Everyone’s whispering it, and it certainly makes sense: Facebook will likely take its next round of funding at a valuation lower than the $15 billion Microsoft set when it bought 1.6% of the company for $240 million in 2007.
This will prompt a lot of Bronx cheers, but we think it will actually be a good thing for the company — a chance to reset employee and investor expectations and regain the attractive options needed to hire talented new people.
Evidence is mounting that Facebook wants to raise more money and it won’t likely be able to raise it without a down round.
Why do we think Facebook wants more money?
- CEO Mark Zuckerberg said so. He told Michael Arrington: “We’re not actively going around trying to raise money from a lot of different people. It’s more just a follow on to that [previous round].”
- Headcount costs continue to increase. Facebook could have as many as 800 employees at the end of the year — up from 400 last December. To accommodate these folks, Facebook is moving to a larger office park on Palo Alto’s Page Mill Road in Q109.
- Server costs: Facebook’s active users are up 30% since August. But as much of half Facebook’s members are international — creating traffic that is harder to sell ads against but just as costly to maintain.
- Slower-than-expected revenue growth: Ad agency execs tell us the kind of experimental ad products Facebook offers are the first to go when clients tighten their budgets. These days, clients are tightening their budgets. Reflecting this conservatism, eMarketer just cut its projections for Facebook’s 2008 ad revenue by 20.8%. An unconfirmed source echoed this outlook for us.
- There’s no way Facebook saw this ad collapse coming: No one did.
Facebook will likely keep trying to find investors willing to “follow on” the previous round, but we doubt they’ll find any. We doubt, for example, that Facebook investor Accel — which just raised a new late-stage fund — will pony up at that level. And other indicators also point to a down round:
- A source close to Facebook said so. In October a source close to Facebook told VentureBeat: “even if Facebook were worth $15 billion last year and executing flawlessly, their valuation would be reset by the market.”
- Facebook couldn’t find investors who wanted common shares valuing the company at $4 billion and so had to indefinitely postpone an employee stock sale program.
- Microsoft didn’t buy into the company at $15 billion with the same thinking that a financial investor would. The investment was more like the time in 1997 when Microsoft invested $150 million in Apple in order to appease the Justice Department — a cheap way for Microsoft to deploy a relatively small portion of its massive cash holdings in order to deal with an otherwise very expensive problem. In this case, Microsoft simply spent as much money as it had to keep Facebook away from Google. Microsoft also got an exclusive ad deal on Facebook — not something your average investor would care about.
- Germany’s Samwer brothers and Chinese billionare Li Ka-Shing joined the $15 billion round after the dollar had crashed. It’s much healthier now, and a $15 billion valuation is suddenly expensive even for Arab oil titans.
Why now’s a great time for Facebook to take the down round, despite the crap it will get:
- We hear Facebook investor Accel Partners marketed its still open late growth stage fund as a way to get into Facebook. If so, there is presumably interest from limited partners for preferred shares at a more modest valuation.
- Facebook hasn’t come up with a real advertising product yet, but since everyone knows the ad market is terrible right now — even Google is cutting costs — Facebook can blame its disappointing ad revenues on macro-economic issues.
- Now’s the time: There’s a market need. There aren’t going to be many IPOs for the next 9 to 18 months, and investors need a place to put their cash.
- A down round will make options more attractive for new hires, and with startups failing all over the Valley, there are plenty of talented engineers and ad sales people to gobble up.
Know better? Call us at 646-747-1539 or email [email protected].
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