Facebook has a huge valuation relative to the size of its revenues and how fast (or actually, slow) those revenues are growing.
When its shares start trading in late May, Facebook is expected to have a valuation between $75 billion and $100 billion. It’s already above $100 billion on private markets.
Meanwhile, Facebook’s revenues are actually decelerating, reaching $3.7 billion in 2011.
Google and Apple trade at 3X and 4X revenues. LinkedIn trades at 16X revenues.
A Facebook valuation that is 15 times the size of its 2011 revenues would be something around $50 billion. A valuation 15 times the size of Facebook’s projected 2012 revenues would value the company between $55-$80 billion.
There is a big gap between $50 billion and $100 billion.
The explanation for that gap is this: People who are optimistic about Facebook’s future business are betting not that Facebook’s current ad business will grow to justify that $100 billion valuation, but that Facebook has so many users (almost a billion!) that it will be relatively simple for it to invent a new business to make money.
So whose job is it to close that $50 billion gap?
Meet Gokul Rajaram, the product director of ads at Facebook. He is, in the words of an industry source, Facebook’s “main man for ads strategy.”
Rajaram joined Facebook in 2010 when it acquired the startup he was running with his brother, called Chai Labs.
Facebook bought Chai Labs for one reason: to hire Rajaram.
He has an impressive resume.
Before Chai, Rajaram spent 5 years at Google.
His last job was Product Management Director, AdSense.
Rajaram is also an active startup investor, having put money in successful companies like Adku, Associated Content, and Coupons.com.
Google AdSense is the product that puts all those text ads “by Google” all over the Internet. They scan the page, and try to match the right ad for it based on keywords.
One ex-Googler we talked to told us Rajaram “is a legend” and that he is “beloved times 10” by those who have worked with him.
“[Rajaram] sees the forest and the trees,” says this source.
Former Googler and Associated Content CEO Patrick Keane says “Gokul is a brilliant technologist and a skilled executive. He can deftly bridge the most sophisticated technical and business challenges.”
“I worked with him closely at Google on the launch of AdSense and he was a key tech and recruiting asset on the board of Associated Content.”
Another ex-Googler says Rajaram “is the man.”
“He was key figure at Google in days of AdSense. He served as a translator between tech and business. Any time a business person at Google had a question about how our ad systems worked, they would go to him. That group of senior ads people from Google became even more senior at Facebook and wanted him to serve similar role there.”
The most important ad product that Rajaram’s team has come up with so far is something called Sponsored Stories.
Basically, Sponsored Stories give businesses the chance to turn natural conversations Facebook users are having about their products into ads.
An example: Ticketmaster.com has a feature where, when customers buy their tickets, they can share the news and a link to Ticketmaster with their friends on Facebook. Ticketmaster tells us that when those friends click on that link, it’s worth $6 to $8 for Ticketmaster revenues. The only problem is, those links tend to get lost on Facebook.com when users visit. They go into News Feeds and get pushed to the bottom pretty quickly.
This is where sponsored stories come in. Instead of spending money on billboards or radio commercials, concert promoters can put that link from Ticketmaster in an ad on the right hand side of Facebook.com and then pay Facebook every time it gets clicked on.
There is a lot of promise in this ad unit, but so far it hasn’t quite taken off like you’d expect. They were first introduced at the beginning of 2011, a year in which Facebook’s revenue deceleration steepened.
One reason may be that advertisers used to spending their budgets on things they’ve heard of and are used to, like billboards and 30-second radio commercials, haven’t quite figured out what good something new like Sponsored Stories can do.
Still, Rajaram is adjusting.
The ads used to get stuck on the right side of the page. Now they’re going to go right in the middle at the top of the News Feed, where users are used to looking for pictures of their friends. Already some users are screaming about it, and a few even sued.
Rajaram will have to adjust again. He’ll have to. There’s $50 billion or so riding on it.
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