On Monday, Facebook announced plans to invest as much as $10 million (in chunks of up to $250,000) in companies that are developing novel Facebook-related applications. Two venture capital firms will also participate in the fund. Interestingly, the financing will come in the form of non-recourse grants, which means that the entrepreneurs who receive it will not be forced to give up even a sliver of equity. (The VCs retain the right of first refusal to invest in these companies later on; Facebook, however, does not retain that right.)
Adding a slew of new applications is seen as a strategic priority for Facebook, according to Reuters. "The Palo Alto, California-based site has seen its number of active users spike by 70 percent to 41 million members in the four months since it opened up the social networking site to allow independent developers to build programs inside it," the news service reports. "Hundreds of companies have created more than 4,000 applications that run inside Facebook and let users know what each other are watching on Web, how they are feeling at the moment or their favorite movies or music."
The bloggers at Breakingviews think the idea of funding new companies is nice but that Facebook blew it by letting the VCs take charge. They write: "Facebook can argue that this arrangement allows it to focus on what it knows best - social networking. True enough. But when Facebook hits up investors for a stock offering, it will need to explain why it's effectively giving away options on some of the Internet's most creative new applications to its VC backers - for free."
What do you think? Is Facebook's plan a shrewd new way of fostering innovation? Is this a new model and a welcome departure from the equity-snatching mores of venture capital? Will Facebook benefit more by profiting indirectly from its investments than it would if it went after a direct return?
Finally, what's your (poke) favorite Facebook doodad?
Last updated: Sep 19, 2007
MIKE HOFMAN was previously editor of Inc.com and a deputy editor at Inc. magazine, which he joined in 1996. The site was nominated for a National Magazine Award for Digital Media in 2010, and was named the best business website by Folio Magazine. In 2006, Hofman was part of a team of writers nominated for a Webby Award for best business blog. He lives in New York City. @mikehofman