Microsoft and Facebook Business Connection Strengthens
Published by Rodney Rumford September 24th, 2007 in Facebook, Facebook News, facebook Business.
It was just reported in The Wall Street Journal that Microsoft is in talks to acquire up to a 5% stake in facebook. This is big technology and business news.
Microsoft already has an existing advertising agreement with facebook that runs until 2011.
Here is a short WSJ excerpt about Facebook and Microsoft: “Microsoft’s approach to Facebook in recent weeks with proposals to invest in the fast-growing site is part of the software giant’s effort to catch up with the Internet rival Google. If successful, Microsoft’s talks with Facebook could give it an up-to-5% stake in the closely-held startup—a stake potentially valued at roughly $300 million to $500 million, the people familiar with those talks said.”
…”An investment in Facebook could give Microsoft or Google greater opportunities to tie their services in with Facebook at a time when they’ve both recognized that social networking is changing how consumers tap into their core activities, such as Web search and email.”
This has great importance to facebook application developers and businesses that are looking to create a presence on facebook. This could give Facebook the assets it need to further strengthen thier online presence and allow them to create the additional functionality desired to grow even more rapidly. Make no mistake about this; facebook is growing more powerful by the minute.
So What Does The Facebook & Microsoft Talks Mean For Businesses?
* Having Microsoft as a business investor could help lay the groundwork to helping to provide the advertising infrastructure and inventory for facebook to leverage across their platform and applications. So hopefully this will awaken the sleeping business professionals that think facebook is just for kids.
* Facebook and the associated applications that reside on it’s platform provide great business use cases. We have only seen the beginning of the desktop facebook capabilities and how this can interface with a web environment.
* The time has arrived for business, product managers, branding and marketing professionals to get their ducks in a row for building a facebook strategy.
You can read the full Wall Street Journal Article about Microsoft and Facebook here.
Technorati Tags: facebook, microsoft, facebook microsoft, facebook business
Rodney,
I couldn’t agree more. It is clear that Facebook is benefiting from Microsoft’s desire to bypass Google in the online advertising game. You can read more about this in my blog on Google’s rumored response to the strategic threat to their business that Facebook represents in a post entitled “The Social Operating System War — the First Leaks” (see http://blog.adonomics.com/2007/09/24/the-social-operating-system-war-the-first-leaks/).
For those you think the $10 to $15 billion reported valuation range, calls into doubt my predictions about Facebook being worth $100 billion when they IPO, please note that Facebook is only going to take $500 million at this valuation (not sell the entire company). You can read more about this in my post from 2 weeks ago entitled:
Should Facebook Take an Investment at a $10 Billion Valuation? (written Friday, Sep. 14)
http://www.facebook.com/note.php?note_id=4978327365
Thanks,
Lee
Lee,
So now your post was entitled “Facebook will be worth $100bn WHEN they IPO”?!
Mark,
No, I’m not saying that Facebook will be worth $100 billion in the future, I’m saying Facebook is worth $100 billion right now because that is my estimate of the price it would take to get Mark Zuckerberg to sell. I’m also saying that their IPO between Oct. 2008 and Dec. 2009 will value them at $100 billion. Shortly after that, their common stock will be liquid and individual VC’s, founders and employee shareholders can begin to cash out a portion of their shares.
Valuation is simply defined as what a willing buyer and willing seller will agree to. In the case of the valuation of an entire company, you have to get to a price where whoever controls the voting shares of the company (in this case Mark Zuckerberg and not the VCs) decides they are willing to sell. When Mark Zuckerberg is saying that he is only willing to sell 5% of the company at a $15 billion valuation, you cannont conclude that the company is not worth $100 billion. You can only conclude that Mark zuckerberg sees an opportunity to create a war chest for the coming Social Operating System war and to align himself with a very key ally.
As Warren Buffett says, valuation is really about the sum total of the “Owners Earnings” which would be the “Discounted Cash Flow” that the business produces that can ultimately flow into the owner’s pockets (See http://www.fool.com/investing/value/2005/05/11/digging-into-buffetts-numbers.aspx for a description of this).
So, when I said that Facebook is worth $100 billion in a blog post about three months ago, I’m implying that Facebook’s owners will earn $100 billion in 2007 dollars if they were to hold their shares forever and flow the future earnings of the company out to themselves (and/or liquidate their ownership in a post IPO world). This may be hard to understand if you have been trained to value companies based on a multiple of current earnings or current revenues. However, when you think like an entrepreneur and you have a long term view about how the market will evolve and what your position in that market will be it is easier to understand why P/E ratios aren’t how Facebook should be valued.
As an example, Microsoft was formed in 1975 and went public in 1986 at a valuation around $525 million. In late 1988, Steve purchased (in the public market) around 1 million shares of Microsoft for $40 million. This gave him about 5% of the company which with his other options ultimately led to him owning around 12% of the company. Steve sold 2/3rds of his holdings in 2003 and now retains about 4% of the company which at a $250 billion valuation for Microsoft accounts for around $10 billion of Steve’s current net worth.
When Steve bought his 5% of Microsoft for $40 million (at a time when Windows 2.0 was late and slow and in competition with OS-2 Presentation Manager from IBM), it was a situation where Warren Buffett’s fictional partner Mr. Market had beaten down Microsoft’s valuation to around $800 million. So, when Steve bought 5% of Microsoft for $40 million, he made a bet that the Stock Market was miscalculating the future Owner’s Earnings that would flow to someone who owned 5% of Microsoft. Clearly he was right and the market was wrong. If you or I had the advantage of Steve’s brains or the wisdom to follow his lead we would have done just as well.
With 20/20 hindsight we know that the sum total of Microsoft’s future cash flow was clearly more than $800 million. Even with 20 years of cash flow already flowed out of the company, the market believes that Microsof has another $250 billion of future cash flow left in it. Therefore, it is safe to say that in 1988 Microsoft’s true valuation was more than $250 billion. If you had $800 million in your pocket at that point in time, you could have capture 100% of this future value because the market WAS SO WRONG about Microsoft’s valuation. In fact, it would have been a good bet to buy a 30 year option to buy all of Microsoft for $80 billion, because that option would be in the money today to the tune of around $170 billion.
So, I believe (and Mark Zuckerberg does too) that Facebook is worth at least $100 billion. I believed it 3 months ago and I believe it even more now and I’m confident it won’t take more than 2 years for the stock market to confirm this belief. For me, I’m only betting the money involved in the apps we are acquiring and developing, However for Mark Zuckerberg, he is betting what just about anyone would view as a lot of money (and possible future life of luxury) that WRT Facebook’s valuation, he has a better sense of the future than the market does. I believe that his VC’s, shareholders and employee option holders will owe him a big debt of thanks that he didn’t allow anyone to sell too early.
In May, FastCompany’s cover story by Ellen McGirt was about the 23 year old who turned down $1 billion from Yahoo. I’ve reads tons of blogger and press comments at the time that he was either stupid or arrogant or insane (or some combination) to forsake the billion dollar bird in the hand. However, four short months later, he is in a position to slide $500 million off the table and retain 95% of his holdings. In this way, I think that Mark has not only a lot in common with Bill Gates (Harvard drop-out who founded the company that built the dominant operating system of the future) but also a lot in common with Steve Ballmer who knew when to place his bet that Mr. Market was wrong about the valuation of his company.
Thanks,
Lee Lorenzen
CEO, Altura Ventures — the first facebook-only VC
(c) 2007 Altura Ventures LLC.