
Facebook is not worth $33 billion - malbiniak
http://37signals.com/svn/posts/2585-facebook-is-not-worth-33000000000
======
spolsky
I hate to leap in with what seems like an ad-hominem attack on the 37 signals,
but their utter and complete misunderstanding of all the basics of business is
starting to grate on me, and I'm wondering if it has anything to do with
Chicago. Is the problem that they're sitting there in a city without any other
Internet industry, stewing in their own witty ideas, listening only to the
adoring comments they get from the groupies? How else could you explain just
how far they seem to have drifted away from basic reality?

First of all, David: The word is VALUATION, not evaluation. KTHX.

Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is
valued by taking the last share traded and multiplying by the number of shares
outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL.

The whole section "Minority investment evaluations aren’t real" is so
economically bizarre and incorrect that I don't even know where to start. It's
like you wrote a blog post arguing that it is incorrect to refer to a 5' tall
boy as 5' tall because he's often sitting down. Every single day every single
public company in the world is valued by the last share traded, usually for a
tiny fraction of the company.

Finally, to the main point. Facebook has certainly figured out how to make
money off of 500,000,000 users. And as they optimize, they will make a lot
more money. When they figure out how to make another DIME off of every user,
they will instantly be making another $50,000,000 a year... in pure profit.
How much profit will 37signals make if you figure out how to make another dime
off of every customer? Eh David? Facebook works on the theory that when you
have a lot of people, you don't have to make as much per person, because the
amount of money you make is the number of customers times the amount of money
you make off of each one. Again, that pesky multiplication.

It's weird, it's like in Chicago they don't have multiplication or something.

~~~
dhh
1\. Thanks for the word correction, updated.

2\. Publicly traded companies have instant liquidity on many more shares,
which makes using "last share sold" an meaningful metric.

3\. When only 3% of the money a company is supposedly worth has been moved
around, it's a poor indicator of what the other 97% would go for.

4\. They haven't figured out how to make much profit yet. And it's still
questionable whether they will. MySpace supposedly also just needed to turn on
the faucet, but apparently the water ran out before they got to it.

5\. Oh, and New York smells. (take that!)

~~~
spolsky
2\. That's just not correct. Spend twenty minutes talking to anyone who trades
in bonds or equity before you make assumptions about what liquidity you need
to get a good price... it's not much. Facebook trades all the time on
sharespost, certainly enough to be liquid and to reach a market price. Google
itself only has a tiny fraction of the shares available to the public (10% if
I remember correctly) and far less than 1% of the outstanding shares trade
every day. That doesn't mean that the market doesn't find a market price.

3\. Also not correct. When entire companies are bought and sold that had a
previous market in the shares, the price for the entire company is usually a
PREMIUM ON the the market valuation. "PREMIUM ON" means MORE THAN. Somewhere
in Chicago, I understand that there is one market of some sort, I think they
trade corn and pig bellies, surely SOMEONE there can explain it to you...

4\. Also, just not true. They are very profitable and their profit is almost
certainly growing at a rate that will make their valuation reasonable.

~~~
dhh
2\. The bond and equity markets are based on sound regulation, transparency,
and quarterly statements. Facebook has none of those things when it operates
in the dark of the secondary markets.

3\. Again, these premiums are based on outstanding shares traded under the
transparency of the public stock market. See Secondary Suckers for a nice take
on the perils of the secondary market:
[http://www.homethinking.com/brontemedia/2010/09/17/secondary...](http://www.homethinking.com/brontemedia/2010/09/17/secondary-
suckers/)

4\. Do you have their P&L handy to back that up? If the valuation was so
wonderful and they were raking in the profits, then taking series E funding
three months ago doesn't make much sense.

~~~
jbarham
> The bond and equity markets are based on sound regulation, transparency...

Presumably subprime mortgage backed securities are the exception that proves
the rule...

~~~
patrickk
The stock market is well regulated but the bond markets a lot less so, hence
that's where Wall Street makes big profits (when times are good.) They make
serious profits as 'market makers' (standing between buyers and sellers) with
bonds.

~~~
grandalf
You view the bid/ask spread as an indicator of poor regulation? Not actually
true.

The spread reflects the willingness of firms to compete as market makers. More
firms competing means a smaller spread.

The spread also reflects the risk associated with the market maker holding
inventory. The more perceived risk, the bigger the spread.

------
jfager
For a little more context, a 33B valuation is ~1/5 Google's current market
cap, 1/8 Apple's, 1/6 MS's, 1/4 Oracle's, 1/2 Disney's, 1/2 Amazon's, 2x
Yahoo's, 15x AOL's, etc.

It would make Facebook the 79th largest company in the US, and 226th in the
world. It would be right behind the likes of DuPont, Dow, eBay, Metlife, Time
Warner, and Target, and right ahead of the likes of DirecTV, Lockheed Martin,
Texas Instruments, Dell, Fedex, and Nike.

------
jacquesm
What facebook is really worth we'll know when they IPO and they sell off a
majority portion of the stock. Until then it's anybody's guess.

I wouldn't buy their stock at any valuation, there are much more solid ways of
investing than speculating on something that already feels over valued. And if
I would want more risk then I'd rather put my money in start-ups than
facebook.

The next bubble is here, and it will go the same way as the previous ones.

Remember what netscape was supposed to be worth.

edit: sorry, that 'majority' was meant to be 'major'.

~~~
spolsky
That's not correct. There is a secondary market for Facebook stock which is
plenty liquid (see Sharespost, et. al).

~~~
photon_off
"In business, economics or investment, market liquidity is an asset's ability
to be sold without causing a significant movement in the price and with
minimum loss of value.

...

Another elegant definition of liquidity is the probability that the next trade
is executed at a price equal to the last one. A market may be considered
deeply liquid if there are ready and willing buyers and sellers in large
quantities.

...

The liquidity of a product can be measured as how often it is bought and sold;
this is known as volume."

I don't think any sane investor would consider private shares of Facebook
"plenty" liquid. The volume of Facebook trading is so low that when a large
trade of it does occur, as in this additional investment that valued it at
$33b, the price jumps wildly and it makes news.

As per the secondary market, Sharespost shows the last contract traded on
their system being over 3 weeks ago, and that there are only 3 people willing
to sell and 5 people willing to buy right now. Those are pathetic numbers.

Granted, shares are not entirely illiquid either. You could sell your
shares... but it's a necessity that the more you want to sell, the lower your
price is going to have to be to attract enough buyers.

------
ulf
"Facebook has been around for seven years. It has 500 million users. If you
can’t figure out how to make money off half a billion people in seven years,
I’m going to go out on a limb and say you’re unlikely to ever do."

This is a strawman. If they wanted to make money right now they would. But
they also observed many examples of turning-the-faucet-on gone wrong,
especially with the whole privacy issues, that they are moving very carefully
in that space. But they will make a lot of money if they decide to start.

~~~
Andrew_Quentin
what exactly are they waiting for? They have half a billion users. You know,
that is more than America and Russia together, or comparable to the entire
population of the geographical Europe. They can only go down hill from here I
think. Therefore, personally I certainly would not wait.

The truth is really that they do not know how to monetize themselves
effectively

~~~
pclark
No offense but have you taken more companies public than:

* Marc Andreessen

* Jim Breyer

* Peter Thiel

because they are some of the directors on the Facebook board, and I think they
know their stuff.

~~~
run4yourlives
Argument to Authority is a logical fallacy.

~~~
matwood
That logical fallacy always bothers me especially in cases where experience
and inside knowledge are crucial to forming an opinion. The people listed
above all have experience, knowledge and are more qualified to value companies
than many other people. Of course it doesn't make their opinions absolutely
correct, but it does lend some legitimacy to the FB valuation argument.

~~~
run4yourlives
_The people listed above all have experience, knowledge and are more qualified
to value companies than many other people._

I've got a dot bomb crash, real estate bubbles and sub-prime mortgages that
say otherwise.

No offence to any of them personally, and I'm not about to argue FB's actual
valuation, but they all have a vested interest in making us all believe that
it is as high as possible.

They are the last people one should be looking at when making an investment
decision.

------
bherms
I agree that this valuation is absurd and that Facebook will never really be
worth this much. I also really like the 37signals guys and a lot of their
opinions.

HOWEVER, one thing that has been bugging me is the thought, espoused by
37signals, that not generating a large profit as a business is a bad thing.
We're forgetting that these businesses that don't make huge profits are still
employing large amounts of people, creating new jobs every day, and giving
back to the community in many ways. Facebook has over 1000 employees. Granted
they may not be making 33bil in profits (or even revenue), but that's pretty
cool that they were able to create 1000 new jobs that didn't exist before,
while also improving the lives of many people who use the service--eg, helping
people keep in touch with friends and loved ones, helping people find old
friends, etc. If they break even for the rest of the existence of the
business, they're still doing pretty damn well IMO.

~~~
jbarham
> If they break even for the rest of the existence of the business, they're
> still doing pretty damn well IMO.

Presumably Facebook's investors are hoping for more than to merely "break
even".

~~~
bherms
From an investor standpoint it'd be disappointing to not get a big payoff, but
37signals sometimes frames it as a failure to not be a huge profit machine.
They don't consider the positive repercussions of operating a sustainable
business (jobs, quality of life, etc). As I said, I'd be more than happy to
make an average salary and be responsible for creating jobs that allow others
to support themselves and their families. I'd like to make killer profits too,
but there's value in breaking even too.

~~~
Semiapies
Profit is a major component of sustainability. Businesses that put off making
profit long enough tend to go _poof_ much more often than become sustainable
or profitable in the end.

------
marclove
Facebook’s biggest weakness is that its core value proposition to users is
that everybody you know is on it. Any business whose core value proposition is
that “everyone is doing it” is essentially a fad. Its success and usage is
driven primarily by peer pressure.

Sure Facebook is a decently designed site that makes sharing your photos,
videos, comments, links, etc. easy. But that’s not hard to replicate (the
backend scaling parts are hard, but invisible to the end user). When people
find the new social network that all the cool kids are using, they’ll flock to
it and abandon Facebook in an instant, leaving shareholders dazed and
confused. I doubt Facebook will die as quick & horrible a death as MySpace (in
addition to being more fad-driven, MySpace was also centered around a fad-ish
industry and had horrible usability), but it will die a similar death.

Google on the other hand has developed revolutionary technologies that other
companies find nearly impossible to find the talent & resources necessary to
replicate and improve upon. They provide a real, unique, non-fad value
proposition to the end user. Same with Amazon, Apple and many other
established tech companies.

Facebook investors' problem is, will they be able to get a return on their
money before a new social network becomes the trendier place to be.

~~~
JabavuAdams
Right. The moment Facebook starts charging me money is the moment I stop using
Facebook.

~~~
marclove
Well no reason to worry, cause Facebook isn't that stupid. They'll always make
their money through indirect means, either through processing payments,
displaying ads, giving companies access to data, etc.

------
InclinedPlane
The more interesting question is whether facebook will even be around in 5 or
10 years. Look at myspace, huge userbase, grew from almost nothing practically
overnight, and relegated to the dust bin almost as fast once facebook came
around. The chances of a competitor being able to do the same thing to
facebook cannot be ruled out. Indeed, with facebook's api such a competitor
would have an easier job of nabbing facebook users than was the case with
myspace (join the new site, let the new site import your fb social graph and
mirror your feed to facebook automatically up until the day you decide more of
your friends are on the new site).

------
zacker
Google IPO'd with a market cap around $23.1B which went up to $33B very
quickly: <http://www.google-ipo.com/>

Google's revenue in 2004 was $3.1B: <http://bit.ly/bOQZeZ>

Facebook's revenue for 2010 is rumored between $1.2B and $2B:
<http://techcrunch.com/2010/03/03/facebook-revenue-2010/>

VC investment rounds and secondary market transactions are probably not the
best way to price a company, but they seem to be in the ballpark.

------
stevefarnworth
Argue about it all you want, but I will never accept a company's valuation
based on second market stock. Only when the stock is publicly trade-able and
market forces determine the price to be paid will I accept a valuation.

And a valuation at, what, 33x revs (on a good day)? I'm sorry, but gambling
that hard on a web company on the basis of "potential" profits is not good
business (I don't know whether it's a Silicon Valley thing or not), if you
know, they can be bothered to monetise it before the next website du jour
comes along.

YouTube was "valued" at $1.6bn, and has really struggled to make money. I'm
not denying that it wont pay off for Google in the long run, but when Facebook
floats, you think that investors will stick around if they struggle to
monetise and fail to bring profits and revenues to a 1/5 or a 1/10 of
valuation in 4/5 years?

------
bl4k
1\. _The company has supposedly taken just under a billion dollars in venture
capital and small secondary-market sales of stock. So the actual money that
has changed hands is just 3% of the total evaluation of the company!"_

Not true. Sure they have raised $1B themselves, but _a lot_ of stock has
changed hands on the secondary market. Facebook sanctioned employees being
able to sell stock up to a certain amount, in lieu of going public (employee
pressure was part of what prompted Google to go public).

2\. _"In other words, the evaluation is resting on the flawed assumption that
Facebook could actually ever get 33 times as much money to change hands if
they wanted to. There’s just no way, no how that’s happening right now. If it
could, they’d IPO tomorrow."_

Again not true. When you IPO you don't float 100% of your shares. In the case
of Facebook, an IPO may not even see 10% of the company listed - ie. not a lot
more than what is already being traded in secondary markets.

Most listed companies do not exchange 100% of their stock - _not even close_.
By this reckoning then, no company in the world has a real valuation because
at no time is all of their stock available for purchase. The author needs to
go to Google Finance and lookup any of the Fortune 100 and see for himself
that most have a lot of stock outstanding or not listed.

3\. _"If the supposed billion dollars Facebook is allegedly pulling in this
year was happening at anywhere a decent margin, they wouldn’t have needed a
series E round of $120 million from Elevation Partners just three months
ago."_

You should have read the link you posted, because the story is that Elevation
bought $120M of stock from private holders. ie. Facebook didn't raise that
money. The last money they raised was $200M (on $10B) from Digital Sky in May
of 09[2]

(btw if you did read the story at the link you referenced, the 4th paragraph
mentions that Facebook revenue for '09 was $700-800M, not the 200 'best guess,
being generous' that you work on).

But anyway, the recent (cheap) money they raised went into CAPEX (building
datacenters to lower your overheads) and cashing out some stock holders for a
very high valuation for non-voting stock.

Facebook is still at the growth stage so every dollar is (wisely) re-invested
in the company in ways that will improve the bottom line. $100M is a drop
compared to the cost of building datacenters (the new Google datacenter in
Iceland cost 250M - _without servers_ ).

Having their own datacenters will reduce their infrastructure costs over time.
While it is a lot of money - it will pay itself off within a few years because
atm they are leasing space and bandwidth. Not a bad use of what is 1% of their
company.

4\. _"But let’s be charitable. Let’s imagine that Facebook miraculously made
$200 million this year — a 20% margin. (I don’t think that’s true, otherwise
why take another $120 million from Elevation Partners, but hey, let your
imagination roam). That would put Facebook’s P/E at some 165."_

How about we Get Real(tm) and say $1.1B this year[1], and that is before they
start booking platform revenue from Facebook credits, which will be 30% of
everything Zynga et al make (and Zynga made over $500M+ in '09). $700+ in 99,
$1.1B+ this year, and at least an extra billion in the _first year_ of
Facebook credits. Not bad.

Each time they double revenue you can halve the PE - which is why it is so
high atm.

 _"No outrageous profits after seven years and half a billion users"_

They are profitable, and on a trajectory that will see them reach ridiculous
numbers. See the more sane and informed discussion about Facebook revenue
projetions and the business model here:

<http://news.ycombinator.com/item?id=1718512>

(if you are actually interested in learning why Facebook is valued so highly,
what the business model is and where it is going - check this link, the
conversation took place earlier today and it will save me re-hashing a lot of
the points here)

Facebook has reached every corner of the world in short time. We can all agree
that their ads _suck_ \- yet even with this shitty advertising, which is
mostly for Russian brides, they have managed to hit a cool $1B - without even
trying. Imagine if they had some real ad technology behind that site. They
will do something that Google has failed to do, that is, have two sources of
revenue. 1. the ads. 2. the platform - both of these are billion dollar
businesses.

What is more depressing than just how mis-informed and terrible this article
is? The number of fans in the comments who eat up every word and cheer them
on.

(Edit: updated)

[1] <http://techcrunch.com/2010/06/22/facebook-revenues/>

[2] <http://www.crunchbase.com/company/facebook>

~~~
richcollins
> Facebook sanctioned employees being able to sell stock up to a certain
> amount, in lieu of going public

Does Facebook approve the sell price? If so then it's likely biased up.

~~~
bl4k
They do not approve the price, but they have to approve the transaction and it
can only take place within one of the allowed trading windows (Facebook has
non-trading periods leading up to major events to prevent insider trading).

They also have to make sure that they remain within the 500-shareholder rule,
which would otherwise force them to go public (which is what happen to
Google).

------
bambax
The argument between _spolsky_ and _dhh_ is funny but ultimately they seem to
not be talking about the same thing. They are both right, but one is more
right than the other.

Joel is talking about market value.

What Joel is saying is "dude, you don't understand value. Value is what people
are willing to pay for. If someone - just one person - is willing to pay $100
for a millionth of a broken piece of crap, then that broken piece of crap is
worth a hundred million dollars, _your opinion of it notwithstanding_ ".

He's right. Technically.

But David does not care about market value (although he tries to attack it and
picturing it as not real). David is talking about _intrinsic value_ ; he's
saying: "this thing has 500 million users, and that's amazing. But they don't
make much money out of all those users, let alone any profit. So if we try to
estimate the present value by actualizing future cash flows, we find the real
price should be... well, not much".

He's also right. And I think he's fundamentally right.

During the housing bubble, some people (Peter Schiff for example, or the
heroes of _The Big Short_ ) argued that the real value of housing was a
multiple of rent (10-15 times rent), and that anything above that was crazy.

At the time, they were wrong -- they were very wrong; the value of a house was
the market price, not the "intrinsic" price. The value of anything is always
the market price.

But then suddenly there is no market. The bubble bursts and nobody's buying.

In that situation, if you're selling you don't have many options; but if
you're buying how do you calculate a price at which you'd be willing to buy,
and a price at which you may convince a seller to sell?

\- - -

In a sellers' market (Joel's market) prices are fair because people accept
them. If everyone wants a piece of Facebook at any price, just because they
have to have it, then, well, the value of Facebook is infinite. It's not 33
billion dollars: it's the whole amount of dollars in the universe, plus one.

But this situation never lasts. There has to be a time when Facebook will be
out of fashion, and someone will have to ask what is the intrinsic value of
this thing.

The intrinsic value is hard to compute because you need to actually know how
the company makes money, you need to understand its operations, its cost
structure, strategy, etc. That's hard work for a public company; it's almost
impossible, from the outside, for a private company.

But one thing is certain: the intrinsic value of Facebook is not infinite.

And then and there, David has a point.

------
dusklight
Thing about making money off facebook is the same thing that happened with
trying to make money off myspace.

Facebook has gotten increasingly annoying to use lately and the reason is
changes are being made that benefit the company's ability to make money, not
the interests of the users. I remember a time when all my friends were on
myspace and suddenly everyone switched to facebook. The reason was facebook
loaded instantly and you didn't get spammed by bots trying to make money off
you. These two things are becoming increasingly less true of facebook today
and I can feel the attempts to make money on facebook becoming more intrusive
and more insulting of my intelligence.

Also as Cory Doctorow has pointed out, the inherent of value of a social
network decreases over time the longer you use it
[<http://craphound.com/?p=1961>]

It's possible for facebook to become a real success but they need to figure
out the difference between creating value and making money and not try to make
money by destroying value. That is never a self-sustaining strategy.

------
harryh
Anyone want to help me come up with fair terms for a bet between myself
(twitter.com/harryh) and dhh? See our back and forth on twitter.

~~~
harryh
How about something like this? In the event of a FB IPO within 5 years we look
at the valuation of the company 30 days after the IPO and compare it to 33B in
todays dollars (with say a 5% IRR).

If facebook goes out of business (unlikely, but want to cover every scenario),
you win 10k.

If facebook is purchased outright by another company we take that as a fair
valuation and pay the bet out in the same was as an IPO+30 days price.

If facebook is still private 5 years from now it's a push (don't want this to
be open ended forever).

We take the difference any multiply it by your "stake" (10k/33B) and the bet
pays off.

So, for example let's say facebook IPOs 335 days from today (so IPO+30 = 1
year). With the 5% interest that puts us at 34.7B as the comparison valuation.

So if FB is worth 0 on that day, you win 10k. If FB is worth 20B, you win
about 4.5k. If FB is worth exactly 34.7 it's a push. If FB is worth 40B, I win
about about 1.6k. If FB is worth 50B, I win about about 4.6k. etc.

1) Make sense? 2) So you in?

~~~
dhh
I like the basic concept and would definitely put money on it. But making
internet bets in comments on HN seems unlikely to pan out in the future. You
ready to escrow that $10K?

~~~
harryh
> You ready to escrow that $10K?

Sure. As long as you do the same.

~~~
dhh
I'm in. Email me at david at 37signals.com with the details and we'll go from
there.

In fact, I think this would be a great little business. Allow people to place
long-term bets with money on the line on predefined, objective results. Then
hold the cash in escrow until the resolution day.

~~~
frossie
If you guys can come up with a longer-than-two-year bet you can go here to
broker it (and let other people join in the fun)

<http://www.longbets.org/>

------
paul
I bet it's worth more than that.

~~~
far33d
Facebook is one of the few companies in the world with unbounded potential.
It's a cultural phenomenon that has changed the way people use the internet
and, more importantly, has changed the way people interact with their real
friends. Very few companies change culture and daily interaction like this.

Is it worth $33b today? Not sure. Could it be worth $200b someday? Could
Facebook be bigger than Microsoft? Bigger than Google? Bigger than Exxon?
Maybe. I can't think of any other company for which "maybe" is a reasonable
answer.

That's why investors value it so highly.

~~~
code_duck
I've heard this same thing about AOL, MySpace, etc. and really, who knows.
People who have come to the internet and use nothing but Facebook will
discover there are actually other sites out there, or they may get tired of
Mafia Wars spam. Someone could create something more innovative. I think
Facebook will continue to become more valuable, but they're not going to take
over the entire world.

~~~
emit_time_n3rgy
I'm interested to see what becomes of Diaspora* <http://joindiaspora.com>

They're featured in an article entitled "Defacebook"
[http://nymag.com/news/features/establishments/68512/?mid=fac...](http://nymag.com/news/features/establishments/68512/?mid=facebook_nymag)

------
points
Bless the 37signals guys. Always fun for a laugh.

------
blakeross
Great job writing an article about other people's alleged delusions and then
basing it on delusions of your own.

Facebook didn't raise a Series E from Elevation Partners; that firm purchased
secondary shares.

Seriously, you can't ride in on a high horse of fact and reality and then get
the basic tenets of your argument so wrong.

------
jackowayed
Apple's also not worth $267B. Based on the current rate that people are
selling Apple stock, the demand for Apple stock makes for an equilibrium price
such that Apple's market cap is $267B. But if every share of stock were up for
sale, they'd have to lower the price to sell it all because there aren't an
infinite number of people willing to buy Apple stock at a $267B valuation.

Facebook is probably more overvalued by this because so little Facebook stock
is up for sale, but it's not really fair to make this argument about Facebook
without mentioning that the same issue exists for all publicly traded
companies as well (save a company where all of its stock is changing hands
every day).

~~~
TheCondor
Maybe, all the shares being for sale does sort of implicated a lack of demand
so the price would drop, it's a very far extreme end of the curve though. With
an FB IPO and "all the shares" being for sale at once, I'd have to assume
they'd go up, lot's of people seem to believe in their future.

The flip side of all this valuation talk (you know, DHH had me at 'evaluation'
hahahaha. that's priceless.) is that if you were to attempt to "buy" Apple, it
would cost you a lot more than $267B... maybe even a trillion dollars. Does
that make them worth more or less than their valuation? Don't get me wrong,
there are dynamics here, it's not a static calculation.

------
frzl
With respect to traditional brick-and-mortar businesses the skills required to
successfully build, grow, and manage a small business are different from those
required do the same for a big corporation.

That is, successfully running a neighborhood cheese shop requires different
skills - and attention to different metrics - than successfully running GE.

One is not 'better' or 'worse' than the other. They are simply different.

37signals is a small business. This is not a knock against them.

The knock against them is that they readily forget (ignore?) this when they
point fingers at other, large corporations for operating differently from
them.

------
Keyframe
Sure it is, it is called Speculation
<http://en.wikipedia.org/wiki/Speculation> Just because there is no real value
going on for proper financial analysis behind it yet, doesn't mean prospective
valuation couldn't be derived. Obviously, people that invested worked on a
model that derived said valuation. Maybe it's a bubble, maybe it's not - but
valuation is here. That's how speculative market works, without it there would
be no investments.

My take is that Facebook is transitioning into a phase where they will try to
monetize their user base by a large factor. Vector of their approach is widely
speculated in media (they'll take on google, they'll make phone, they'll do
this, they'll do that). The fact is that we don't know for sure what and where
will they hit, but certain fact is they must hit somewhere. Speculation is fed
with that fact.

Google had a 5 year span before it hit Adsense. Amazon was in the gutter for
quite some time... I really see no point in this article from the arguments
perspective.

I see a point in subjective matter where one who understands only a
traditional commerce model (<http://en.wikipedia.org/wiki/Commerce>) would
have trouble with speculative nature of business like this. From the tone of
the post it looks like the message here is the messanger's emotions rather
than fundamental aspect of point being made (since there isn't any to begin
with).

------
proee
Getting a valuation on this asset is interesting because it's hard for me to
understand what 1-Billion dollars buys in today's world.

I often use the tallest building in the world as a reference for the value of
1.5 Billion dollars. So FB is worth about 20 of these.

<http://en.wikipedia.org/wiki/Burj_Khalifa>

The sad thing is hearing how much our government loosely throws around a
billion dollars. 50-Billion here, 100-Billion there... No biggie.

------
dmillar
I don't want to put words in his mouth, but it sounds like David is arguing
that should Zuckerberg decide to just walk away from Facebook today, he would
have a very difficult time coming up with $6.9B in cash in exchange for his
equity. (Not to mention if other equity holders wanted to liquify at the same
time.)

It is important to point out however, this a valuation does not make.
Liquidity is not part of the equation.

------
jonshea
I largely agree with dhh’s thesis that “minority investment valuations aren’t
real”, and I agree that the lack of liquidity is part of the problem. But I
think it’s “liquidity preference” that totally breaks the investor valuation.

As a toy example, imagine a company that could be worth $3, $30, or $300 each
with equal probability. The logical valuation of this company is $111. A risk
tolerant investor would pay $11.1 for 10% of the company.

Now imagine you have a 3x liquidation preference. If the company liquidates
for less than 3 times your investment, then you get it all and the suckers
holding common stock get nothing. How much will you pay for 10% of the company
in this situation?

Well, if the company exits at $3 or $30 then you’ll get all of it, and if it
exits at $300 then you get $30. The total expected value is ($3 + $30 + $30)/3
= $21. That’s almost twice what you’d pay if didn’t have liquidity preference!
Even though, with 3x liquidity preference, you’d pay $21 for 10% of the
company, $210 is clearly a nonsense valuation for the company as a whole.

------
mattlanger
_If the supposed billion dollars Facebook is allegedly pulling in this year
was happening at anywhere a decent margin, they wouldn’t have needed a series
E round of $120 million from Elevation Partners just three months ago._

It's actually not at all uncommon for wildly profitable companies to take an
additional round so they can continue to ramp up at accelerative rates.

------
rafski
The 100 million for schools is a preemptive publicity stunt ahead of "The
Social Network" film premiere next week.

It will be interesting to see how hundreds of millions of people seeing a film
(on- and off- cinema screen) – supposedly depicting shady roots of their
favourite website – will react.

Most likely, with a "meh…" but let's wait and see.

------
flocial
I think one area people overlook with Facebook is that they pretty much leave
social games to eat their lunch. There's only so much they can squeeze out of
advertising (it's already starting to feel over-priced).

In Japan Mixi got eclipsed by Gree when it came to making an IPO because Gree
focused on games and selling virtual goods. Gree had way more profits and
growth potential. They eventually opened up to social gaming but their profits
are still strong. Ditto Mobage.

The way Zynga built on Facebook is similar to how MicroSoft and Intel took off
of IBM. Facebook's valuation and growth potential would be astronomical if
they owned a piece of social gaming instead of just providing infrastructure.

------
ankimal
Facebook has "demand". Once you have that the rest is just keeping your head
on your shoulders. 500 million users and still counting. It would be
interesting to see the number of internet users in the world, I think might
become their biggest problem. Can you monetize each user more, maybe not a
whole lot more without pissing 'em off, but 1c more per user for almost a
billion users (should happen soon) is helluva lot.

Basically, a lot of people DONT wanna be on facebook, they probably detest the
very idea! But they ARE! As a business owner what else could you want? And
would someone pay $33b to get 500 million+ users, Absolutely!

------
mtrn
In the past, FB's focus was almost solely on growth and they making planet-
scale progress. If you reach some natural border in growth, you can throw your
resources on sales, ads and novel revenue models, we haven't seen before.

------
sayemm
DHH: you should read this Business Week article on Google in 2000:
[http://www.businessweek.com/bwdaily/dnflash/dec2000/nf200012...](http://www.businessweek.com/bwdaily/dnflash/dec2000/nf2000127_947.htm)

I love 37signals, as I'm sure most of us here do too, but this analysis on
Facebook is completely haywire. I bet he would've said the same thing about
Google's prospects back in 2000, just like that BW article.

------
dabeeeenster
"In other words, the evaluation is resting on the flawed assumption that
Facebook could actually ever get 33 times as much money to change hands if
they wanted to. There’s just no way, no how that’s happening right now. If it
could, they’d IPO tomorrow."

This is simply not true. There are many reasons why a company may want to stay
private.

~~~
ZachPruckowski
> "There are many reasons why a company may want to stay private"

True. But there are a billion reasons to be looking for an exit - all those VC
investors are eventually going to want to close out their funds and get real
money for their institutional clients. Not to mention all the employees.

Most of these shareholders are going to want to cash out in the next few
years, and $200 million in profits won't go far towards making that happen.
They've got to exit eventually, and $33 billion is a lot for a major company
to pay for Facebook when they don't have a clear monetization strategy. I
mean, that's twenty times bigger than the YouTube sale. So IPO it is.

~~~
pclark
There's no doubt Facebook will IPO eventually.

I imagine a lot of the employees could and probably have cashed some shares
out in previous rounds. I'm sure VCs are happy to wait for their IPO (they can
probably raise funds just by saying they own Facebook stock)

------
teyc
Don't underestimate FB. Every hour a user spends in front of FB is an hour not
spent in front of a TV.

The ad spend has to go somewhere.

------
danielha
Not saying Facebook is worth $33B, but these justifications to why Facebook
isn't worth $33B are at least as tenuous.

------
jlgbecom
I'm surprised this isn't bloody obvious. At one point AOL was worth $247
billion, and then an open internet steamrolled over it.

The same thing will happen to Facebook with the open web. At least AOL had
subscription revenue.

------
robgoodlatte
They printed the same article 3 year ago:
[http://37signals.com/svn/posts/670-can-microsoft-buy-cool-
fr...](http://37signals.com/svn/posts/670-can-microsoft-buy-cool-from-
facebook)

------
johnrob
Sometimes I think the big names startups (and angels, as per that bin 38
stunt) intentionally create soap-opera-esque controversy as a way of
distracting the upstarts from the work they need to be doing.

------
stretchwithme
Unfortunately, you cannot convince the masses in the midst of a bubble that
they are in one. The cows stampede in the direction of the stampede.

------
dnaquin
As far as I can tell MySpace only ever had 100M MAU tops. Comparing that to
something 5x that is apples to oranges.

------
bradgessler
"valuation" != overvalued || undervalued

------
protomyth
I wonder what the % of message traffic is on Facebook compared to SMS or
e-mail?

------
jamesshamenski
the flaw here is that it assumes money is real. With no gold standard, money
is entirely based upon perception. More fortunes have been made through
adjusting this lens than actual hard work.

------
gojomo
DHH can write my web framework but I wouldn't let him manage my money.

------
djahng
price is what you pay. value is what you get.

------
borism
just a small point of disagreement here - Forbes is not a serious publication

------
sabat
Troll.

~~~
parfe
I agree completely. The blog post was poorly written and reeks of the same
style of Rush Limbaugh or Glenn Beck. The point isn't to be informative or
insightful, but to get the 37signals name out there by saying anything.
37signals has put out some decent software that serves a purpose, but I feel
they're fairly hype driven and I think they're starting to jump the shark.

