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!

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