Stats, acquisitions, facebook, ipo, mark zuckerberg, peter thiel, top, yahoo

What is Facebook's valuation made of?

Even more fictitious than Facebook's revenues is its valuation. A market value, after all, requires a willing buyer and a willing seller, and Facebook CEO Mark Zuckerberg, and his board members have repeatedly said they don't want to sell. (Facebook has a valuation as a private company, of course, but trust me, it's nothing near the numbers insiders are bandying about.) So why make up multi-billion-dollar valuations for the company, seemingly out of whole cloth? Because it saves them from having to hear out lowball offers, I imagine — and it also sounds mighty fine in the press. Here's a thought for newly hired number-fudger Gideon Yu, however, as well as that stock-plan administrator Facebook wants to hire: The higher a private company's value, the harder it is to dole out lucrative options to new employees. After the jump, my theory on what Facebook's worth, and why.

My assumptions:

Facebook turned down multiple offers from Yahoo, reported variously as $1 billion, $1.4 billion, and $1.6 billion. Call it $1.6 billion, and let that be the floor for Facebook's value.
Peter Thiel, the former PayPal CEO and early Facebook investor, like many PayPal insiders, believes PayPal sold out to eBay far too cheaply for $1.5 billion. Thiel certainly won't settle for a headline number less than twice his eBay deal, so tack on another $1.5 billion.
Never underestimate the hubris of a 20something first-time CEO. For Mark Zuckerberg's wishful thinking alone, shovel on another $5 billion.
Everyone believes that Facebook is going to come up with some magical new business model. They may be wrong, but for the fairy-dust hopes of the Valley, add another $0.9 billion to bring the total to a nice, round $10 billion.

And Facebook's real value? It will be set on the first day of trading after an IPO, of course — or when Facebook makes a liar out of Zuckerberg, Thiel, and the rest, and sells out.

11:29 AM on Wed Jul 25 2007
By Owen Thomas
3,443 views
7 comments

Comments

Alex at 11:38 AM on 07/25/07
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Well written. Pretty much puts the hype in its place. Below ground.
ashkan at 12:05 PM on 07/25/07
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good analysis. i think i like "whoopass" more than "omg", btw.

for the record i don't think FB is worth anywhere near the high end of my analysis here:
[www.watchmojo.com]

but the flip side is that an asset is worth what *someone will pay* for it, and there is enough a) desperation out there and b) giddyness surrounding FB to drive up the price.

and, for an asset to be worth someone (ie. bought) then the seller must have a floor price. in light of the fact that FB would walk away from anything in the low-single digits and consider all of those variables, in an "auction of sorts" the price could raise to $3.3B and would not top $6B.

Again, the breakdown, here:
[www.watchmojo.com]
andyfox1979 at 08:15 PM on 07/25/07
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I'm tired of hearing about facebook, yet I do have a reasonable appetite for anti-facebook posts for some reason.

[misanthropytoday.wordpress.com]
DaveMcClure500Hats at 01:08 AM on 07/26/07
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nice charts owen... i knew liberal arts degrees were useful for something in silicon valley (aside from when the roll of tp runs out ;)

Q: so how about a gentleman's bet on the market cap at the end of 1st day of Facebook liquidity (IPO or buyout)?

A) <$10B, i buy you 1 beer for every $1B under.
B) = $10B, push.
C) >$10B, you buy me 1 beer for every $1B over.

whaddya say? put your money where your charts iz?
Rick at 01:39 PM on 07/26/07
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damn dave, catty :)
Owen Thomas at 06:58 PM on 07/27/07
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@DaveMcClure500Hats: I smell an ex-PayPal employee!
ejt113 at 06:33 PM on 07/31/07
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How do we establish a baseline valuation for this company? How about a valuation built around a user engagement metric.

This builds off of a previous model I explained in Valuing Online Video Properties with Web Metrics and can be applied to any destination site. Instead of trying to determine value based off unique visitors, it makes more sense to view this from a "user-engagement" perspective (i.e. with the accompanying metrics).

It's awfully hard to accurately measure what constitutes an actual person on the web with existing measurement tools. So perhaps this model is more relevant to establishing ad rates and valuations of the sort.

Not to get sidetracked-let's get back to Facebook. Using my model, Facebook values at $2,930,775,392.

See spreadsheet here

For these destination web sites, we should strive to apply some kind of fundamental analysis for baseline valuations. A model doesn't have to be overly complex, but rather should go farther than unique visitors alone. As the field of web analytics evolves we should be able to apply more rational (I use that term loosely) valuation models to online real estate.

A simple valuation model can also aid investors as more destination sites go public. A model that weighs in time spent on site will reduce the likelihood of investors being duped by juiced traffic numbers (through adware, clickfraud, SEO, etc.). The model that I proposed is just a starting point…