The social-networking site wants as much as $100 million in debt financing, sources say. Facebook's accelerating user growth carries huge tech costs
Facebook, the fast-growing social-networking Web site, is one of the many companies looking for additional financing as banks and other lenders become increasingly careful about extending credit.
Over the past few weeks, Facebook has been trying to secure as much as $100 million in debt financing, according to two sources with knowledge of the proposed transaction. Specifically, the company is looking for a handful of credit lines that would help it finance leases for the growing number of computers it needs to run its popular Web site. Such leases are used by well-known companies, including Google's (GOOG) YouTube video service, and are a common way to finance equipment purchases in Silicon Valley.
Facebook has been shopping for credit from a number of large financial institutions, including Bank of America (BAC). The Charlotte-based bank, already Facebook's primary commercial bank, received $25 billion from the federal government as part of the effort to relieve the credit crisis. Facebook has not yet secured new debt financing from Bank of America or any other lender, according to the sources. It is continuing to try to line up credit lines for leases and is considering other forms of debt.
A Facebook spokesman says the effort is simply part of the normal course of business. Equipment leases offer lower up-front costs and certain other advantages over purchases. "Facebook always seeks to keep its costs of capital as low as possible, particularly in these uncertain economic times," the company said in a statement issued to BusinessWeek. "Along with other Silicon Valley companies, we rely on a range of tools to do so, including equipment lease lines to acquire equipment."
Questions About the Timing
Facebook's search comes after it lost access to additional credit from TriplePoint Capital, a venture lending firm in Silicon Valley. TriplePoint had extended Facebook a credit line of $100 million for equipment leases a year ago, but that line expired several months ago after Facebook had drawn down $60 million of the total, according to two sources familiar with the deal.
TriplePoint CEO Jim Labe says the company is in discussions with Facebook about its financing needs and may offer the company more credit at some point. "We continue to be their largest debt financing partner and hope to continue to be so in the future," wrote Labe in an e-mail.
Facebook's hunt for financing has led some Silicon Valley insiders to wonder why the company needs more money now. Gideon Yu, Facebook's well-respected chief financial officer, has already raised more than $500 million in debt and equity, an enormous amount for a startup. One important question is whether Facebook has enough money stockpiled to stick with its current strategy of emphasizing user growth over revenue or whether the company will have to dial back on growth in the face of the economic downturn.
The company declined to comment specifically on its cash position. A month ago, Facebook board member Peter Thiel told BusinessWeek the company did not need to raise any more money and had sufficient cash to continue at its current growth rate.
Storing All Those Photos Isn't Cheap
Facebook gets virtually all of its revenues from online advertising, a business that has softened with the overall economy. Yet the company's expenses are rising as it adds millions of new users. At the end of February, the company reached 275 million users around the world, up from 100 million last February, according to research firm comScore (SCOR). Over the last few months, as Facebook has rolled out numerous versions of the site in foreign languages, its user growth has actually accelerated. In the last three months, Facebook added 75 million users, more than its entire audience in the U.S., which has flattened out at 57 million users.
The expanding user base comes with growing costs—in the form of higher expenses for computer servers, storage, electricity, and Internet bandwidth. Rising capital expenditures prompted the company to negotiate the first $100 million lease with TriplePoint last year. Facebook buys its tech gear from a variety of established manufacturers—a simpler yet more expensive approach than that of Google, which saves money by building its own servers and storage systems and writing complex new software to tie everything together.
Tech analysts believe Facebook's breathtaking growth is raising its technology costs sharply. "We're talking tens of millions of dollars a year," says Frank Gillette, vice-president at market researcher Forrester Research (FORR). "It's safe to say that supporting 275 million users from 100 million means that you've effectively had to triple your infrastructure. They are being forced to build at scale with expensive technology."
Facebook spends heavily on equipment such as storage technology. The company is now the world's largest photo-sharing site. Last October, when it had 100 million users, the company said it had uploaded more than 10 billion photos to the site. Facebook's storage costs are multiples of what an average company spends because it stores four images of each photo its users put onto their Facebook pages. To handle all that data, Facebook needs to buy dozens of storage systems every year. "It's not unusual for [such purchases] to be six-figure deals," says Mark Bowker, analyst with the tech research firm Enterprise Strategy Group. "They are buying storage capacity at a very rapid rate. There's a lot of money involved."
What About More Equity?
Facebook is private, so it doesn't have to release its financial statements, but it's unlikely that revenues are keeping pace with expenses. Many companies are cutting back on their advertising budgets and shifting spending to more proven online ad methods such as the text ads that run alongside Google's search results. The research firm eMarketer estimates that Facebook's U.S. revenues will reach $230 million this year, up 10% from the estimated $210 million last year. The firm has not forecast Facebook's overseas revenues, which have historically accounted for about 25% of the total. Online advertising analysts say that while most of the growth in social networks is coming from abroad, the relative immaturity and small size of those ad markets makes it difficult to generate strong revenues from that growth.
Facebook's hunt for debt financing doesn't mean it has closed the door on raising additional equity. It remains open to selling more of the company, but valuation could be a stumbling block, say several sources familiar with its thinking. The company was valued at $15 billion when Microsoft (MSFT) invested $240 million in the company in October 2007, and Hong Kong mogul Li Ka-Shing put up $120 million at the same valuation. Given the sharp decline in stock values since then, most financiers believe it would be very difficult for Facebook to sell equity at a similar valuation.