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Is Facebook Really Worth $15 Billion?

Maybe not. Microsoft's $240 million investment in the wildly popular social networking site is turning heads, but some insiders describe the valuation as "ridiculous." An inside look at the deal -- and what it means for the tech industry.
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The business world is still buzzing about Microsoft's $240 million investment in Facebook -- a 1.6 percent stake which places the wildly popular social networking site's total value at around $15 billion. Quite a coup for 23-year-old founder Mark Zuckerberg, the Harvard dropout who reportedly turned down a $1 billion offer just a year ago.

The deal may give Microsoft a leg up on rival Google, another Facebook suitor, and is no doubt a stamp of approval for Facebook, which still has a relatively unproven revenue model. But skeptics say Facebook, in reality, is worth a whole lot less.

So what does the move really mean for Facebook and other tech upstarts? Will the site revolutionize the Web, or end up triggering another bubble burst? We took our questions to industry insiders, investors, and entrepreneurs. Here's a look at what they had to say:

 

Microsoft does not value Facebook at $15 billion. Microsoft values an ongoing, extremely large ad relationship plus 1.6 percent of Facebook equity at $240 million. I believe this deal has been spun by Facebook as a $15 billion valuation as a pre-IPO move to convince the public markets that it really is worth $15 billion or $20 billion.

That said, I think Facebook is really worth $15 billion plus. The question is, Is Facebook more valuable than Monster.com with its $5 billion market capital or 33 percent as valuable as Yahoo with its $40 billion market capital? I don't think anyone can argue credibly that Facebook doesn't deserve to be valued at $15 billion. Its traffic doubled in the last year, it takes up 1 percent of all Internet visits, and it's well architected with tens of thousands of developers.

Facebook is no fad. There is no way in the world Google can create anything competitive with Facebook. They should have written a $5 billion check a year ago. I think Google should be extremely worried that they are no longer technology's darling, and that they lack the ability to innovate as fast at Facebook.

-- Geoff Cook, Co-founder, myYearbook.com


Microsoft is probably getting some kind of option for their $240 million…. We don't know what it is, but it's probably the right to purchase shares of Facebook at some known price in the future. The value of that option is very hard for business journalists to calculate, but it's NOT hard for Microsoft's CFO to calculate, and it's probably very significant. You have to deduct the value of the option from the purchase price before you can multiply and get the valuation. Almost certainly, the $15 billion valuation is ridiculous.

-- Joel Spolsky, Inc. Columnist and Co-founder and CEO, Fog Creek Software


Microsoft's investment in Facebook made news because of the price Facebook got for it. That said, it's probably a reasonable deal for both companies in that it gives Microsoft a new and more prominent role in the placement of online banner ads and it "legitimizes" Facebook's value. In reality, though, given its resources, the amount Microsoft invested is immaterial and the new cash should have no real impact on Facebook's strategy.

Of greater interest, perhaps, is what this says about where the Internet is headed. Factually, there is no scarcity of online inventory, as almost anyone anywhere can create a Web page and allow the space to be populated with ads. What is scarce, and, apparently, becoming scarcer, is the amount of time people spend on each web page they visit and their attention span while they are there. The assumption is that social networking sites encourage people to spend more time on the site's Web pages because they aggregate information others find useful.

Additionally, the amount of personal data available on the social networking sites has the effect of accelerating an advertiser's ability to target ads to relevant potential customers, thereby improving their yield.

The real impact of the Microsoft investment then would seem to be to reinforce the notion that we are all going to get more-- and more targeted--ads for the foreseeable future.

-- Jonathan Silver, Founder, Core Capital Partners


To me, the money side of the deal isn't as amazing as the reaction from the other companies who are trying to build similar platforms. What surprised people a lot is that Facebook is still rather small compared to Microsoft and Google. So over the last three months, a lot of start-ups, VCs, and major Internet companies have been watching the growth of Facebook's platform offerings and it's caught a lot of people by surprise. 

[As far as the $15 billion valuation], I've been saying more than $5 billion and less than $20 billion…. Microsoft is betting on a lot of future growth and monetization. The growth isn't really a question -- it's the monetization that they need to figure out. So it's probably an advantage for Facebook not to have to be a public company before they figure out their revenue model. When Google went public they had a very mature revenue model. Right now, Facebook has yet to prove that they are substantially more valuable than MySpace. They have that potential, but the jury is still out. But now they have plenty of cash to grow and they don't have to go public for another couple of years.

-- David McClure, Blogger, Master of 500 Hats


When I was at SHOP.com, we went from zero to 500,000 users in nine years. On Facebook, iLike added 600,000 users in eight hours. When I saw that, I thought "Oh my gosh. Something new has arrived on the planet." What had arrived was the first mainstream social operating system. I believe it will affect the next 20 years the way Windows has affected the last 20 years. My belief is that the $15 billion valuation is actually very low. I believe that Facebook, when they have their IPO, will actually be valued at closer to $100 billion.  It is going to be the social operating system. 

Facebook's lead in social operating systems has the potential to dethrone Google from their lead in advertising. Advertisers are going to be much more interested in connecting in a deep way with consumers, which happens in the Facebook environment. While Google's business is based on the fact that people quickly leave Google, Facebook is built to engage their users and keep them inside and on the platform. That strategic difference between Facebook and Google is going to be the avenue Microsoft uses to become the dominant online advertising provider. 

-- Lee Lorenzen, CEO, Altura Ventures


It's not worth $15 billion. However, it is worth $15 billion to Microsoft. It wouldn't have made sense at that number for anyone else, including Google. This gives Microsoft a seat at the table which they didn't have before. Moreover, it keeps Google out.

It's brought [Microsoft] two things. One, direct visibility into the platform. It's an option down the road to buy into the platform…. It sort of puts the thumb in the scale and puts [Facebook] into the Microsoft camp and takes it away from the Google hegemony which is taking over the world.

I think that Facebook has done a superb job so far in taking social networking as a platform. By opening it up to third parties, Facebook has positioned itself much as Google has. They are positioned to be if not the only major player, if not the Google of social networking, at least one of the top two or three in the social networking space.

-- David S. Rose, Chairman, New York City Angels


Beauty is in the eye of the beholder. On the one hand, it does sound like a crazy valuation of a company that reportedly has $140 million in revenue. On the other hand the service is growing at an astronomical rate and that growth is not slowly. They only opened up the service about a year ago, and so one could argue that the price is justified by fundamentals. I'm quite sure that reasonable, smart people at Microsoft did that.

The flip side is that they only bought 1.6 percent. The point is that how much did it cost Microsoft to build a strategic relationship with Facebook? Is that strategic partnership worth $240 million? 

I think Microsoft clearly is behind Google in the world of advertising and traffic aggregation. I think Google is threatened by Facebook as a platform that advertisers are going to reach out to. In many ways it's a smart move by Microsoft to leapfrog search and try to establish a strong position in social networking. [In that area], Google is a distant, distant player.

-- Jeff Bussgang, General Partner, IDG Ventures




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