominem attacks one way or the other, or

. Technical discussions on whether there's sufficient liquidity to get a real 'price'.

When I look at what facebook has done, and the absolute fucking mountain of data they sit on, FAR better quality than Google's in my opinion, If I were on the board, I would be thinking "brilliant job executing on growth, guys. I'm deeply excited to see you make all this pay once you're not running around putting out massive fires all the time."

It's not going to be rocket science to make it pay, and pay, and pay...

Taking another slice: I'd bet my entire (comparatively very small) net worth that the board would unanimously vote down a $33B cash buyout offer right now. There's just no way you guys think that FB has topped out; it hasn't really even gotten going when you think of a complete, end-to-end business model yet.

Job offers happily accepted. : ).

rafski• 16 years ago

The 100 million for schools is a preemptive publicity stunt ahead of "The Social Network" film premiere next week.

It will be interesting to see how hundreds of millions of people seeing a 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.

harryh3• 16 years ago

Anyone want to help me come up with fair terms for a bet between myself (twitter.com/harryh) and dhh? See our back and forth on twitter.

harryh3• 16 years ago

How about something like this? In the event of a FB IPO within 5 years we look at the valuation of the company 30 days after the IPO and compare it to 33B in todays dollars (with say a 5% IRR).

If facebook goes out of business (unlikely, but want to cover every scenario), you win 10k.

If facebook is purchased outright by another company we take that as a fair valuation and pay the bet out in the same was as an IPO+30 days price.

If facebook is still private 5 years from now it's a push (don't want this to be open ended forever).

We take the difference any multiply it by your "stake" (10k/33B) and the bet pays off.

So, for example let's say facebook IPOs 335 days from today (so IPO+30 = 1 year). With the 5% interest that puts us at 34.7B as the comparison valuation.

So if FB is worth 0 on that day, you win 10k. If FB is worth 20B, you win about 4.5k. If FB is worth exactly 34.7 it's a push. If FB is worth 40B, I win about about 1.6k. If FB is worth 50B, I win about about 4.6k. etc.

1) Make sense? 2) So you in?

dhh6• 16 years ago

I like the basic concept and would definitely put money on it. But making internet bets in comments on HN seems unlikely to pan out in the future. You ready to escrow that $10K?

vessenes3• 16 years ago

Where's Spolsky? He should be in on this. Maybe DHH can put up his Zonda for something that Joel values highly.

InclinedPlane2• 16 years ago

The more interesting question is whether facebook will even be around in 5 or 10 years. Look at myspace, huge userbase, grew from almost nothing practically overnight, and relegated to the dust bin almost as fast once facebook came around. The chances of a competitor being able to do the same thing to facebook cannot be ruled out. Indeed, with facebook's api such a competitor would have an easier job of nabbing facebook users than was the case with myspace (join the new site, let the new site import your fb social graph and mirror your feed to facebook automatically up until the day you decide more of your friends are on the new site).

blakeross• 16 years ago

Great 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.

johnrob• 16 years ago

Sometimes I think the big names startups (and angels, as per that bin 38 stunt) intentionally create soap-opera-esque controversy as a way of distracting the upstarts from the work they need to be doing.

djahng• 16 years ago

price is what you pay. value is what you get.

bradgessler• 16 years ago

"valuation" != overvalued || undervalued

dnaquin• 16 years ago

As far as I can tell MySpace only ever had 100M MAU tops. Comparing that to something 5x that is apples to oranges.

jlgbecom• 16 years ago

I'm surprised this isn't bloody obvious. At one point AOL was worth $247 billion, and then an open internet steamrolled over it.

The same thing will happen to Facebook with the open web. At least AOL had subscription revenue.

mattlanger• 16 years ago

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.

It's actually not at all uncommon for wildly profitable companies to take an additional round so they can continue to ramp up at accelerative rates.

jackowayed• 16 years ago

Apple's also not worth $267B. Based on the current rate that people are selling Apple stock, the demand for Apple stock makes for an equilibrium price such that Apple's market cap is $267B. But if every share of stock were up for sale, they'd have to lower the price to sell it all because there aren't an infinite number of people willing to buy Apple stock at a $267B valuation.

Facebook is probably more overvalued by this because so little Facebook stock is up for sale, but it's not really fair to make this argument about Facebook without mentioning that the same issue exists for all publicly traded companies as well (save a company where all of its stock is changing hands every day).

TheCondor• 16 years ago

Maybe, all the shares being for sale does sort of implicated a lack of demand so the price would drop, it's a very far extreme end of the curve though. With an FB IPO and "all the shares" being for sale at once, I'd have to assume they'd go up, lot's of people seem to believe in their future.

The flip side of all this valuation talk (you know, DHH had me at 'evaluation' hahahaha. that's priceless.) is that if you were to attempt to "buy" Apple, it would cost you a lot more than $267B... maybe even a trillion dollars. Does that make them worth more or less than their valuation? Don't get me wrong, there are dynamics here, it's not a static calculation.

stretchwithme2• 16 years ago

Unfortunately, you cannot convince the masses in the midst of a bubble that they are in one. The cows stampede in the direction of the stampede.

dusklight• 16 years ago

Thing about making money off facebook is the same thing that happened with trying to make money off myspace.

Facebook has gotten increasingly annoying to use lately and the reason is changes are being made that benefit the company's ability to make money, not the interests of the users. I remember a time when all my friends were on myspace and suddenly everyone switched to facebook. The reason was facebook loaded instantly and you didn't get spammed by bots trying to make money off you. These two things are becoming increasingly less true of facebook today and I can feel the attempts to make money on facebook becoming more intrusive and more insulting of my intelligence.

Also as Cory Doctorow has pointed out, the inherent of value of a social network decreases over time the longer you use it [http://craphound.com/?p=1961]

It's possible for facebook to become a real success but they need to figure out the difference between creating value and making money and not try to make money by destroying value. That is never a self-sustaining strategy.

gojomo• 16 years ago

DHH can write my web framework but I wouldn't let him manage my money.

sayemm• 16 years ago

DHH: you should read this Business Week article on Google in 2000: http://www.businessweek.com/bwdaily/dnflash/dec2000/nf200012...

I love 37signals, as I'm sure most of us here do too, but this analysis on Facebook is completely haywire. I bet he would've said the same thing about Google's prospects back in 2000, just like that BW article.

ankimal• 16 years ago

Facebook has "demand". Once you have that the rest is just keeping your head on your shoulders. 500 million users and still counting. It would be interesting to see the number of internet users in the world, I think might become their biggest problem. Can you monetize each user more, maybe not a whole lot more without pissing 'em off, but 1c more per user for almost a billion users (should happen soon) is helluva lot.

Basically, a lot of people DONT wanna be on facebook, they probably detest the very idea! But they ARE! As a business owner what else could you want? And would someone pay $33b to get 500 million+ users, Absolutely!

marclove3• 16 years ago

Facebook’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 essentially a fad. Its success and usage is driven primarily by peer pressure.

Sure Facebook is 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, leaving shareholders dazed and confused. I doubt Facebook will die as quick & horrible a death as MySpace (in addition to being more fad-driven, MySpace was also centered around a fad-ish industry and had horrible usability), but it will die a similar death.

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 and many other established tech companies.

Facebook investors' problem is, will they be able to get a return on their money before a new social network becomes the trendier place to be.

JabavuAdams2• 16 years ago

Right. The moment Facebook starts charging me money is the moment I stop using Facebook.

marclove3• 16 years ago

Well no reason to worry, cause Facebook isn't that stupid. They'll always make their money through indirect means, either through processing payments, displaying ads, giving companies access to data, etc.

jamesshamenski• 16 years ago

the flaw here is that it assumes money is real. With no gold standard, money is entirely based upon perception. More fortunes have been made through adjusting this lens than actual hard work.

bambax• 16 years ago

The argument between spolsky and dhh is funny but ultimately they seem to not be talking about the same thing. They are both right, but one is more right than the other.

Joel is talking about market value.

What Joel is saying is "dude, you don't understand value. Value is what people are willing to pay for. If someone - just one person - is willing to pay $100 for a millionth of a broken piece of crap, then that broken piece of crap is worth a hundred million dollars, your opinion of it notwithstanding".

He's right. Technically.

But David does not care about market value (although he tries to attack it and picturing it as not real). David is talking about intrinsic value; he's saying: "this thing has 500 million users, and that's amazing. But they don't make much money out of all those users, let alone any profit. So if we try to estimate the present value by actualizing future cash flows, we find the real price should be... well, not much".

He's also right. And I think he's fundamentally right.

During the housing bubble, some people (Peter Schiff for example, or the heroes of The Big Short) argued that the real value of housing was a multiple of rent (10-15 times rent), and that anything above that was crazy.

At the time, they were wrong -- they were very wrong; the value of a house was the market price, not the "intrinsic" price. The value of anything is always the market price.

But then suddenly there is no market. The bubble bursts and nobody's buying.

In that situation, if you're selling you don't have many options; but if you're buying how do you calculate a price at which you'd be willing to buy, and a price at which you may convince a seller to sell?

- - -

In a sellers' market (Joel's market) prices are fair because people accept them. If everyone wants a piece of Facebook at any price, just because they have to have it, then, well, the value of Facebook is infinite. It's not 33 billion dollars: it's the whole amount of dollars in the universe, plus one.

But this situation never lasts. There has to be a time when Facebook will be out of fashion, and someone will have to ask what is the intrinsic value of this thing.

The intrinsic value is hard to compute because you need to actually know how the company makes money, you need to understand its operations, its cost structure, strategy, etc. That's hard work for a public company; it's almost impossible, from the outside, for a private company.

But one thing is certain: the intrinsic value of Facebook is not infinite.

And then and there, David has a point.

robgoodlatte• 16 years ago

They printed the same article 3 year ago: http://37signals.com/svn/posts/670-can-microsoft-buy-cool-fr...

borism• 16 years ago

just a small point of disagreement here - Forbes is not a serious publication

protomyth• 16 years ago

I wonder what the % of message traffic is on Facebook compared to SMS or e-mail?

jonshea• 16 years ago

I largely agree with dhh’s thesis that “minority investment valuations aren’t real”, and I agree that the lack of liquidity is part of the problem. But I think it’s “liquidity preference” that totally breaks the investor valuation.

As a toy example, imagine a company that could be worth $3, $30, or $300 each with equal probability. The logical valuation of this company is $111. A risk tolerant investor would pay $11.1 for 10% of the company.

Now imagine you have a 3x liquidation preference. If the company liquidates for less than 3 times your investment, then you get it all and the suckers holding common stock get nothing. How much will you pay for 10% of the company in this situation?

Well, if the company exits at $3 or $30 then you’ll get all of it, and if it exits at $300 then you get $30. The total expected value is ($3 + $30 + $30)/3 = $21. That’s almost twice what you’d pay if didn’t have liquidity preference! Even though, with 3x liquidity preference, you’d pay $21 for 10% of the company, $210 is clearly a nonsense valuation for the company as a whole.

teyc• 16 years ago

Don't underestimate FB. Every hour a user spends in front of FB is an hour not spent in front of a TV.

The ad spend has to go somewhere.

flocial• 16 years ago

I think one area people overlook with Facebook is that they pretty much leave social games to eat their lunch. There's only so much they can squeeze out of advertising (it's already starting to feel over-priced).

In Japan Mixi got eclipsed by Gree when it came to making an IPO because Gree focused on games and selling virtual goods. Gree had way more profits and growth potential. They eventually opened up to social gaming but their profits are still strong. Ditto Mobage.

The way Zynga built on Facebook is similar to how MicroSoft and Intel took off of IBM. Facebook's valuation and growth potential would be astronomical if they owned a piece of social gaming instead of just providing infrastructure.

Facebook is not worth $33 billion

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