Adonomics™ Facebook Analytics and Developer Services

NOTE: These are rough Talking Points from my Web Community Forum Keynote

Introduction

1. The Altura Ventures’ Genesis Story — I was not present on May 24th at the launch of the F8 Platform and I only knew a little about Facebook from my sons (one of whom graduated from college two years ago and the other who is a Junior this year). I did not have a Facebook account and had only checked out MySpace briefly after its acquisition by Rupert Murdoch. I was not impressed and tried to delete my account the same day I created it (without much success since they make this virtually impossible). In any case, after leaving SHOP.COM where I worked for 9 years to grow the site from 0 to 500,000 users and while working on a new software startup, I read the iLike story of how they launched their facebook app and added 600,000 in 8 hours!!!

   Clearly, there was something new under the sun in software. After studying Facebook from mid June on, I decided to reposition Altura Ventures as the first facebook-only VC.From that point on, I began to use Facebook itself as a way of building my own personal brand as a thought leader in the Facebook space. I created the “Official Altura Ventures and AppFactory Facebook Investment Fund” group and made officers in the group of about 100 of the top 300 Facebook App developers, key Facebook employees and key Microsoft employees. My strategy was based on the fact that since I couldn’t own any of Facebook’s Social Operating System, the next best thing would be to own a portion of Facebook’s Application Space.

   I also acquired Adonomics.com and began to use it as a site to convince developers that their Facebook apps were going to be worth a lot in the future and to not sell them too soon for too little money (e.g., like Favorite Peeps did when they sold an app with 1.5 million users to Slide for only $60,000).I also began to write about the comparison between Facebook’s Social Operating System and Microsoft’s Graphical Operating System. This comparison along with Facebook’s exponential growth in users and applications led me to conclude that they were worth $100 billion and I started to blog about this and attend Facebook conferences where I would explain why I thought this way.

2. $100 Billion!!! Are You Drunk? — At Dave McClure’s Graphing Social Patterns conference, I mentioned my belief about Facebook being worth $100 billion and this led to a series of reactions from the panel that followed mine in which I was accused of being drunk, an idiot and/or crazy enough to be escorted out of the building. While not true, these accusations were made by the likes of Jason Calcanis, Robert Scoble and Michael Arrington and indicated that calculating a valuation for a privately held company that is growing as fast as Facebook is something that is not well understood. It is my goal in this talk to explain how I arrive at the $100 billion figure, convince you that this number is right, show that Facebook has multiple paths to arriving at this number and failing all of that, demonstrate that I not drunk, on crack or crazy.
3. WATER FIGHT! and Birthday Calendar and Stanford Facebook Class — Before beginning, I should also mention that Facebook continues to be the fastest and cheapest way for any company to create an app that can gain 1 to 2 million users in an extremely short period of time. Altura Ventures demonstrated this with two apps WATER FIGHT! and Birthday Calendar that reached 1 million users in only 60 and 15 days, respectively. In addition, 5 of 25 apps from BJ Fogg and Dave McClure’s Stanford Facebook Class reached 1 million users in less than 30 days. This unbelievable growth was accomplished AFTER Facebook had eliminated the Ultra-Viral, Unlimited Invite System that was in place at the time of iLike.

Overview

1. Why Facebook Can’t Be Worth $100 Billion
2. Facebook’s Growth and Current Business
3. Graphical Operating System vs. Social Operating System
4. Value of a Registered Web User vs. a Facebook App User
5. Warren Buffett’s Views On Valuation
6. How Should We Determine Facebook’s Worth?
7. Valuation Time Machine
8. Getting To $100 Billion in 3 Easy Steps
9. $2.4 Billion Per Year from $1 Per User Per Month from 200 million Users
10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month
11. $2.4 Billion Per Year from 100+ Major Merchandise Categories Paying $2 million Per Month
12. Conclusion
13. Commercial

1. Why Facebook Can’t Be Worth $100 billion?

See the blog post:  A to Z on Why Facebook CAN’T Be Worth $100 Billion. 

2. Facebook’s Growth and Current Business

2004 Feb – 3 users – Mark, Dustin and Chris
2004 Dec – 1 million users (college only members via .edu e-mail verification)

2005 Dec – 5.5 million users (adds high school members)

2006 Dec – 12 million users (opens up to any member)

2007 Apr – 20 million users

2007 May 24 – Platform Launched

2007 Dec – 60 million users

450 employees è -$45 million (headcount)
50 million users è -$25 million (infrastructure)
Page Views è 2.1 billion page views per day
Microsoft Ad Deal è $100 million (approx. $0.13 CPM rate)
Profit è $30 million

2008

900 employees è -$90 million (headcount)
200 million users è -$100 million (infrastructure)
Page Views è 8.4 billion page views per day
Microsoft Ad Deal è $400 million (approx. $0.13 CPM rate)
Profit è $210 million

3. Graphical OS vs. Social OS

	Graphical Operating System	Social Operating System
OS Name	Windows	Facebook
Founder(s)	Harvard drop-out and his former roommate	Harvard drop-out and his former roommate
Initial Launch	1984	2004
Critical Mass Achieved	1995	2007
Competitors	Digital Research’s GEM, IBM’s OS/2 Presentation Manager, VisiCorp’s VisiON, Sun xWindows, Apple’s Mac	MySpace, LinkedIn, Orkut, Friendster, OpenSocial
Focus	Windows SDK à Developers / Developers / Developers!!! 80,000 employees 4+ million 3rd party developers	F8 Platform à Developers / Developers / Developers!!! 450 employees 180,000 3rd party developers
Lock-in	OEM PC companies bundled Windows; Developers’ apps and API knowledge; Consumer investment in apps, file system and user interface	Consumer investment in Profile Data, Notes, Photos, e-Mail history, Groups, Apps, and Friend Network; developers’ apps and API knowledge
Killer Apps	Word, Excel, Powerpoint, Access, Outlook, Browser	Photos, Events, Friends, Newsfeed, Inbox, Groups, Profile Page Calendar, Dining, Travel, Gifting, Shopping, Turn-based Games, Super Groups

4. The Value of a Web User vs. a Facebook App User

	Web site Registration	Facebook App Install
User Actions Required to Accomplish Registration	Select Registration Button, Enter E-mail, Enter & Re-Enter Password, Enter other app related profile data	Select Add Application, Select Continue
Source of New Users	Cost Per Click Advertising (typically $0.25 to $1.00 to get a visitor), Cost Per Impression Advertising, Search Engine Optimization, PR, Offline Advertising, Blogs,	Friend Invites, Friend Newsfeeds
Cost of Registered Users	Assuming 2% conversion rate, $12.50 to $50.00	$0.00 via viral flow, $0.50 for Cost Per Install
Site Reminders	Bookmarking (<1%)	Profile page
Post Registration Marketing Methods	e-mail	e-mail, newsfeed, profile page, friends’ interactions
Opt-Out Rate	50% to 75%	< 1%
Hurdles to Re-using Site/App	Remember e-mail/password	Find app/icon on Profile Page and Click

 

5. Warren Buffett’s Views on Valuation

Warren Buffett’s Definition of Value

The value of any business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset.”

Owner’s Earnings is the amount all future cash that the investor could take out of the business without hurting the business’s long term competitive position.

Stock Market’s Definition of Value:

Valuation is any amount that a willing seller and buyer agree to

For public stocks, Mr. Market values every business each and every day

And, Warren’s fortune is based on buying stocks whose future earnings
are being undervalued by the marketplace

Valuation is not based on past or current earnings but on future earnings

6. How Should We Determine Facebook’s Worth?

Facebook’s Investment History

June 2004 à 5% sold, implied valuation à$10 million
May 2005 à 12.5% sold, implied valuation à $100 million
Apr 2006 à 5% sold, implied valuation à $500 million
Oct 2007 à 1.6% sold, implied valuation à $15 billion

Facebook’s Valuation Should NOT BE BASED ON:

Yesterday’s Small % Investors

Yesterday’s Earnings

Today’s Monetization Methods

Today’s Strategic Partners

My Estimate of Facebook’s Valuation Is BASED ON:

Today’s Growth Rate

Today’s Developer Platform

Today’s User Experience

Tomorrow’s Monetization Methods

Tomorrow’s Strategic PartnersSum Total of All Future Earnings

So, what is Facebook worth today?

                       Lee’s Answer à $100 billion

7. The Valuation Time Machine

What was Alaska worth in 1867?

1867 – Seward’s Folly:
586,000 square miles for $7.2 million (1.9 cents per acre)
$182 million in today’s dollars

1867 – 1958 à $40 billion in Fur, Gold, Copper, Salmon
1959 – 2006 à $375 billion in Oil, especially after the pipeline

2007 – Today’s valuation = ???

What was Microsoft worth in 1984?

1986 – Post IPO valuation à $750 million

1986 – 2006 à $126 billion in Net Income from OS Licenses, Office Suite Apps

2007 – Today’s Stock Market Valuation = $310 billion

What was Google worth in Dec. 2001?

2001 – AdWords CPM = 2001è $86 million revenue

2002 – AdWords CPM & CPC = 2002 à $347 million revenue

2003 – AdWords CPC only + AdSense = 2003 à $961 million revenue

2004 – Post IPO valuation à $31 billion

2001 – 2006 à $20 billion in Net Income from CPC Search

2007 – Today’s Stock Market Valuation = $218 billion

What was Facebook worth in May 2004?

2004 – $10 million???

Growth of non-college, non-US members
Signing Microsoft advertising deal
Opening of the platform for developers
Accepting Microsoft investment

2007 – Today’s Private Investor Valuation = $15 billion

8. Getting to $100 Billion in 3 Easy Steps

a. What will Facebook’s P/E Ratio Be?

14 – Disney ($62 billion)

17 – GE ($371 billion)

17 – American Express ($67 billion)

22 – Microsoft ($319 billion)

33 – MasterCard ($26 billion)

50 – Yahoo ($34 billion)

54 – Google ($218 billion)

103 – Amazon ($38 billion)

280 – eBay ($45 billion)

b. Earnings Required to Get to $100 Billion Post-IPO Valuation

25 P/E è $4 billion in earnings
42 P/E è $2.4 billion in earnings
50 P/E è $2 billion in earnings

c. Users Required to Get to $100 billion Post-IPO Valuation

2007 à 65 million
2008 à 200 million
2009 à 300 million
2010 à 400 million

d. $100 Billion Post-IPO Valuation è $1 per month per user

P/E ratio = 42
Late 2008 earnings run rate = $2.4 billion
$100 Billion = 42 P/E * $2.4 billion

200 million users$2.4 billion = $200 million per month * 12 months
$200 million per month = $1 per month * 200 million users

9. $2.4 Billion Per Year from $1 Per User Per Month

Add Web Search to Facebook:

28 web searches per user per month

1 in 7 lead to Cost Per Click Sponsored Link click

4 clicks = $1.20 per month per user

(Facebook’s rate: $0.04 per web search)
(Google’s rate: $0.26 per web search)

Create Web-Wide, Open AdSense that is Enhanced with User Data:

Google makes $4.7 billion per year in AdSense Revenue

Facebook could make it 50% better its User Knowledge

Works out to $2.4 billion per year in Facebook’s Share of AdSense Revenue

Offer a Facebook Mall with 35% New Customer Acquisition Fee (otherwise 5% fee)

Average Transaction Size = $30

35% New User Merchant Commission = $10.50

5% Existing User Merchant Commission = $1.50

Purchases Per Year Per User = 2

50% of Purchases are with New Merchants

Commission Fees = $12 on Total of $60 Per User

$12 billion in Mall Sales per year

Works out to $2.4 billion in Customer Acquisition and Commission Fees

Offer a Facebook Wallet (i.e, Web-Wide Auto-Login / One-Click Buy Service)

Prior Wallet’s have failed due to lack of Adoption

Facebook already has massive adoption and complete user data

Facebook already has 6 million credit cards on file

At 1%, this is $2.4 billion for assisting $240 billion in annual purchases

10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month

License eBay to Power Person to Person Sales

License Amazon to Power Book/Music/Video Sales

License Visa to Power All Credit Card Sales

License Craig’s List to Power Classifieds

License AT&T to Power Yellow Pages

License Expedia to Power Travel

License YouTube to Power Video

License Skype to Power VOIP

License Apple to Power Music Downloads

License eTrade to Power Finance

11. $2.4 Billion Per Year from 100+ Merchandise Categories Paying $2 million Per Month

Gifting – Red Envelope, Gifts.com, Harry & David

Computers – Dell, HP

Gadgets — Sharper Image, Hammacher Schlemmer

Men’s Fashion – Lands End, Big & Tall, Gap

Women’s Fashion – Lane Bryant, Talbots, Gap

Children’s Fashion – Hanna Anderson,

Home Furnishing – IKEA

Discount Selling – Overstock, SmartBargains

Shoes – Zappos, Amazon

Lingerie – Victoria’s Secret

Books – Amazon, Barnes & Noble

Music – Amazon, Virgin

Video – Amazon, NetFlix

etc.

12. Conclusion

a. Facebook is “Addictive”

b. Facebook is “So, Distracting, Companies Must Ban It”

c. Facebook is “God’s Gift to Developers”

d. Facebook is “Nirvana for Direct Marketers”

e. Facebook is the first “Word of Mouse” Engine

f. Facebook is “Bloomberg Terminal for Your Life”

g. Facebook is the ”Lowest Cost Customer Acquisition Vehicle on the Planet”

13. Commercial

The GEM System for the Viral Design and Tuning of Apps

Growth – 1 to 2 million users in less than 1 year

Engagement – 5% to 10% active users PER DAY

Monetization — $30K to $60K in Ad Revenue per Million Installs Per Month

Lee Lorenzen
CEO, Altura Ventures – the first Facebook-only VC
e-mail: LeeL@altura.com
Cell: 831-595-7501