For all the talk about whether Microsoft wants to buy Facebook for $6-billion, or whether Facebook will do an IPO, or whether CEO Mark Zuckerberg is/was a genius for turning down Yahoo’s $1-billion offer, one thing that seems to be buried in the background is what do Facebook’s investors want.
In April 2006, Facebook raised $25-million in venture capital, which, at the time, squashed growing speculation the company was looking for a sale. The investors included some heavy-hitting Silicon Valley VCs – Greylock Partners, Meritech, Accel Partners – and ex-Paypal CEO Peter Thiel.
Based on the fact Facebook’s expects to have revenue of more than $100-million this year (much of its coming from a guaranteed ad deal from Microsoft, according to Valleywag), let’s assume/guess-timate the company’s revenue in April 2006 were $25-million. Then, let’s factor in the speculation Facebook was rumoured to be worth $750-million to $1-billion, and it had about 13 million unique visitors.
So what was that worth and how much an equity stake does $25-million get you?
For the sake of a good argument, let’s assume Zuckerberg was able to convince investors the company was worth 10X sales – giving it a pre-money valuation of $250-million. This would have given investors a 10% stake in a fast-growing company in the right space at the right time.
If you’re still with me, this 10% stake is now worth $600-million to $1-billion – a 24 to 40-bagger depending on how much you think Facebook is worth. Of course, it could be worth a lot more if the VC were able a bigger equity stake.
If you’re a VC with this kind of potential return possible, do you push Zuckerberg to pursue a sale or IPO? Or do let your bet ride a little while longer given Zuckerberg refused to throw in his chips at $1-billion to Yahoo?
What do you think? Is it time for Facebook to do an exit?
More: Just to keep things interesting, Zuckerberg is facing a lawsuit from three former Harvard classmates who allege he stole their code, design and business model when he worked for a start-up now called Connect U. ConnectU’s About Us includes this juicy paragraph:
“Over the course of development, we’ve had our ups and downs. We’ve cycled through several programmers, even one who stole our ideas to create a competing site, without informing us of his intentions. But we’ve been troopers. At first we were devastated and climbed into a bottle of Jack Daniels for a bit, but eventually emerged with a bad headache and renewed optimism. We weren’t going to lie down and get walked over like this.”
Update: TechCrunch and others have caught on to the Zuckerberg lawsuit angle.
(First sentence MSFT is rumored at 6 billion not million)
I think they’re going for the IPO. Seems like they’re more ambitious than just becoming part of Google, Yahoo! or MSFT especially with this talk of “platform” This could be huge if they pull of a successful IPO and with the markets hitting new highs, the first big .com IPO in a while, and the past success of Google and YouTube I think it’ll be huge – even if the actual worth of Facebook is under debate.
Mark,
I definitely think an IPO is in order here. The fact that the company is still growing at an astonishing rate (i.e. hasn’t peaked) means that Facebook does not need a larger company to take them to the next level. For this very reason, it is in their best interest and the best interest of their investors to snarl at any potential suitors. Only a ridiculously large sum of money should sway them in the takeover direction and I just don’t see this happening.
Cheers,
Aidan
http://www.MappingTheWeb.com
If Facebook does do an IPO, it could be the first “tier one” IPO since Google. Given the froth still in the market, it’s probably a better route than a sale – IF Facebook’s revenue is solid and sustainable.
not sure if this is accurate, but i heard the rumored pre-money on the $25M round that Greylock led was actually $500M, which would make it more like 5% instead of 10%. that sounds unusual, and i’d normally think those figures are screwy except that Facebook was in the driver seat the whole damn time. the previous round was supposed to have been $10M on a $100M pre- for 10%, so it actually might make sense (? sort of?) that the next round was at $500M.
regardless, whether it was 5% or 10%, either way i think David Sze & friends are going to have a great return on their investment.
onward & upward.
Re: Facebook, Relax. « Jared Tame @ Phunctional
[...] That doesn’t excuse people’s behavior toward it. For those people, I just have to ask: where’s your Facebook startup at? Why isn’t everyone using your web application? And you do realize that there are a lot of intelligent people riding on this? [...]