Here's Why Facebook's Valuation Drop Is NO BIG DEAL

Once upon a time, spectators made a big deal about Facebook being worth more than $100 bn thanks to trading on private exchanges such as SecondMarket and SharesPost. Now, trading on the same platforms,according to Motley Fool, has led to a more reasonable, so to speak, implied valuation of $68.2 bn. The reality, of course, is that this isn’t really a big deal.

Here’s why:

1. The notion of Facebook being worth more than $100 bn at this stage of the game has always been absurd. The company is trending to a bit over $4 bn in revenue for 2011. There’s no way you can get to a realistic implied valuation of $100 bn from there.

2. Nobody wanted to look stupid. For many venture capital firms who never got a piece of the Facebook deal, this meant getting a position in the company at virtually any price. Now, valuation growth at this stage of the game isn’t a huge deal, as long as there’s a pop relative to that implied valuation at IPO time. Whether that will actually happen remains to be seen, especially given what is now a high hurdle.

3. There isn’t much to use for comparison, and LinkedIn seems to be the best bet. The hype, obviously, wasn’t as high as it is for Facebook. When LinkedIn went public this year, it soared well past the valuation implied by private equity exchanges. So, maybe there is some hope for a huge Facebook valuation when the company rings its opening bell.

4. Facebook is still relatively illiquid, despite the possibility of appearance to the contrary with all the action on SharesPost and SecondMarket. So, price swings don’t mean much right now. For a better sense of the company’s implied valuation, it makes more sense to look at the transaction IPG completed back in August. The $133 mn deal involved between .2 per cent and .25 per cent of Facebook’s stock and led to an implied valuation of around $65 bn. That’s not too far from where Facebook is today, and given the illiquidity of the stock, it’s pretty much a rounding error.

So, has Facebook really gotten pummelled? Of course not. This is where all those disclaimers you see actually start to mean something. Facebook at $100 bn was an illusion. Now that we’re getting closer to the IPO, the numbers are starting to reflect what is likely to be the underlying reality.

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