Simon’s Blog

I’ve written before about the issue of Facebook valuation, suggesting that a rational valuation for Facebook today might be around $2B (see Facebook - True Value Less Than $2B?). Now, in response to the values of $100B being touted, Jason Calacanis has valued Facebook at around $1B-$2B; or $2B-$5B, depending on how you do your valuation calculations. Essentially, we’re in complete agreement on this, and his detailed post is worth reading, especially if you don’t understand how to value companies (and if you think Facebook might be worth anything close to $100B today, you don’t understand how to value companies!).

Forget what Jason and I think Facebook is worth though. What does Facebook Founder and CEO Mark Zuckerberg think Facebook is worth? If you believe the rumours, then it seems that he believes that $15B might be a bargain basement valuation for the company. So, the big question is: has Zuckerberg inhaled his own PR? When you really believe in the future potential of your company, as I guess Mark does, it’s incredibly difficult to know the right time to take the money off the table.

Now, we don’t know what people have really offered for Facebook historically; and we don’t know how much cash Mark has already been able to take out of the company. These are important factors in understanding his behaviour now. However, whatever the situation, there’s no doubt that selling a company at the right time is an incredibly important, and difficult decision. I remember standing in the inner sanctum of Skype’s lead investor maybe a year before they sold the company to eBay. At that time, no-one knew what kind of value Skype would achieve. They had some great real-time tools for monitoring the use of Skype, and were showing me the amazing growth rates they were achieving and explaining the vision for Skype. I could tell they believed Skype could take over the world. We had a pretty interesting discussion about the “stickiness” of systems like Skype and the scalability of P2P systems - and we had rather different opinions how far the company could grow. So, when the rumours about companies making big offers for Skype started hitting, I said I hoped they were going to sell if they were really being offered that kind of money! Taking over the world is a great vision, but I thought $4B was an amazing valuation for Skype. It seems the investors and founders shared that opinion - I got an e-mail the day they signed the deal with eBay, saying the deal was done, and that everyone was very happy indeed!

So, back to Facebook. I honestly think that if someone has offered to buy Facebook for $5B, Mark should have sold the company. Could Facebook be worth more than $5B in the future? Or more than $15B? Or even $100B? Perhaps, but it’s by no means a foregone conclusion. Making billions in annual revenues from social networking is not an easy proposition (and that’s what it’s going to take to reach the stellar valuations). For sure, I can see routes to the massive revenues, but they seem pretty high-risk to me… and we’re in a hot market right now. Hot markets don’t stay hot for ever, and the problem is, if conditions change, it’s easy to see how Facebook’s value could fall to around $200M (see - How Low Do Valuations Go When A Bubble Bursts?).

Only time will tell on this one… but I hope Mark figures out the right time to cash out…