
Cash-Burning Facebook Borrows $100mm...Because It Couldn't Sell Stock? - rockstar9
http://www.alleyinsider.com/2008/5/cash_burning_facebook_borrows_100_million_to_buy_servers_because_stock_valuation_has_dropped
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johnrob
Facebook is unique because, unlike other 'giant' silicon valley startups, they
don't really offer anything new in terms of revenue. They are a sophisticated
billboard. Google, on the other hand, built something new - targeting ads by
keyword/content analysis.

Here is a thought experiment: If all of facebook's users came to your website
tomorrow, chances are you could monetize them just as well as facebook.
However, if you took all of google's users, you would not do as well because
you lack their technology.

Facebook is like any other site on the net, just with more pageviews.

~~~
maximilian
not _any other site_. Google can target better than anyone because they know
what you are looking for and can provide advertisements for that thing. If I'm
trying to find a track bike, and if I search google for track bikes, I get ads
for places that sell track bike.

However, If I have in my profile that I ride bikes, bike companies can target
me very specifically. Or if I say what bands I like and have listed where I
live or go to school, advertisements for concerts for those bands (or bands I
might like) can come up. Obviously a lot of sites online can do similar target
style advertising, but IMO not as targeted as what facebook can pull of. And
they can go horizontally with the company types that advertise, as profiles on
facebook are very general. I can put a lot of my info up - for facebook, the
more the better. Most sites don't have this broad ability. They are much more
niche oriented.

~~~
nickb
>However, If I have in my profile that I ride bikes, bike companies can target
me very specifically.

Sure, but does you having that item in your profile tell me, as an advertiser,
anything about your intent to buy a bike? Buy it today? Are you buying it in
the next two weeks while I have the money to run a campaign? The answer is of
course a big no. Just knowing something about someone doesn't tell you about
their current intent. Now, would showing someone like that bike ads over the
course of a year help him decide on the make and model of the next bike he
purchases? Probably it would. But that's a very expensive proposition and not
very profitable. This is why Facebook has such low CPMs.

Now, suppose I had a way of saying "I'm looking to buy a bike"... a person
like that would be much more valuable to an advertiser than someone who
already rides bikes and has preferences set already for the type of bike/model
that she likes. A customer that is new to bikes is A LOT easier to persuade to
try out your brand than someone who's been riding bikes for years.

In the end, Google's intent-based advertising is so much more amazing since it
caters to everyone's whims so perfectly and displays things to you that you
really might want to buy and buy it now.

~~~
nostrademons
A lot of advertising isn't targeted towards getting you to buy things now,
it's so that when you _do_ go out and buy things, you'll recognize their
product first and prefer it over the competitors that are also sitting on the
shelves.

As a kid, I always wondered why companies bothered to run TV commercials.
After all, you aren't likely to jump off the couch and buy a car _this
instant_ , no matter how much Ernie Boch tells you to. But a friend's mom
explained that they don't care if you buy _now_ : they advertise so that in a
year or two, when you find yourself in need of a car, the first place that
comes to mind will be Boch Toyota.

It's amazing how many people don't do any research on consumer purchases and
instead rely on a simple recognition heuristic. Even people who should know
better. The reason my startup's on GoDaddy is because when my cofounders
bought the domain & rented the server (before I came on board), they just went
with whatever they'd heard of.

~~~
nickb
Yep, I think those are called branding exercises. Only big companies engage in
those types of advertising since they are not easily gauged for effectiveness.
It's very hard to convince some smaller company that they should spend $5M on
some blimp and slap their logo on the side or something crazy like that. Big
companies (car companies spring to mind) have that kind of money and
advertising budgets and they do run these kinds of branding campaigns all the
time.

But the issues with these campaigns is that they're the first to go when
recession hits. In times of recession, first thing you cut is branding
advertising since you can't measure it and you can't track it.

Online banners, and especially google adwords, will fare better in slowdowns
since a company must advertise if it is to survive and get some revenue in.
They will probably pick something that's effective and something that they can
track right away.

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mynameishere
_But the real reason you don't often see emerging private companies take on
big debt-loads is that borrowing money is riskier than selling stock, and it
also subordinates the existing equity holders._

I can't get my head around this sentence. I remember Henry Ford bought out all
his original investors (when Ford Motor was "emerging") because he didn't want
to lose control. (And the family still hasn't). Creditors only have power when
you're in bankrupcy court. Shareholders have power until judgement day.

EDIT: Holy beans! When you buy one dollar of Ford Motor stock, you are buying
10 dollars of Ford Motor debt:

<http://finance.yahoo.com/q/ks?s=F>

    
    
      Market Cap (intraday)5:	16.20B
      Total Debt (mrq):	168.53B

~~~
Maascamp
Debt gets paid before equity. Meaning if they don't sell out or aren't able to
pay off all their debt. The shareholders get screwed. That's it.

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RyanGWU82
The title is a bit aggressive. It's likely that Facebook it couldn't sell
stock _at last fall's $15 billion valuation_. Rather than do a "down round" of
financing -- a round with a lower valuation -- they likely found it easier or
cheaper to use debt.

~~~
slapshot
Debt financing isn't just about avoiding a "down round." It's also about
maximizing the upside value for current stockholders.

There is some maximum possible business value of Facebook, no matter how much
capital they take in. The founders hope to reach that value. If they issue
more stock, even if they take in the same valuation for that stock, that final
maximum value is being divided among more shares. Each shareholder's upside is
limited as a result.

The lesson: -- equity is dilutive for growth companies, even if it's priced
appropriately --

~~~
nostrademons
Debt also makes a lot of sense for variable costs like servers, where you know
roughly how much revenue you'll get per additional dollar investment.

Akamai financed most of their infrastructure with debt, which was a huge drag
on the stock price in 2002-2004 when people thought they were going to go out
of business, but since has paid off _very_ nicely for stockholders.

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matthewking
So how many servers does $100 million buy exactly? A bespoke built data center
full of them I would have thought!

~~~
reggplant
They're looking to buy 50,000 apparently

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carterschonwald
the question I have it how much of the new server farms are to accommodate
growth and how much of it is them just struggling to have the current setup be
resilient to the normal usage patterns that they see?

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vlad
In the Startup Junkies series on iTunes, EarthClassMail borrowed the money to
buy servers from a special bank made up of former venture capitalists who
specialize in loaning money strictly for the purchase of physical hardware,
also used as collateral. If Facebook already has almost half a billion dollars
in investments, and feels this expansion will make them money, then they could
pay off the loan without having to lower their valuation.

~~~
slapshot
I don't know if Silicon Valley Bank is made up of former VCs, but they will
lend to startups.

If you have real assets to back the loan (here, the physical servers they are
buying), debt is a far better way to get money than equity. Sure, Facebook
_could_ issue stock, but investors would expect a 20%+ return. Instead,
Facebook issues some IOUs to a bank that expects a 10% return. The current
investors don't get diluted and everyone goes home happy.

Buying physical assets with equity usually unnecessarily dilutive. Save your
stockholders; issue debt instead.

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paul
It's impossible to know if this was a good deal for them without knowing the
terms.

Also, Google actually did lease machines early on, which is essentially debt
(done for accounting reasons, as I understand it).

