$15 Billion Folly

3 Mar

In prior posts I have made the argument that while I have been a fan of what certain social networks have been able to achieve, the Achilles heel of social networking to date has been (and remains to be, in my opinion) the ‘hot new club’ phenomenon. That is to say, those social networks that have had the good fortune of being able to attract a critical mass of users — Friendster, MySpace, etc — have subsequently seen an exodus of those users (or at least a precipitous slowdown in growth and traffic) as the social network ages and loses its intangible buzz or ‘coolness’ factor. The beneficiaries of the user exodus are often newer social networking competitors who might offer a richer user experience or just a perceived “hipper” environment for consumers in which to spend time and interact.

Last fall, the announcement of Microsoft’s $240 Million investment in Facebook set the social networking and broader Web 2.0 space ablaze. Crafty finance types quickly broke out their green eye shades and Number 2 lead pencils and divined that the 1.6% interest that Microsoft acquired for its $240 Million equated with a valuation for Facebook of some $15 Billion. In some respects, the Web 2.0 and social networking landscape has not been the same since.

In short order, virtually every Web 2.0 company’s investor PowerPoint working its way up and down Sand Hill Road or Route 128 had factored in the $15 Billion Facebook valuation in their models. This typically resulted in huge step-ups in the perceived value of these properties by the entrepreneurs (and, often, the early investors). In the aftermath, some term sheets — in process for months, in many cases — collapsed under the weight of revised and misaligned expectations between investors and company management teams. Other times, discussions broke down completely. I was recently quoted on this point in a local media piece (here) and I continue to hold my original position that the $15 Billion figure “anchored” in the minds of certain participants in the community from the Microsoft investment in Facebook has created a host of complications for venture investors and companies themselves in getting financings done.

Entire volumes can be penned on what goes on in the minds of Microsoft senior managers in the deals they make and the valuations they set on investments. My crystal ball is not likely to be any clearer than most. What I can say with some degree of confidence, however, is that what Microsoft values for its corporate development purposes has little bearing on what a “market” valuation would be for a Web 2.0 company such as Facebook when facing a venture financing. I’ll say it again: I see no reasonable or logical rationale for a $15 Billion valuation for Facebook. Again, this is only my own strongly held view. I am more than happy to hear conflicting arguments on this.

I go over these points again now in the wake of considerable chatter in the community over the current and growing perception, as described well by Michael Parekh, of a Facebook fatique setting in. Has Facebook jumped the shark? Do the metrics support this? Or is this just digerati snarkiness and schadenfreude over a few of Zuckerberg and Co.’s stumbles of late (Beacon, anyone?)

I am not entirely convinced, but I do sense an overall fatigue for social networks in general. I commented on this in an earlier post and remain sanguine that most social networks have yet to find solid ways of driving value for users. Informal polls we conduct now and again seem to support this. Most admit to belonging to 2 or 3 or 10 social networks, but getting very little out of the participation. The result of this is that scar tissue has begun to form around this area of social networking as more consumers openly admit to being resistant, if not downright hostile, to the idea of joining yet another social network.

Parekh and others point to a slightly different kind of fatigue. The fatigue they illuminate is around the demands placed on users through their participation in social networks — the endless pokes, pings, twitter-like messages about their friends’ latest forays to the dry cleaners, and on and on. Truth is, much of the “content” coming out of social networking platforms are inane blather. This is proving to be taxing to a lot of consumers and, dare I say it, they may begin looking for more fertile fields to hang out and interact with one another. While I admire Facebook for being forward thinking about this inevitable consumer attrition/exodus inherent in the Web 2.0 sphere, they really need to tighten their ship around these compounding user burdens.


3 Responses to “$15 Billion Folly”


  1. Social Networking: Let’s Get Vertical « Adventure Capitalist - November 11, 2009

    […] of the social web and related platforms; and, (b) stickiness. Some time back I took issue in a post with a then-$15B valuation for Facebook imputed by a Microsoft investment and pointed out some of […]

  2. MySpace On Life Support? « Adventure Capitalist - February 11, 2010

    […] this Darwinism has not changed in any meaningful way. The ‘hot, new nightclub’ problem I wrote about some time ago that particularly afflicts social media/networking companies remains unabated without any particular […]

  3. A Regular User’s Attempt to Decode the Secret of Facebook’s Success « Bsix12 - February 25, 2010

    […] think Facebook won’t just disappear like other Web sites, or like night clubs (as one person used as analogy for SNSes) because people get […]

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