This is somewhat meaningless or very meaningful, but MSFT finished up 1.13% for the day, after taking a sharp turn upwards late in the trading day… at which point the Street knew that Facebook had gone with MSFT and not Google.
Then, after the market close, MSFT is up 0.93%… meaning that it could be argued that by getting Facebook’s business, MSFT’s stock went up 2%, or given its $290B market cap, over $5 Billion.
What did that cost them? $240 Million.
Say what you want but in the school of financial engineering, this deal might look like a winner even if the $240M commitment and the $15B valuation seem awfully steep.
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WatchMojo NewsletterWill MSFT’s backing of Facebook be akin to the day and age when Yahoo! backed Google? That was undoubtedly a turning point for Google and maybe Microsoft’s agreement to invest in a minority stake worth $240M valuing Facebook at $15B might mean the same thing.
All I know is MSFT is showing some backbone - perhaps foolishly - by not letting Google outbid it, though let’s face it: Mark Zuckerberg is not eyeing MySpace in his cross hairs, he views Google (right now somewhat naively and foolishly) as his main target, and he’s betting that MSFT can help him beat Google in all things Web. Will that happen? Who knows, but clearly he does not view MSFT as a foe, but he knows that Google can on a whim destroy Facebook in many ways, and some of those we’ve outlined previously.
Let’s just hope that Facebook does not totally close the door on a potential exit with this deal, as we outlined earlier today.
Anyway, why $240M? Here’s why: rumor has it that Facebook shareholders own less than 27% of the company (according to Valleywag), so a $240M investment on a post-money investment of $15B implies MSFT gets a 1.6% stake, not much… which is key for shareholders not to slip below 25%. I’m guessing on all of this, but it would make sense… despite what some VCs say about there not being actual minimum holdings, psychology is a big factor in driving valuations…
You don’t raise money when you need to, you raise money when you can, says the popular adage.
As such, Facebook will announce - according to the NY Post - over the next 24-48 hours that it has sold 5-10% of itself to Google or MSFT for a pre-money valuation of $10-15B. That would make it an extremely expensive company given its current revenues of $150M. Clearly, securing $500M or $750M in financing is wise, because it gives Facebook all the time in the world to ramp up revenues and continue its assault on MySpace as the world’s largest social networking site, but is it really wise?
If Google or MSFT come in at this level, it is mainly strategic. But “though both companies could afford to pony up that money on their own, neither is likely to do so, with one source saying an outside financial player will likely be brought in to help sell the round,” as such, financial players don’t invest for strategic purposes, they invest to make money… and that will mean that even if the player has absolutely no rights or say in the matter, it won’t be happy unless Facebook sells for much, much more, or IPOs, at which point the player might not even be in a position to cash out its entire position.
When AOL sold 5% of itself to Google for a $20B valuation, I said “I’m not sure it’s wise, because any future sale of AOL will have to be at a much higher price than $20B and that won’t be easy.”
In other words, if you’re gonna float a high valuation price, you better do so at an exit and not necessarily at a fundraising round.
In my first web job at one of the first search engines, our CEO struck a deal with a VC that valued our company at $40M. He took some money off the table, the company got some money in the coffers… but he not only gave up control of the company, he inadvertently created an environment that no offer above $80M, $100M, etc., would be deemed reasonable.
Subsequently, a company called GoTo.com - now Overture - made us a $70M offer, it was refused. Overture sold to Yahoo! for $1.5B.
Another company called Go2Net - who merged with Infospace - also made us a rich offer… but all of these offers proved too cheap, not based on the company’s actual business, but based on that $40M valuation that the company struck with the VC.
I can honestly say that if the company failed to reach its potential - it had 4M unique users when Google was just starting - the reasons can be traced back to that deal and valuation.
Mark Zuckerberg is an extremely driven and smart young man, but unless he wants to corner himself I think someone should remind him that a valuation established on paper for the purposes of an investment round more often than not backfires…
Anything taken to the extreme eventually backfires, fundraising is no different. The paradox of raising money is that to ensure that you can maximize the valuation at an exit, you have to ensure that valuations at fundraising rounds are sensible. A $10-15B valuation for Facebook today, my dear, is not!
