Tuesday, January 30, 2007

Lesson #9 - Don't turn down a billion dollars

This is a tough lesson to teach, and I am afraid this is one you need to experience for yourself (but I will go ahead and post it anyway). Where there is a good idea - there is money waiting to be invested, and where there is a great idea - there is money to be turned away.

I felt it was timely to post this lesson with the latest news on FaceBook turning down a $1 Billion dollar offer from Yahoo. To add more color to the story - FaceBook is a website, started by a 22-year old, that is 99% content generated by teenagers. It is essentially our modern-day Teenage Wasteland. However, the "experts" spin it a different way. FaceBook is one of the most visited websites in the Internet with 8 million users a month, and it dominates the 17-25 year old market as #1 website. Whichever analysis you agree with it doesn't matter - the fact is the market has spoken, and it says FaceBook is worth 1B.

So, lets break it down, and really try to understand why Facebook = 1B. First, I assume it has a premium value because of its web traffic (8 Million visitors per month) and it has a lock with a very valuable demographic. So lets start with the obvious question - how does it make money. Well, first lets look at advertising. Facebook currently has ads running on its site, and I am not sure the economics they have negotiated with providers, but I am going to make some basic assumptions and try to project their potential revenue.

First lets just assume they fall in the same "rate range" a Google or Yahoo sells advertising. This would be around $0.10 to $0.50 per click or $.02 per impression.
Lets start with CPM (Cost per Impression). If they have 8 million visitors, then we can assume they have around 200 Million impressions (each visitor goes to around 25 pages). Then lets assume they sell 5 ads per page. So basically their "maximum" ad inventory is 1 Billion impressions (basically they can sell 1B impressions per month to advertisers). Which if they sell at $0.02 per impression, they could sell a maximum of $20,000,000 of ads per month. Which is $240M per year.

Now realize I am taking the high side on all aspects (5 ads - most sites do 1-2), and I assumed every impression was on a page that had ads (which is not going to be the case, for example the homepage gets 30% of those impressions and has no ads).

So best case $20M per month - but more likely $10M per month.

So this can't be the reason they are worth $1B? Perhaps there are other revenue streams (affiliates, cross-sale opportunities, or even subscription based revenue?) I don't know - but what ever they come up with it has a lot of ground to make up.

At the end of the day, the objective of every entrepreneur is to make millions of dollars so they can continue to work on what they love. Do we want to change the world - sure, but banks, investors and shareholders don't really care about it, and to be honest it shouldn't be what drives an entrepreneur - because we live in a world that changes so rapidly - by the time something innovative hits the streets, it is overtaken by something bigger, better and faster. Ideas and Innovation are measured by seconds, not by years anymore - and the only thing that can truly change the world is wealth.

FaceBook.com will not change the world, in fact I would bet that it becomes a novelty within 3-5 years (not because the concept of social networking is a fad, but Facebook like so many other websites will become bloated, lose its focus and it will not be "cool" anymore). I am afraid the only way FaceBook.com could have changed the world, is if Mark (the founder) sold it for 1B, and turned his focus on giving away his wealth to better mankind by funding new projects, donating to charitable organizations and educating the world.


David said...

I wholeheartedly agree with your analysis. I understand that Zuckerberg may be trying to pull an Amazon and make even more money by hanging on to the company longer BUT I fail to see how Facebook will not go the way of Friendster, Amazon it is not. Clearly he has a vision but I would have taken the money like the Youtube guys and moved on to my next venture.

As a 26 year old who started my first company at 20 during my MBA program, I have quickly learnt that one of my major goals should be to grow the company to the point where it can be acquired then move on to the next venture and help the World in my spare time with the extra cash I now have, not keep holding out to only end up selling for significantly less. My God-brother did that, had a company valued at around $100 million, didn't sell and then had to accept less than $10 million in the end, and he knows Zuckerberg too funny enough - He said he will never make that mistake again.

Jeffrey said...

It's not hard to understand that the 'community' wouldn't want it to go mainstream. It's even more obvious to all of us that Zuck may want to retain control of his creation and core ideals.

What's very unclear to me is: How is it that Facebook's investors have been neutered? What kind of board allows a 22+ year-old idealist make these calls?

I'm stunned by this one.