BreakingViews Wrong About Facebook $10 Million Fund


The normally astute BreakingViews swings and misses when it tries to blast Facebook’s new $10 million investment slush fund.  Facebook plans to hand out seed cash to Facebook-App entrepreneurs while asking only that its VCs, Accel and Founders get a right of first refusal on any future financing.  Authors Rob Cox and Jeff Segal excoriate the company for giving its VCs a sweetheart deal while its other future shareholders (read: the gullible public) get nothing:

Facebook, in tandem with two of its venture capital backers, will parcel out non-recourse grants of as much as $250,000 apiece to start-ups making software programs that its users can download.  In return for putting up the capital, Facebook shareholders Accel Capital and Founders Fund get the right of first refusal to invest in the applications, or their founders.
Facebook can argue that this arrangement allows it to focus on what it knows best – social networking. True enough. But when Facebook hits up investors for a stock offering, it will need to explain why it’s effectively giving away options on some of the Internet’s most creative new applications to its VC backers – for free.

Ah, but Facebook (and its other shareholders) are getting something: More Facebook apps.  More Facebook apps make Facebook more valuable–by attracting more users and locking them in. Facebook’s reason for opening its API was to encourage people to develop apps for the platform, which essentially makes it an operating system.  Another famous operating system, Windows, got more valuable with every new application that was built on top of it (so valuable that, eventually, the money started flowing the other way). 

For its $10 million (provided by the same venture capitalists), Facebook is essentially buying, say, 400 more Facebook apps.  If one or two of those work, the company (and its future shareholders) will receive an excellent return.