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Facebook is not worth $33 billion (37signals.com)
315 points by malbiniak 2409 days ago | hide | past | web | 245 comments | favorite

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.

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!)

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.

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...

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.

Point of order... It wasn't a series E, it was $120 million in purchases on the secondary market


This is an extremely important point, germane to the conversation.. The $120mm was not a funding round -- it was liquidity for founders. Huge difference, and it invalidates much of dhh's original analysis.

These are all valid points, but they are logically equivalent to saying "I don't understand why anyone pays $12 for a Ke$ha album".

You may not agree on the worth of the album or of the shares, and nobody is forcing you to buy either one. That some people do consider it a good price is enough to result in a market price for both, on the basis of which many decisions are made.

Well, no, it's like saying "I don't understand why anyone pays $12,000 for a Ke$ha album." If the price was broadly reasonable, there would be no argument. But if the price gets outlandish, then someone needs to call B.S.

And yes, this happens now and then for ordinary, exchange-traded companies. Usually, it results in the exchange suspending trading for the company for a bit. Sometimes, it requires someone to call B.S. In an ordinary, regulated market, one or the other of those actions restores sense, gets the price back somewhere within shouting distance of reasonable.

Not true, b/c as far as I know nobody is buying Ke$ha albums at $12K, while there are many investing in FB, hence the notion of a market price.

Not sure what phenomenon you're referring to in your second paragraph.

Actually I don't understand why anyone buys a Ke$ha album at any price...

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

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

Exception that proves the rule means that since their is an exception a rule must exist.

For instance - Tonight we got an exception and are allowed to stay out till 11pm, would imply that there exists a rule that forbids them staying out that late. Hence the exception proves the rule.

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.

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.

Do YOU have their P&L handy to back up YOUR statements about how they have no idea how to monetize their users? Or is that only a valid critique of people who are arguing with you?

Maybe the equity markets. The bond markets not so much.

Also, Sharepost currently has 3 positions for sale at valuations between 33 and 44 billion. The total outstanding shares for sale represent 0.001% at 44B.

That's pretty close to the 0.000000001% that put our $100B valuation on paper: http://37signals.com/svn/posts/1941-press-release-37signals-...

But hey, you better snatch these shares up quickly. It's rare that you get a chance to a clear shot at a company where "profit is almost certainly growing at a rate that will make their valuation reasonable". How much can I get you down for, Joel?

If you're selling another 0.000000001% of 37signals, put me down at $10. Being a minority shareholder of 37signals and putting "increased the value of 37signals 10x" on the CV has far more than $10 of cachet ;-) (as Microsoft realized with FB).

6 orders of magnitude is not pretty close.

His $1 trade was in jest. The point is, both are very small numbers compared to 100%, or even 1%.

Uh, Joel, have you bought any Facebook stock on Sharespost?

Valuing Facebook just by the market price on Sharespost is like predicting the outcome of an election when only 1% of the votes have been counted. Maybe those votes are a representative sampling, maybe not.

I'm inclined to think not, because you have to be an accredited investor, ie already wealthy, to buy pre-IPO shares. Facebook's investors are there for the potential upside and are more comfortable with risk than Joe Blow saving for retirement or his kid's college education.

So Sharespost prices will be higher because (PROB_FB_DIES * NEG_UTILITY_FORME_IF_IT_DOES) will be less negative for millionaires than for the middle-class people or conservative mutual fund managers who will buy most of Facebook's equity when the company goes public.

Predicting the outcome of the election when only 1% of the votes have been counted is sometimes known as polling.

I'm inclined to think not, because you have to be an accredited investor

You "only" need $1 million in net assets (minus the house due to recent law I believe) to be an accredited investor. I would really be surprised if Joel didn't have at least that much.


I think the simple summary of your point is this: Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them.

Facebook is worth $26 billion. That doesn't mean that buying it at a valuation of $26 billion is a good investment. Worth and my estimation of what it will be worth in the future two are different things.

"Things are worth what people are willing to pay for them, not what other people think they should be willing to pay for them."

I agree with this, but there is a difference between the market being willing to pay $26 billion for a company, and minority investors being willing to pay $26 billion/0.03. Only the former establishes the actual* value.

Now, now. Let's be reasonable. No one is valuing Facebook at $866.67 billion.


That is sharespost's estimate of Facebook's worth, not what Facebook is actually worth. Hopefully if this thread was a little less heated, at the basics this is a discussion on estimating the present worth of Facebook.

A decent estimate would include the expected future worth, whether it is based on expert analysis or a market's expectations. I don't think any estimate here could be categorized as what "it will be worth in the future".

Estimation beats market cap when it comes to the sustainable value, which only comes from hard-earned cash, not crazy bomb-passing games you can observe in every bubble scene. I do think that FB can be traded around $50 billion and may be $500 billion (Who cares? Most of investors-speculators don't care about its paper worth on the market.) if another dot-com bubble forms. However, what would be its sustainable value? How will it generate its profit to justify its valuation? Until it's on its verified earnings statement, it's just another bomb-passing game. Who really care whether it's $5 billion, or $500 billion, if one believes he can pass his bomb to the enthusiastic guy beside him?

I know you were being facetious, but agricultural derivatives are totally different from equities. But we do also have a stock exchange and options exchange in Chicago, you know.

Anyway, the primary reason that your point 3 is true is because of basic supply and demand. It is harder to buy all the shares than to buy a few. When it's perceived there's a very small number of shares available--I don't know if this is true, but it does seem like investors are clamoring to invest in Facebook--share price will be higher than if that were not the case. In particular, perceived scarcity can share prices artificially high. The idea of getting a slice of the pie before someone else does was a big factor in the dot-com bubble, for instance.

Sheesh, did this topic hit close to home or something? Someone needs to chill and lay off Chicagoans, or red bull, or something..

Doesn't it come down to who comes up with the price and what their motivation for investing is?

When a VC invests in a company, they're looking for a big exit. Essentially, they're trying to predict how much the company might IPO or get acquired for. A public investor is trying to predict the rise in future profits of the company. The difference in motivation matters when you consider a hypothetical.

Suppose the company is guaranteed to have stagnant or falling profits. Does that discourage the VC? Not necessarily. They don't care about whether the company can make money. They care about whether they can keep building perceived value in the eyes of anyone who would want to acquire. A public investor, however, would not put their money in that company (at least not for long).

Therefore, I think David's main point is sound - VC's are more likely to over-value your company than the market is. We also know this to be true because of what happened in the early 2000's.

Hi Joel, ex stock analyst here. What you say re minority trades is correct in so far as that is the way market valuations are calculated. However, what David says is also correct: just because someone pays X for a tiny fraction of the company doesn't mean someone else will pay the same for all of it.

Wily investors always look for meaningful volumes before taking big jumps/declines in share prices seriously.

One of the easiest ways to ramp a stock (apart from getting your journalist buddy to write a puff piece) is to continually lift the offer for small volumes.

As Joel points out, it's tautological. How many companies would buy up Google for it's current market valuation? Apple? Since no buyers have tried to do that, are they ipso facto no actually worth that market cap?

Yes, but Google's valuation is confirmed by trading volumes.

In the early days of computerized trading it was quite common for even quite liquid stocks to be suspended limit up/down because of programming bugs.

But by Joel's logic, the market has 'spoken' and these companies are now worth 10% more/less than 30 seconds prior, when in fact all that has happened is some faulty code just ripped through the book on minimal volumes.

The point is that 'true' valuations are validated by significant volumes. Hence Google's valuation is real. Depending on your viewpoint, the size of the recent transactions in FB may or may not be material - and I think this is the point that David was making.


You need some amount of liquidity to make a meaningful valuation. Lack of liquidity leads to price volatility. Think May 6 flash crash.

Hey! Ad-hominem the 37 signals if you must, but leave Chicago out of it!

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

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

Two of my heroes dragging discourse on hacker news into the toilet. What's the world coming to?

Apparently it wasn't obvious from the "New York smells" point that it was a joke. So let me spell it out: It was a joke (even if it's actually, technically true. Many parts of New York really do smell from all that trash on the street!).

people don't have a sense of humor. obviously my comments about chicagoans not knowing how to multiply was a joke, too. They multiply like bunnies.

Let this be a lesson to you edw519: you make a joke, and both your heroes attack you! Biff! Bam! Actually, I can't imagine a funnier response.

Ah, the Chicago-New York feud, older than Hatfield–McCoy.

Joel's comment:

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?

.. is a often genuine criticism of 37s here on HN. Probably part of the reason the joke was missed.

Just came from San Francisco to NY. If you think it's bad here...walk around downtown SF sometime ;-)

You should never meet your heroes (IRL or online). It invariably leads to disappointment.

I wasn't disappointed by meeting DHH. In fact, it led me to respect him even more.

Having senses of humor, they are clearly JOKING with these lines.

Warning: Prolonged exposure to HN comment sections may blunt your sense of humor, too.

Both of them have some insights worth pondering, but the attacks are kinda negatively overshadowing the discussion. Joel really shouldn't have started the Chicago hyperbole.

Do they have some history or it's just impulsive?

I think it all started with Joel's "Language Wars" article http://www.joelonsoftware.com/items/2006/09/01.html for which DHH responded with "Fear, Uncertain, and Doubt by Joel Spolsky" http://www.loudthinking.com/arc/000596.html. They have been at loggerheads since then.

If you're like me and can't access loudthinking link, here's a copy: http://www.artima.com/forums/flat.jsp?forum=123&thread=1...

Thanks for the link. I couldn't really access the loudthinking link.

On this one, I am with David. Joel pretty much negates his point about using something battle tested and mainstream in the end when he mentions using some proprietary language for his product, which translates to a couple of mainstream languages. I don't really see the point of cross-compiling to multiple languages. The work and time invested in maintaining the proprietary language can be better invested on other critical activities. If language interoperability is an issue, thrift or message queues is there to the rescue.

Why he would use some fancy stuff when he himself is advocating using mainstream stuff is beyond me. I sure would be betting on ruby being more robust than whatever he is using in-house (preposterous claim; I have no ideas what they have in-house)

IMO the only valid complain about Ruby was lack of good unicode support at the time post was written.

Did joel ever post a response?

They are competitors.

That alone shouldn't be reason enough and I would say both of them behaved very unreasonably if being competitors is all there is to it. I was asking more along the lines of previous altercations or confrontations.

I do remember some post from 37 signals commenting about Joel's taking investment; not sure if it was David or someone else though.

A very thin line divides frank and honest speech and rude and arrogant statements. Most of the internet celebs sit on the fence and cross it every now and then - Linus Torvalds (Open BSD devs are a bunch of masturbating monkeys), Zed Shaw(Rails is a ghetto) etc etc.

That being said, there always is a take-away as these people are one of the most hardworking and talented people in the industry but the sad thing is it makes it difficult for people not familiar with their style to neglect the firework and just consume the good parts(not that it would matter to any of them).

Joel really shouldn't have started the Chicago hyperbole

He's a New Yorker, it's in his DNA.

The fact that they responded to your jest in sincerity gives hope to the "little guy"

HackerNews: battlebots for geeks who can't build an ashtray without a makerbot

You should take a chill-pill and go check out reddit sometimes.

Agreed, kind of depressing that neither appears to have anything better to do.

Not really. They are both professional writers of online publications. This forum is the perfect place for them to stir up controversy to entertain their target audience. I'm entertained, at least.

I was impressed (surprised?) at how civil this response was. Probably because it was a response to Joel and not randomHNuser9 :)

I was also surprised that it didn't really address the question of whether or not you (37S, dhh) are "stewing in their own witty ideas, listening only to the adoring comments they get from the groupies"

Do you have any thoughts on the "bubble-ness" of Chicago. Think it's a totally invalid point?

Given employees of small service companies sometimes deal with clients more often than they deal with their own families, it's not unreasonable to posit these clients act as a "bubble" that insulates the company from the world at large.

What's laughable is Joel's implicit assumption that the majority of 37s clients are, apparently, Chicagoans. How charmingly pre-internet of him.

Such arguments should be left to professors of financial theory. Here's a balanced analysis:

  In the real world, markets cannot be absolutely efficient or wholly 
  inefficient. It might be reasonable to see markets as essentially a 
  mixture of both, wherein daily decisions and events cannot always be 
  reflected immediately into a market. If all participants were to believe 
  that the market is efficient, no one would seek extraordinary profits, 
  which is the force that keeps the wheels of the market turning.

  In the age of information technology (IT), however, markets all over the 
  world are gaining greater efficiency. IT allows for a more effective, 
  faster means to disseminate information, and electronic trading allows 
  for prices to adjust more quickly to news entering the market. However, 
  while the pace at which we receive information and make transactions 
  quickens, IT also restricts the time it takes to verify the information 
  used to make a trade. Thus, IT may inadvertently result in less 
  efficiency if the quality of the information we use no longer allows us 
  to make profit-generating decisions.
Source: http://www.investopedia.com/articles/02/101502.asp

If you take #3 to its logical conclusion, any company's shares, if sold all sold at once, would be worth far less than the price at the nexus of supply and demand (the market price).

Price is simply a function of supply and demand. It's not customary to use a fire sale price as the sole basis of a company's valuation.


I can verify point five. New York does indeed smell.

only when you're outside. :)

Or not on the subway.

Everyone thinks their sh*t don't stink. Honestly, Chicago smells too.

Yes, like chocolate!

David's point 2 is a good one. It is the reason why bourses insist that a large percentage (IIRC >25% for the LSE) of share capital is in public hands at all times. (Where "public" means people or organisations not associated with the directors or major shareholder.)

Nonetheless, Joel's post is quite funny.

I'd bet they make a lot more profit than 37signals.

it's "a meanningful metric" not "an meaningful metric". Please spell people. This is not SMS!

I think it is always wrong to point out spelling mistakes, except in posts about spelling mistakes.

Especially as many spelling mistakes are actually typos.

Also, "meanningful" is an excellent example of Muphry's Law.


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

Indeed. And Pets.com was worth $100 million on the day of its IPO. And tulip bulbs were worth more than a man's annual salary in 1637. And that house down the street was worth a million dollars last year. Someone paid for those, too.

You don't have to have a different definition of "valuation" to see that a small sample of the most eager investors in the private market doesn't guarantee a reliable estimate of value.

Value is determined by what someone- anyone- will pay for something. And it makes sense if you think about it. The goal is to find out how much you can sell that something for and it is the exact same problem as figuring out how much someone will pay for that something.

Company valuations are messier than tulip bulb valuations though. With tulip bulb valuations you are saying that since someone will pay x the bulb is valued at x. With company valuations you are saying that since someone will buy 1/n of the company for x then the company is worth n*x. This makes sense because people really want a piece of facebook and valuations do a great job of setting that price. But the price is also used to determine how much the entire company will go for, which is how the number is often thought of.

As long as the valuation goes up and you have the opportunity to sell for a net gain then it is a good investment. DHH's thoughts here are important beacause they call attention to a valuation bubble. I think the main controversy lies in his creative use of words.

> Value is determined by what someone- anyone- will pay for something.

Not "someone", but THE MARKET ... when you buy a piece of Facebook, but won't be able to sell at least at the same price, then you're the loser ;)

When multiple losers gather and start buying stupid shit with no value to THE MARKET, that's called a BUBBLE, that will burst sooner or later.

The trick for estimating if "the valuation goes up" is to see if that company actually provides value (i.e. actual profits, since that's the only goal of a company) ... and in that light, DHH's opinion makes a lot of sense.

I dont disagree with anything you or dhh said although I don't know for sure if his predictions will hold.

Right. But unless you think there's someone (or a set of someones) who would pay 33B for all of Facebook, it's not unreasonable to assert that it's not worth that much.

Agreed. We are valuing the whole pie based on the cost of a slice, which is problematic for many reasons...

Value is determined by what someone- anyone- will pay for something.

This is unexamined Econ 101 dogma. See the other posts on intrinsic value.

I say this coming from a practical point of view though. If I can sell something today for at most 15 bucks, that is how much it is worth, no?

Actually, in my mind price is what anyone will pay for something - the value may not be the same as the price

It should be immediately obvious that they're comparing intrinsic value vs market valuation, so no, it's not tautological at all.

Everyone who invests should know that market value does not necessarily predict intrinsic value, and it becomes more problematic when there's illiquidity, and when only a small fraction of the company is being bought and sold. These are basics, going back to Ben Graham's famous book on value investing, and probably much further back than that.

Even if liquidity and size didn't matter, it's still a basic error to go by last share traded and claim that that represents the actual value of the company.

Exactly. While the technical sense of valuation might be tautological, it's also nowhere near the average person's definition of economic "value" or "worth". A good test in the every-day sense of those words might be if company X were given 3 months to sell off everything and end up with a stack of cash, how much would they have? Apple could stand a chance of getting reasonably near their valuation whereas I'd be shocked if Facebook could.

    Is the problem that they're sitting there in a city 
    without any other Internet industry
orbitz, groupon, careerbuilder, peapod, everyblock, skinnycorp, grubhub, the onion, ars technica, to name a few

And Google since they bought FeedBurner a few years ago.

their utter and complete misunderstanding of all the basics of business is starting to grate on me

Their linkbait really grates on me as well (though I happen to agree with this post's conclusion, if not the methods), but I think it's pretty unfair to say that they misunderstand all the basics of business. They seem to be doing pretty well for a shop their size. In fact, I'd say there's a good chance they're doing better than Fog Creek. Maybe misunderstanding the absolute perversion of what too often passes for "business basics" in Silicon Valley isn't such a bad thing.

Considering their success, how do they misunderstand the basics of business?

That's my point.

Haha... I just reread your comment. Sorry, I read it too fast the first time.

I don't entirely disagree with your points here, but as someone who is from Chicago and spent many years helping to build a very successful Chicago-based business (Threadless), I take offense to the notion that David's misconceptions have something to do with Chicago.

First of all, he's from Denmark – he just lives in Chicago. Secondly, ever heard of a little startup called Groupon? They're from Chicago and I'm assuming they have a few people there that excel at multiplication.

The location of 37signals has nothing to do with it, and you're clouding an otherwise clear and well articulated set of points with the asinine notion of "no one outside the valley understand business".

37signals is great at understanding the laws of small business, however arguing with those same laws doesn't always work when scale is involved.

This would have been a valid argument 2 years ago if Facebook was trading at this valuation, however Facebook has a reasonable valuation given their rapid revenue growth. They may surpass $200 million this year and their user base is still about to double (yes, to beyond 1 billion users).

They haven't even begun to open up the revenue faucet. 37signals should stick to providing advice to "lean startups" who want to build small businesses.

What if there's not faucet to open?

There is a faucet to open, and a big one at that.

The fact that they have gotten to the point where other companies are able to build majorly successful (Zynga) businesses based on their platform, and the fact that they have become ubiquitous with many business' marketing and online presence speaks for its self.

The fact that the total amount of time spent online is greater for those on Facebook than Google (including Youtube) is also important. http://news.cnet.com/8301-1023_3-20016046-93.html

But what is more important is Facebook's pursuit of pushing the envelope and being willing to innovate and lead as the online landscape changes.

The posts above which mentions that people were saying the same thing about MySpace having the user base and then not being able to monetize is like comparing apples to rotten tomatoes. MySpace was not a technology company, Facebook is. MySpace was primarily a media company with little to offer technologically (see: http://paulgraham.com/yahoo.html), Facebook is building a social web that has deep horizontal integration with the Social Graph Protocol, mobile communication, and is actively trying to optimize it's infrastructure for both scalability and user experience. Look as far back to their decision to go with AJAX and not base everything strictly on page loads (as MySpace did), or as recent as their open sourced internal projects... (I don't think MySpace ever worked on any HipHop PHP or Cassandra)

Facebook is in it with the right mindset, to be the leader and game changer in the "social web," and with both the value and quantity of data they are constantly amassing I wouldn't be surprised to see them on par with Google in a few years.

Also, as they grow they can continue to optimize and decrease costs on their end... I'd say they have both a big faucet to open and probably a few leaks they could plug as well, the combination of which makes for a large valuation to be expected.

It's always easier to look at something we don't quite fully understand from the outside (not many people understood the true value of those little text ads on Google until later) and then make blanket assumptions on valuations based on other companies that were inflated but not even on the same playing field as the company being discussed.

Seriously, Joel, Facebook just needs to "optimize" a bit and they'll be more profitable? Really? With a valuation of $33 billion, Facebook needs to make a bit more than a dime or two extra from their users. They need a ton of real dollars from each and every user or (more likely) dozens or hundreds of dollars from some users and nothing from the rest. How are they going to do that, exactly?

How will Facebook change its platform to convert its hundreds of millions of users, who signed up for a free party, into billions of dollars per year without spoiling the party? No one likes getting invited to a party with their friends only to find that the beer isn't free after 11:30, or worse, they've been tricked into attending an MLM meeting. If Facebook could convert eyeballs to dollars the way Google can, there was no reason not to do so when they had 50 million users, or 100 million, or 200 million... It hasn't been done, though, because it would spoil the party and stop that lovely flow of VC money.

I am just gobsmacked that, within just a few years of the US housing market bubble popping and the financial empires getting caught with their pants down, you would continue to support the speculators' fantasy of pre-IPO tech valuations. These types of valuations aren't just irresponsible or insane, they're scams! The consumers have no money or credit left, so the easy money is going to come from gullible investors.

There is a relevant difference between valuations derived from secondary markets and public markets. Investors in secondary markets rarely have clear understanding of real financials or the capital structure of the company. This is a good writeup: http://www.homethinking.com/brontemedia/2010/09/17/secondary...

Also, Chicago has lots of smart people, and I agree with you that FB is well positioned to make lots of money.

What does Chicago have to do with FB valuation? KTHX. DHH makes a good point though - what are FB's profits/profit projections? No one knows. Assuming its $200M, how the hell can FB be worth $33B? That's all...

It could well be that "only" $200M in profits is the result of spending $$$ on R&D and product development (FB Questions, FB Places, FB Credits), which could lead to a massive amount of cash flowing in shortly.

They've massively invested in infrastructure, which has certainly lowered profits. They could very well start benefiting from this as soon as next year.

Without information, though, it's all speculation.

Without information, though, it's all speculation

Right - that's the point. The valuations are not based on actual profits or profit potentials but rather on speculation/hype, which means bubble, and when a bubble bursts, it ends up hurting the entire community.

Obviously, startup valuation is not a science. BUT when valuations are based on wild projections (such as FB will be be more profitable than Google), then someone must call it out.

I agree mostly, but it is true that in private equity, it's not always taken for granted that you can take a small stake's buy-in price and multiply it out to get a valuation. It depends on why that investor bought in, what the prospects for similar investors are, etc. It's taken with much bigger grains of salt than the standard (share price * shares outstanding) valuation for public companies is, anyway.

Last I checked one of the most profitable "internet" businesses (Groupon) in the last decade is in, and founded in, Chicago.

A dime per user is nice and all, but they need to make 20x that for a billion dollars in revenue. That's still only $2 per user, but a lot harder.

My gut feeling is that Facebook is somewhat overvalued at $33billion. (This is $66 for their average user.) But I don't think it is overvalued by orders of magnitudes and I think the 37signals article is very demagogue.

People are horrible at taking variables like growth into account.

It isn't 66$ per user. It is 33billion/expected number of total users over the lifetime of facebook.

So if you throw in rough estimates of 2 billion facebook users and give them a decade of profiting from an average user...3$ per year per user.

Which means that if Facebook's valuation rises over the next decade there will be an even bigger gap between their user base * revenue per user than there is today. Either that or their valuation will have to remain flat for the next decade.

Does anybody else see a problem in that?

A company's valuation can certainly take into account growth potential, but when it assumes massive growth and leaves no margin bad things happen. Risk is much higher since any faltering of the company would need to be adjusted for in stock price almost instantly. If a normal company sees slower than expected growth the stock may fall a little. If an overenthusiatically future valued company sees slower than expected growth the stock may tumble by huge margins (because it's tied to the company's size 10 years from now, not today). Worse yet, if there's no margin remaining in stock price it'll be forced to remain stagnant for a very long time. This is bad for investors and bad for the company (because the use of stock as employee compensation is less potent).

It strikes me as a bad plan to depend on 400% growth that's sustainable over a decade. You're right, people are horrible at taking growth variables into account. They usually overestimate them.

Facebook may well achieve the numbers outlined above. But let's not kid ourselves. People were doing the same back of the envelope calculations for MySpace when it first started to get big. I see nothing wrong with a judicious use of common sense and caution in this case.

Things are changing very fast in this industry. So even 10 years and 2 billion users are optimistic numbers. And if you take 2 billion users, most of these users are from very poor countries, it is extremely hard to monetize these users (almost orders of magnitudes harder than users from rich countries.). That said, I don't think that Facebook is overvalued by orders of magnitudes, and the 37signals article did not make much sense to me.

2 billion active users is almost 1/3 of the worlds population. That seems like a strech.

Also you can't link the 33billion to expected. 33billion is their "valuation" now with 500M active users. There's a certain expectation that your valuation should go up as users increase.

Personally I think the per-user deal is kind of a red-herring. Revenues and Profits are the only things that really matter. Users are just a one (good) dataset for estimating growth - but hardly the only one.

"rough estimates of 2 billion facebook users"

Right. Because the Chinese and Indian Peasantry is definitely going to be on FB.

Not to mention other platforms are more popular in other countries. For example, Google's Orkut is very popular in Brazil and I'm sure Baidu et al are working on offerings for the Chinese market. USA != world

They're almost certainly making $2 per user. Another dime is gonna be easy.

First of all, Joel, it's THEY'RE not THERE. ;)

Hey, lay off man! If Chicago doesn't have to teach multiplication, New York doesn't have to teach grammar, alright?

Read the original post, Joel didn't make that mistake.

lol, he edited it.

Haven't got a dime from me, and they don't have an idea on how to.

Also a dime per user/year is more than it seems when you can only collect it through indirect means (ads, charging other companies for using your platform). Remember their ~500mio user figure also includes the overwhelming portion of users who generate no more than a handful of page impressions per month.

It's not like facebook could invent a yearly membership fee or start selling t-shirts or such...

Well, they could, but I doubt more than ~20% of their audience would actually pay.

They'd be lucky if ~0.5% of their audience would actually pay.

You don't think so, but they probably have.

I always used to think I was a 'leech' user of TripAdvisor, until I worked there.

Have you viewed more than 300 pages on the facebook.com domain in your lifetime?

If so, they've gotten a dime from you.

3 ads per page, each ad selling at a $0.10 CPM.

I think their CPM is in the $30-$40 range, but the key missing piece of information is how many views they get per user. I know my Facebook use has gone from multiple views per day (20, 40?) to 1 page every other day. Still lets say each user looks at Facebook twicer per day, each user is about 1/2 a CPM per year, or $20 revenue per year.

But CPC, well I've never clicked on an ad on Facebook in my entire life.

Never use tech-savvy people as representative examples when evaluating advertising.

Otherwise, even google would be out of business.

The problem with the comparison of Facebook VS Google is that Google advertising is fantastically targeted.

You literally type into Google "I have this problem" and get a bunch of ads solving that problem. It is practically the holy grail of advertising. Now consider that it is a catch all for personal and corporate questions, it is a cash cow. It is perfectly acceptable to google something at your job, click on a link, and buy a $15,000 system.

Facebook might know a lot about you, but they don't know what you are looking for at any given moment. Add on top that most people are spending their time on personal relationships, and it isn't the same even if they get more impressions. I can't log into Facebook from work and say "who has 5" diameter pipe?" and expect a response, but if I google that I find a vendor and place a multi thousand dollar order.

Also the market on Facebook is somewhat inverted. The "best" customers are generally on their the least. The most frequent people are college students - mostly broke at that. If you aren't advertising clothes, personal electronics, or local bars I don't see the draw.

Speaking as someone who has spent $30,000 on Facebook ads in the last several months: Facebook advertising is fantastically targeted as well.

Google ads work when there is so-called "purchase intent": I know I want a new waffle maker, so I search for it.

Facebook ads work when there is demographic correlation: I just got engaged, and I might not know that I now need a waffle maker, but a Facebook ad can target me and tell me that I should be adding a waffle maker to my wedding registry.

Different kids of targeting, both extremely powerful.

So you're the one putting all those wedding ads on my Facebook page. I hate you.

Congratulations on your engagement!

And seriously. Waffle maker. It's the gift that keeps on giving.

you must be kidding, right? If their CPM were $30-40 they'd be making many billions per year, not (maybe) 1 billion.

I'm not sure a company doing as well as 37s can be accused of having a "complete misunderstanding of all the basics of business".

On behalf of

Groupon.com Orbitz.com Feedburner.com CareerBuilder.com TicketsNow.com Peapod.com Apartments.com Restaurant.com ShopLocal.com Legacy.com GrubHub.com EveryBlock.com Apoolicious.com Threadless.com Newser.com Songza.com ViewPoints.com Timelines.com SitterCity.com BlockShopper.com CarePages.com SurePayroll.com OneWed.com

...and many other Chicago-based internet companies

Fuck off.

You forgot cars.com, viewpoints.com, and navteq ;) Clearly no internet here. Oh...and no financial companies either (I wont start a list of the many)

The present valuation isn't as important as intrinsic value if you're talking about the long term. Of course the valuation is a multiple of its trading price. With that definition, its worth whatever people are trading shares think its worth. But that's only 3% of the shares.

But what I think the 37signals post is addressing is how directly tied this valuation is (or isn't) to the company's intrinsic value. price-to-earnings, a guess at its margins, durable competitive advantage etc etc. In that sense, is facebook truely worth $33B? That's a different question than what's its current valuation. Its subjective, to be sure, but its still fundamentally different.

Its a private company. I doubt many outside the company know its financials. Information scarcity leads to pricing inefficiency. For all we know, speculators might be driving up the price to cash out sooner.

Another point I mentioned before: Everyone is incentivised to see the valuations go higher. The VC's, employees with shares, the founding team, etc. They can cherry pick talent from the competition with such valuations. Since I don't think you can short SecondMarket stock, there's no way to bring negative information into the market to keep prices rational.

To your last point, facebook has certainly figured out how to make money off its current users. But it has radically changed the underlying user-conventions to get there. It started out as a college-yearbook and photo storing site with no profit-motive. In order to become profitable, its iterated on that simple concept with such a pace that the majority of users have yet to catch on with how things have changed beyond photosharing and posting on friends walls. The majority of people have no idea what is being tracked. For them to squeeze out further revenue, it follows that more fundamental changes must take place to get there.

Whats one thing that could absolutely destroy facebook? Overnight? If they started making public which users were viewing which profiles, and with what frequency. That could kill it pretty easily, I think. Of course, they would never do it, but I think if a terrible scandal or crime occurs, involving sensitive user data, and people are compromised in such a manner, that would be a problem for facebook.A billion dollar company shouldn't be so easy to kill.

The Chicago dig seems really, really unnecessary.

It's as valid as when people refer to the Valley as one big techie circle-jerk. Or as the most fertile technological environment in the world. Location, location, location.

37signals != Chicago


> "The city posted a sign," means that an employee of the local government (but not the geographic location or all of its residents) posted a sign

I remember a documentary on Walmart where someone said they succeeded by realizing that a small percentage from a very large number is still a very large number.

Joe Walton wrote a book about it.



I think you are talking past one another. He's saying that he does not think that their valuation is merited. You are saying that his assertion makes no sense because valuation is, by it's nature, defined by the current trading price.

You are I think technically correct, but the market isn't always perfect in judging the value of something, and I think he is saying that this is one of those cases.

"The whole section "Minority investment evaluations aren’t real" is so economically bizarre and incorrect that I don't even know where to start."

I don't think that's so bizarre to say. If there is huge demand for something and only a very very limited supply, then doesn't it stand to reason that price will go up more than it would have otherwise if there was more supply?

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

Facebook is not (yet) public, which is a massive factor relative to the calculation of its book valuation. Presumably, at least on the surface, all of this facebook hype of late would indicate that what used to be a closely-held entity is quickly becoming ripe for the IPO market. What the actual valuation is (or will be) cannot be determined until the free market goes to work on it.

But then again, speculation, anticipation, and fear . . . these have all been attributed to major market fluctuations, crashes, overnight millionaires . . .

Given fb's current position - would it not be incredibly stupid to NOT do everything possible to continue their growth and try to become more widespread as a necessary layer of the internet?

Assume they want to continue growing. Growing both the number of total users and the number of places they grab the users' attention (mobile is the next natural play). Of course they would continue raising money and not worry about profit margins right now as they are still driving money back into the company's growth.

There are two factors that influence your 'multiplier theory' given their advertising model. Number of users and the amount of attention you have from those users. They still have a lot of potential upward growth in both areas.

If facebook made a billionish dollars this year on ad revenue - they could double it with twice as many users. Double it again with twice as much user attention from being a core part of the mobile web. They are still growing their ad platform, so that is another multiplier.

Of course doubling their user base twice is something like 30% of the human species. I'm not sure that's realistic.

Of course Facebook is not worth $33bil. Fact: The Facebook engagement numbers for users suck. The data is inflated. That all is fact BUT forget that. Apple shares cost $6 per dollar of revenue. At the same valuation Facebook is worth $9bil. Would you really pay $25 per dollar of Facebook revenue knowing in 2-3 years they could be the next Myspace? They sell nothing. They are actually the Seinfeld of Networks. No loyalty. Nothing preventing anyone from jumping ship. If you think I am wrong people invested way more in their Myspace experience...photos, blogs, video, tricked out pages etc. And then just left. Gone. Bye. See ya.

Remember a sucker is born every min and Elevation Partners has been a sucker over and over in many investments. Would you spend $6 per dollar of Apple revenue or $25 for a dollar of Facebook? Case closed.

"The cynic knows the price of everything and the value of nothing." -- Oscar Wilde

Disregarding the technical usage of the word valuation in investing, I see three ways of interpreting the terms in the argument here. The price of Facebook is 33B, simply extrapolating from the price of tiny percentages of Facebook.

The value is related to the price people are willing to pay, but is actually unknown and only exists as a prediction of future cash flows.

The worth is a more nebulous concept and related to how much Facebook improves the world.

It seems like spolsky is talking about the price, and dhh is talking about the value, and making illusions to the worth.

y so serious?

-The last executed price times shares outstanding is market cap. Valuation is dcf or guideline; there's a big difference between capitalization and valuation.

-Sharespost can not be considered liquid as all of its securities are governed purely by regulation D and are by definition on hard to borrow

-Facebook will not continue its current exponential rate of revenue growth for the standard 5 year assumption DCF

(jk, but maybe not) Its most avid core user base will graduate with their faggy liberal arts degrees, find out they can't earn for shit, advertising revenues will peak and decline, at which point Facebook will file a timely SEC S-1, followed by a record oversubscribed ipo mostly bought by parent(sponsors) of said faggy liberal arts graduates, then get basket shorted down to 50% of offering price. IB, instl. trading desks, and VC will already have gotten rich long before this; everyone else loses. Same deal with carbon/ECX emissions futures.

-NY owns Chicago; Chicago is the guy on the merc floor shouting hundreds of open outcry bids while one trading desk at 200 west st. takes every bet against him using one single macro on Rediplus. (jk, respect to all veteran floor traders)

-I'm sure everyone will decide their bets based on their own risk-reward/due diligence anyways. Nothing we say to each other will have a huge effect; in the end, the bids and offers we provide will do all the talking for us. That's why the market exists so let the games begin.

The only correction is that in this phrase "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" you confuse customers and users. Facebook users are not their customers. The customers are advertisers, and there ain't 500m of them. So, although their profit hugely depends on the number of users, it's not the only component in the formula.

Users who aren't spending (at the moment) are better termed "product" since their presence on the site is being sold to others.

Actually Joel, your assertion that dhh simply needs to look up valuation in the dictionary is absurd. Valuation is not neatly defined. It's hugely subjective -- especially for private companies.

>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.

It's not like that at all. It's more like comparing a 5' tall boy with a 5' tall light pole and deciding that valuation is based on height alone.

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

Yeah, good point.


Sure, but I would hardly call secondary markets for startup shares a valid market or even try to compare it to public market. Come on, Joel!

So you would agree with the valuation of Slide or Ning a few years ago? Maybe. Would you now? No. Valuation of private companies is not a science but an art. That's startup 101 stuff. Do you really call Sharepost a market most investors would call credible? Please.

There are numerous methodologies for valuation. "last share traded" is by no means the ONLY method. Markets by definition are made up of actors who independently value commodities in various ways, none of which are definitively the only valuation method. Is that tautological enough for you?

Perhaps a little more humble thoughtfulness, rather than indignant ignorance, would do you some good.

Perhaps it is more correct to say that the potential revenues from this thing don't justify the valuation. It wouldn't be the first company to be overvalued and the fact that many owners of this stock cannot sell is certainly relevant.

Here's my issue after reading all of this. Who the hell cares? I love minutiae as much as anyone, but this is worse than arguing about text editors.

This sounds like a bunch of privileged people arguing about something that that doesn't make a damn bit of difference to what's really needed in this world.

I thought I was going to learn something. But now I just feel a little ashamed that I read any of it all.

"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?"

As opposed to being located in a circle-jerk of similar minded companies and VCs, responsible for the first internet boom?

"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."

If he's ALWAYS sitting down, then it's accurate to argue he's not really 5' tall ―not for any practical purpose, that is.

But not only "minority valuations" are not real, but majority valuations are not real either. Valuations are based on guesses, feelings, estimations and some facts thrown in for good measure. A declaration of fact, they are not. Some time they are even complete BS.

"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?"

And how useful is David's products to customers, eh Joel? How possible it is that they jump ship en masse when something trendier comes along, compared to Facebook? That is, which business is based on a solid offering, and which on virtual smoke and manure?

Yahoo could once milk 500,000,000 users too. Nowadays, not so much.

"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."

Yes, many a business failure was based on that theory. It's the old, "we lose money on each product, but we'll make it up on volume" idea, adjusted as "we make a tiny fraction of money from each user, providing no real benefit or substance, and he can jump ship tomorrow like he did on several of our predecessors, from Frienster to MySpace, but we'll make it up on volume".

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

Most likely it's like NY has no manners...

But the real question is, should someone even partially responsible for Visual Basic even be allowed to talk about tech?

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.

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'.

I agree, but as an aside, is it possible Netscape merited that valuation? Was Netscape's a squandered opportunity, or the most likely outcome.

I mean this in the sense of odds--was the valuation wrong because the odds of success were really so slim, or are we calling the die roll of a hard six inevitable after the fact?

I bring this up because I had a similar feeling to what you describe about Google around its second stock offering, but it has done extraordinarily well since then. I second guess these judgments because in hindsight everything seems inevitable.

Google at least has a business model, I can't say I can actually detect one in the case of facebook.

As for netscape, yes, in part it was a lost (or destroyed, more likely) opportunity, but at the same time even if they had continued to be successful their valuation at the time was right up there with far future science fiction.

Honestly, you have to be blind not to see the business model and assets that they are building.

Go to http://www.facebook.com/ads and take a look.

You can target ads at "all doctors under 30 in the chicago area that went to a ivy league school". This type of targeting can lead to huge CPMs.

One example of where they could go: they are one cookie away from a significant branding ad platform.

Another idea: advertise on keywords in activity streams. Tie this to the branding ad network above.

Update: Not clear why this is getting downvoted. These are two huge opportunities for Facebook that could easily justify big multiples. And people said the same thing about Google (no serious business model) before it went public.

How can you "not detect" a business model for a company that has revenues of over a billion dollars? seriously?

Yes, seriously.

I can't make soup of it. What's their intention long term, everything seems to be in anticipation of what they're really going to do.

In all the time that I used facebook (haven't used it in months) I had a very hard time figuring out how they were making money on or off me.

It can't be the ads I never clicked and it wasn't the subscription fee I never paid.

I believe Facebook has at least 6 business models in operation today, including:

* ads in margin

* special paid for groups

* sponsored likes

(these are discussed in Kirkpatricks book of Facebook - and here: http://www.quora.com/Facebook-1/What-is-the-revenue-distribu...)

Additionally, Facebook has just launched Facebook Credits. Zynga (revenues $600M+) is their launch partner. Facebook gets 30% of their spend.

I do not think they are struggling to monetize.

I always figured they'd go and do a payment system because in facebook the 'graph' of your friends validates you to the point that doing business with someone becomes a lot less risky than on paypal, but for some reason they seem to be holding back on that.

Maybe the zynga deal is a prelude to that.

It would make good sense to do that, facebook is the closest we've got to a verified ID on the net. The issues to contend with would then of course be hacked accounts and such but that's not different from other payment systems.

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

"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.

Ok, point taken, but compared to the total number of facebook shares I would imagine that is a relatively small amount traded? (the site requires registration for any data to be even visible)

Companies rarely "sell off a majority portion of the stock" when they IPO. More typically, they sell an additional 20% to 30% new shares to select investors.

The Betfair IPO about to get off (at a roughly $2bn valuation, which is pretty fair for a category killer in a huge business like sports gambling) is entirely insider sales, no new issues, and will be something like 10%-15% of the company.

Sorry, I meant to write major... apologies.

"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.

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

My best guess is that they are waiting to book an entire year of platform revenues - which will give investors a better idea of what their business model actually is.

This time next year they will have 12months of ads + platform revenue to show off. Their business model hasn't been complete up until now.

That is why they opened and sanctioned the secondary market, because of employee pressure and because they had to buy time before going public.

Besides companies prefer to remain private, esp because of the amount of overhead being public adds (esp after Sarbanes Oxley). The role of CEO completely changes when you are a public company.

If anything the reluctance to go public is a good thing, since it means that Facebook are thinking it through and establishing themselves - not making a dash for cash.

Google was also very reluctant to go public, but the SEC and their own employees forced the issue.

This is going to be one hell of an IPO.

While the exact numbers are obviously not available - something like 500 million was spent on FB ads in 2009 and in 2010 that number is likely a billion.

I don't take David's flawed 'they wouldn't raise money if they were making good revenue' as a valid statement. The revenue they make is all profit - there is no middle man or hidden expenses. They have operating costs which are sizeable, but it as they grow and mature their business and revenue - their profit will grow.

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.

I can think of a couple fairly lousy companies associated with at least two of these fine fellows. Their being involved does not say anything about Facebook's potential to make money.

Argument to Authority is a logical fallacy.

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.

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.

Of course simply stating that "Argument [from] Authority is a logical fallacy" is it's self an argument from authority, one is trusting the author to have properly researched the fallacious nature.

Petty arguments aside...

Something being logically fallacious does not make it false, all it is saying is that the premise [that top business minds that have successfully done this sort of thing in the past] does not prove the conclusion [that they know what they are doing/ will be successful now].

Of course it doesn't prove it, no more than knowing someone is Jewish male proves that they are circumcised, it just provides a strong suggestion as to the outcome.

Facebook makes a sizeable amount of revenue now. Why does everyone talk about them like they don't make a dollar?

To be worth 33 billion they should be pulling in ~1.5 billion in profit a year with a reasonable expectation that they will increase over the next several years OR they are going to make significantly more than 1.5 billion a year fairly soon. I suspect FB could start making 1 billion a year fairly soon, but suggesting they are going to be make 3+ billion each and every year within 5 years seems like a significant stretch.

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.

> 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".

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.

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.

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.

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

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.

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).

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.

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?

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:


(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

> 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.

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).

when dhh says "make $X", he means profit, not revenue.

I can't edit above so I will add it here:

* '09 spent $400 on $700M of revenue ($300M profit)

* profitable since Q2 of 09

* one of the only social networks to ever reach profitability

* 55% of US retailers present on Facebook

* 20% of global social network ad revenues

* 550,000 approved apps, 1M developers

* 20% of users have logged into another site using connect

* Zynga revenue is over $40M a month. Up to $10M of that goes to Facebook for advertising, while Facebook then take 30% of what Zynga make through Facebook revenue. So Zynga first pay Facebook to get the users, then pay Facebook again when they make money from those users. Great model.

sources: * http://www.sharespost.com/research_report?filename=facebook-...

* http://www.sharespost.com/research_report?filename=100702_GS...

(both reports source from SEC filings and other sources)

Then his estimate wasn't too far off, although his error bars were in the wrong direction. Facebook is making 9-figure profit, not 10.

FWIW, I believe that $50-100B is where Facebook's market cap will plateau. More than Amazon, about half of Google. I'm not at all in agreement with dhh on this one.

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.

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.

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.

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?

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?

> You ready to escrow that $10K?

Sure. As long as you do the same.

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.

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)


Where's Spolsky? He should be in on this. Maybe DHH can put up his Zonda for something that Joel values highly.

I bet it's worth more than that.

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.

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.

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...

Thanks for saying this -- I think it's interesting that the comments here boil down to:

. Disbelief that FB is worth that much, or

. ad-hominem attacks one way or the other, or

. Technical discussions on whether there's sufficient liquidity to get a real 'price'.

When I look at what facebook has done, and the absolute fucking mountain of data they sit on, FAR better quality than Google's in my opinion, If I were on the board, I would be thinking "brilliant job executing on growth, guys. I'm deeply excited to see you make all this pay once you're not running around putting out massive fires all the time."

It's not going to be rocket science to make it pay, and pay, and pay...

Taking another slice: I'd bet my entire (comparatively very small) net worth that the board would unanimously vote down a $33B cash buyout offer right now. There's just no way you guys think that FB has topped out; it hasn't really even gotten going when you think of a complete, end-to-end business model yet.

Job offers happily accepted. : ).

And unlike most of these jokers, you actually have the bet on.

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

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.

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).

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.

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.

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).

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.


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

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.

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.

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.

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.

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.

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!

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.

DHH: you should read this Business Week article on Google in 2000: http://www.businessweek.com/bwdaily/dnflash/dec2000/nf200012...

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.

"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.

> "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.

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)

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.

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

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.

They printed the same article 3 year ago: http://37signals.com/svn/posts/670-can-microsoft-buy-cool-fr...

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.

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.

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

"valuation" != overvalued || undervalued

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

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.

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

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

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


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.

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