Facebook Still Dancing for Dollars

Posted by: Rob Hof on September 24, 2007

After failing to pony up enough money to buy Facebook a few months ago, Microsoft is now looking to buy just a piece, according to the Wall Street Journal (subscription required). But what a big chunk of change for such a small piece—up to 5% of the company at a stunning valuation of $10 billion, or up to $500 million. Just a few weeks ago stories swirled about Facebook looking to raise more money, but now Microsoft’s name is looming large.

I gather from someone knowledgeable about Facebook that the red-hot social-networking service is indeed looking to raise money at a minimum $10 billion valuation, hoping to raise between $50 million and $250 million, or perhaps more. It wouldn’t be surprising if Microsoft were willing to put in even more, because the prodigious cash on its balance sheet does little for its stock, while a piece of what many people think is the future of the Internet would be worth a heckuva lot more.

So, presumably, would Google, which the Journal mentions as a potential bidder as well. But that would be a strategic challenge for Facebook, more than half of whose $150 million in expected revenue this year comes from its ad deal with Microsoft. So maybe you can chalk up the Google possibility as Facebook’s bargaining chip with a surprisingly frugal Microsoft. As I understand it, Microsoft earlier this year offered up to $1.3 billion to buy Facebook, but it seems that was far below what CEO and founder Mark Zuckerberg and his investors believe the company is worth.

Still, as hot (and, it must be said, useful) as Facebook is, a $10 billion valuation for a company with $150 million in sales is audacious no matter how you look at it. It flatly assumes that Facebook has figured out what is essentially the social network equivalent of AdWords, Google’s money printing press. Maybe they have, and maybe we’ll hear about in November, when some people expect Facebook to outline its future ad strategy. Given how well the company has executed so far, I wouldn’t be surprised. Nonetheless, it’s far from a fait accompli, given that Google isn’t standing still. So I also won’t be surprised either if nothing comes of this latest round of negotiations.

Whether or not Facebook is actually worth $10 billion or more, one cardinal rule applies: Make hay while the sun shines. With everyone from Google to News Corp.’s MySpace to, yes, Microsoft, aiming squarely at what’s being called the social operating system now, the startup had best raise as much money as it can to keep its momentum going. Not only can it avoid having to go public in today’s turbulent markets—likely at a far lower valuation—but it means Zuckerberg can retain more of the control he clearly craves.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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