Kara Swisher is no longer in a relationship with Mark Zuckerberg — It’s complicated
(} {) == Broken Heart
On Sept. 11, 2007 Kara Swisher wrote a good speculative piece about the potential that “perhaps Microsoft or some other moneybag suitors” might be interested in taking a stake in Facebook at a valuation with “several B’s in it” (see http://kara.allthingsd.com
While not quite as specific as one might hope from a professional journalist, it still prompted me to write the following post three days later entitled: “Should Facebook Take an Investment at a $10 Billion Valuation?” (see
http://www.facebook.com/to
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I do believe it would make sense for Facebook to salt away $500 million or so worth of a war chest at a valuation of around $10 billion. Microsoft would be the logical investor and should ask for the following key deal points:
1. An agreement that Facebook not to sell to Google or allow Google to invest.
2. An agreement that extends Microsoft’s existing CPM ad deal for a 10 or 20 year period.
3. An agreement that broadens Microsoft’s existing CPM ad deal into the Keyword-Driven CPC ad space that would be part of a Web Search business that Facebook could enter at any moment they choose to by simply supporting a web search option / results as part of their current People/Group/App search box.
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Kara’s Big Scoop
These specific details were published for anyone to read, including Kara, and they preceded by 11 days the Wall Street Journal story confirming key elements of my prediction. I’m not trying to claim credit for scooping the Wall Street Journal because my post was pure speculation (albeit pretty specific and it may not even turn out to be right). Such pseudo-informed speculation about future market events is much different than a fully sourced story like the on the WSJ wrote. However, Kara goes on to take credit for scooping the WSJ, when she says, “the Wall Street Journal follows up on MY STORY by adding more interesting details.”
I guess claiming credit for breaking a story is how journalists one-up each other.
So, I guess I should say, “Congrats on breaking the story Kara and beating those slow pokes at the WSJ who spend their time, as you say, ‘adding interesting details.’”
My big problem with Kara’s recent reporting is that after getting lots right in her first article, Kara now seems to have a big case of “Facebook Envy” and is doing her best to push Mark Zuckerberg and his tiny army that I’m going to start calling the “the Palo Alto 300″ down into the mud. For example, in her most recent dismissive post about facebook, entitled “More on the Facebook Hype — Oops, I Mean Promise” (see http://kara.allthingsd.com
Protecting Widows and Orphans
I would agree that over-hyping a public stock where widows and orphans are dependent upon the valuation being sustainable for the next 20 or 30 years is a bad idea, but isn’t it any smart entrepreneur’s job to “hype” or “tell” their story in a way that is appealing to potential investors. I also don’t even think that Mark Zuckerberg is the one doing the “hyping” because he always seems to be downplaying speculation. The reason there is a quiet period before an IPO where the company can’t talk about itself is to protect the public investor from making a big mistake in a frothy market. This is not the case here.
I can assure Kara that Steve Ballmer at Microsoft and the Google Guys are very rational investors and even if they weren’t, they probably aren’t going to walk away from a deal with “several B’s in it” because of one of Kara’s posts. So, if Kara isn’t protecting the possible investors, I’m assuming she may be trying to stop the 80,000+ developers who are adding their brain and brawn to the “Palo Alto 300’s” attempt to build something great and of enduring value for consumers. Or perhaps, she is trying to protect Altura Ventures that is actively investing in the only area that is open for mere mortals (i.e., the Facebook application space). Or perhaps, she just wants to be in a position to say I told you so at some point in the future.
Whatever Kara’s motivations, I would suggest that her name-calling is not reporting. Her saying a valuation is laughable or ludicrous or delusional or addled or ridiculous is not that useful when the very fact that discussions are happening implies that the valuation is accurate WRT the only parties that matter. In Kara’s post, entitled “15 billion More Reasons to Worry About Facebook” (see http://kara.allthingsd.com
Next came her “Facebook as Online Ad Nirvana?” piece (see http://kara.allthingsd.com
Enough About Kara’s Writing Style, Let Me Deal With the Substance of the Matter:
As I point out in my post entitled: “Valuation, Shmaluation — How to Win Big When Mr. Market is Wrong” (see http://www.facebook.com/to
The proof of this is that the only valuation that matters is what a willing buyer and willing seller ultimately agree to.
And since, Mark Zuckerberg probably wouldn’t sell Facebook for less than $100 billion, that pretty much sets the valuation for the entire company at or near this figure.
It is a mistake to try to use P/E ratios and multiples of revenue for a company that hasn’t yet found the key to its profit kingdom. As an example of why Kara should be more bullish on facebook, when was the last time you’ve heard about a non-porn-related piece of software that was so addictive that Fortune 500 company’s were having to ban its use at work? I seem to recall such discussion in the early days of the web browser, when companies tried to get their workers not to use the internet.
Who won that battle?
Kara seems to have missed the point that the Social Operating System War has started and Google’s sees the threat even when she does not. Unlike Kara, Larry, Sergei and Eric are not dismissing Facebook as the latest in an ever-renewing cycle of social networks that blow hot and cold and are easily replaced. In fact, Google already knows what their average CPC revenue is from consumers before and after they join facebook and I’m betting they’ve figured out that even without enabling facebook’s search box for web search that Google loses future revenue every time a consumer leaves the dark side and goes toward the facebook light. A smart journalist would demand that Google query their mountains of data and confirm or deny this.
It is not surprising that Google is not making the same mistake of under-estimating Facebook that Yahoo did in underestimating Google when they thought search engines were a commodity-type of technology that they could use for a while and dismiss when the next good one came along. Google knows how sticky facebook is and it has them scared to death (or at least scared to action).
Google’s ultimate consumer stickiness SURPRISED Yahoo to the tune of $177 billion in missed market opportunity when Google’s search engine “user interface and brand” got woven into consumers’ brains as the GoTo home page when it dawns on them while working on something else that it is time to search for something. And now, Yahoo (even with Microsoft, AOL, Ask, Snap and Mahalo’s help) can’t seem to stop the giant that they suckled as a tiny baby into health from now growing to the sky.
My $500 Million Question For Kara
So, before I get to the specifics of how valuation works in a young, entrepreneurial company (vs. an established Post-IPO company), I’d like to ask Kara one question:
“If you knew everything you knew now and were transported back to 2002 with $500 million in your pocket, would you be willing to invest this money in Google to own 5% of their company. Remember this was at a time when they had little or no revenue other than a sweetheart deal with Yahoo that paid them on a per query served based and it was before they started running any keyword-driven, CPC ads. So, do you invest so much money in such a puny company that was being run by a pair of drop-out founders and an apparently washed-up ex-Novell CEO who was the only one in the valley Mike Moritz could find who was willing to provide adult supervision to such a strange little company that thought “search” could be a business.”
Hopefully, your answer is “Yes” since that is what any rational investor in 2002 would do when armed with 100% certainty about how the next 5 years would evolve.
Given that Google now has a valuation of $177 billion with the revenues, profits and the brand-based, technology-enhanced, market lock-in to justify it on the basis of a high, but reasonable P/E ratio, your $500 million would now be worth $8.5 billion. Nice work, Kara you are an investor genius for ignoring the market comparables of 2002 and betting on the future stickiness of a system that provided more advertising accountability than CPM ads in an environment that was year-by-year accounting for more-and-more of the time that used to be spent watching commercials on TV.
How Entrepreneurs See the World
As an interesting aside, the next time Kara see the Google Triumvirate, she should ask them if, in that time period, they would have turned down a $15 billion offer for their entire company. I believe that would have and I’m sure that is what they would tell you now. They had a vision for organizing the world’s information and getting to be among the richest geeks on the planet in the process and they wouldn’t want to have settled for only $3 billion each when a little patience would yield each of them $30 billion.
I believe Mark Zuckerberg sees the world in a similar way. I’m sure he is saying, “the world called me an idiot when I turned down $1 billion for 100% of my company in Feb. 2007. Now, it is 6 months later and I’m being offered $500 million for 3% to 5% of my company and the world is calling my prospective investors idiots. I wonder what might happen if I take this war chest being offered and use it to acquire the secret sauce that will get my goose to start laying golden eggs in the form of painlessly extracted cash from vendors who wish to serve the 200+ million users that I will likely have by Dec. 2008? What will they call me and my strategic investors/allies then?”
The Missing Ingredient for Facebook’s $100 Billion Recipe
The strategic landscape is set and only one little invention is required to give Facebook the same key to the profit kingdom that GoTo’s bid-based, keyword-driven, Cost Per Click invention gave Google.
What could such an invention be? I’m just guessing here but it seems clear that it will be tied to Facebook’s core strength which is keeping users on their site vs. CPC advertising which worked great for Google’s core strength of getting users quickly off of their site.
This implies a transactional model that keeps the user glued into facebook (which is one of the reasons why their current CPC ads are such poor performers in terms of conversion — because users can spot them as ads and know that clicking on them will take them away from the site to which they are addicted).
History is The Wisest Teacher
CPM-based bannder ads around google/yahoo’s search results failed in 2002 because people already knew how to tune them out and so no one noticed them. These banner ad impressions were ultimately valued by google and the market at $0.00 CPM rate when Google introduced their CPC ads and allowed these text link ad impressions to be free and only counted and charged for actual clicks. You will note that the CPC text link ads on Google were designed to look enough like search results that most users were immune from ignoring them and didn’t even think of them as ads.
By extrapolation, the ultimate winning “ads” on facebook will be valued at $0.00 for their impressions and $0.00 for their clicks. They will be valued solely based on the actions that they cause the user to do (e.g., buy a product, share a recommendation, give a gift, call or chat with a local merchant, etc.) To make this Cost Per Order system work correctly, facebook will need to own a OneCart transaction system that offers all of the merchants and all of their products in one standard facebook-hosted shopping and gift-giving experience. They will also need to have the rights to any patents related to offering such a unified shopping system.
(PUBLIC DISCLOSURE: I own 20% of SHOP.COM which happens to offer all of these benefits, is in dire need of locked in access to 40 million consumers and is for sale assuming the price is north of $150 million (in cash or stock). I’d be willing to sell all of my shares for less than 2/10ths of 1% of facebook. Hopefully, Fred Harmon at Oak is listening and would be willing to sell his shares as well. If a 1% deal is done at a $15 billion facebook valuation this would be $150 million for SHOP.COM now with a $1.5 billion exit possible in 15 to 18 months. If this happens, I will be very pleased that my 9 years at the helm of SHOP.COM has resulted in a major payday for all of my early investors, such as Bill Gates, Yahoo, Amazon, Harry & David, Quixtar, plus the 80+ friends and family members and 100+ employees who stuck with us for the past 10 years. So, never let it be said that I don’t have a horse in this race.)
Now Back to The Invention That Puts Facebook Over The Top
The new invention beyond what SHOP.COM already has will be the system whereby this Cost Per Order user experience is handled in such a way that users accept it because they see it as a natural extension and benefit of using facebook.
One of Altura Ventures portfolio companies is working in this area, so I shouldn’t say more. Other than, don’t judge Facebook’s valuation without acknowledging the potential value of a site where 200+ million consumers in the richest countries in the world are locked in and sharing their online and offline lives with the various sub-groups of friends that make up their family, social and work lives — the very same groups of people with and for whom they shop and buy things.
Thanks,
Lee Lorenzen
CEO, Altura Ventures — the first facebook-only VC
(c) 2007 Altura Ventures LLC.
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