Facebook is not worth $33 billion

I hate to leap in with what seems like an ad-hominem attack on the 37 signals, but their utter and complete misunderstanding of all the basics of business is starting to grate on me, and I'm wondering if it has anything to do with Chicago. Is the problem that they're sitting there in a city without any other Internet industry, stewing in their own witty ideas, listening only to the adoring comments they get from the groupies? How else could you explain just how far they seem to have drifted away from basic reality?<p>First of all, David: The word is VALUATION, not evaluation. KTHX.<p>Secondly, EVERY SINGLE COMPANY IN THE WORLD that has shares that trade is valued by taking the last share traded and multiplying by the number of shares outstanding. It's just the DEFINITION of valuation. It's TAUTOLOGICAL.<p>The whole section "Minority investment evaluations aren’t real" is so economically bizarre and incorrect that I don't even know where to start. It's like you wrote a blog post arguing that it is incorrect to refer to a 5' tall boy as 5' tall because he's often sitting down. Every single day every single public company in the world is valued by the last share traded, usually for a tiny fraction of the company.<p>Finally, to the main point. Facebook has certainly figured out how to make money off of 500,000,000 users. And as they optimize, they will make a lot more money. When they figure out how to make another DIME off of every user, they will instantly be making another $50,000,000 a year... in pure profit. How much profit will 37signals make if you figure out how to make another dime off of every customer? Eh David? Facebook works on the theory that when you have a lot of people, you don't have to make as much per person, because the amount of money you make is the number of customers times the amount of money you make off of each one. Again, that pesky multiplication.<p>It's weird, it's like in Chicago they don't have multiplication or something.

For a little more context, a 33B valuation is ~1/5 Google's current market cap, 1/8 Apple's, 1/6 MS's, 1/4 Oracle's, 1/2 Disney's, 1/2 Amazon's, 2x Yahoo's, 15x AOL's, etc.<p>It would make Facebook the 79th largest company in the US, and 226th in the world. It would be right behind the likes of DuPont, Dow, eBay, Metlife, Time Warner, and Target, and right ahead of the likes of DirecTV, Lockheed Martin, Texas Instruments, Dell, Fedex, and Nike.

What facebook is really worth we'll know when they IPO and they sell off a majority portion of the stock. Until then it's anybody's guess.<p>I wouldn't buy their stock at any valuation, there are much more solid ways of investing than speculating on something that already feels over valued. And if I would want more risk then I'd rather put my money in start-ups than facebook.<p>The next bubble is here, and it will go the same way as the previous ones.<p>Remember what netscape was supposed to be worth.<p>edit: sorry, that 'majority' was meant to be 'major'.

"Facebook has been around for seven years. It has 500 million users. If you can’t figure out how to make money off half a billion people in seven years, I’m going to go out on a limb and say you’re unlikely to ever do."<p>This is a strawman. If they wanted to make money right now they would. But they also observed many examples of turning-the-faucet-on gone wrong, especially with the whole privacy issues, that they are moving very carefully in that space. But they will make a lot of money if they decide to start.

I agree that this valuation is absurd and that Facebook will never really be worth this much. I also really like the 37signals guys and a lot of their opinions.<p>HOWEVER, one thing that has been bugging me is the thought, espoused by 37signals, that not generating a large profit as a business is a bad thing. We're forgetting that these businesses that don't make huge profits are still employing large amounts of people, creating new jobs every day, and giving back to the community in many ways. Facebook has over 1000 employees. Granted they may not be making 33bil in profits (or even revenue), but that's pretty cool that they were able to create 1000 new jobs that didn't exist before, while also improving the lives of many people who use the service--eg, helping people keep in touch with friends and loved ones, helping people find old friends, etc. If they break even for the rest of the existence of the business, they're still doing pretty damn well IMO.

Facebook’s biggest weakness is that its core value proposition to users is that everybody you know is on it. Any business whose core value proposition is that “everyone is doing it” is essentially a fad. Its success and usage is driven primarily by peer pressure.<p>Sure Facebook is a decently designed site that makes sharing your photos, videos, comments, links, etc. easy. But that’s not hard to replicate (the backend scaling parts are hard, but invisible to the end user). When people find the new social network that all the cool kids are using, they’ll flock to it and abandon Facebook in an instant, leaving shareholders dazed and confused. I doubt Facebook will die as quick &#38; horrible a death as MySpace (in addition to being more fad-driven, MySpace was also centered around a fad-ish industry and had horrible usability), but it will die a similar death.<p>Google on the other hand has developed revolutionary technologies that other companies find nearly impossible to find the talent &#38; resources necessary to replicate and improve upon. They provide a real, unique, non-fad value proposition to the end user. Same with Amazon, Apple and many other established tech companies.<p>Facebook investors' problem is, will they be able to get a return on their money before a new social network becomes the trendier place to be.

The more interesting question is whether facebook will even be around in 5 or 10 years. Look at myspace, huge userbase, grew from almost nothing practically overnight, and relegated to the dust bin almost as fast once facebook came around. The chances of a competitor being able to do the same thing to facebook cannot be ruled out. Indeed, with facebook's api such a competitor would have an easier job of nabbing facebook users than was the case with myspace (join the new site, let the new site import your fb social graph and mirror your feed to facebook automatically up until the day you decide more of your friends are on the new site).

Google IPO'd with a market cap around $23.1B which went up to $33B very quickly: <a href="http://www.google-ipo.com/" rel="nofollow">http://www.google-ipo.com/</a><p>Google's revenue in 2004 was $3.1B: <a href="http://bit.ly/bOQZeZ" rel="nofollow">http://bit.ly/bOQZeZ</a><p>Facebook's revenue for 2010 is rumored between $1.2B and $2B: <a href="http://techcrunch.com/2010/03/03/facebook-revenue-2010/" rel="nofollow">http://techcrunch.com/2010/03/03/facebook-revenue-2010/</a><p>VC investment rounds and secondary market transactions are probably not the best way to price a company, but they seem to be in the ballpark.

Argue about it all you want, but I will never accept a company's valuation based on second market stock. Only when the stock is publicly trade-able and market forces determine the price to be paid will I accept a valuation.<p>And a valuation at, what, 33x revs (on a good day)? I'm sorry, but gambling that hard on a web company on the basis of "potential" profits is not good business (I don't know whether it's a Silicon Valley thing or not), if you know, they can be bothered to monetise it before the next website du jour comes along.<p>YouTube was "valued" at $1.6bn, and has really struggled to make money. I'm not denying that it wont pay off for Google in the long run, but when Facebook floats, you think that investors will stick around if they struggle to monetise and fail to bring profits and revenues to a 1/5 or a 1/10 of valuation in 4/5 years?

1. <i>The company has supposedly taken just under a billion dollars in venture capital and small secondary-market sales of stock. So the actual money that has changed hands is just 3% of the total evaluation of the company!"</i><p>Not true. Sure they have raised $1B themselves, but <i>a lot</i> of stock has changed hands on the secondary market. Facebook sanctioned employees being able to sell stock up to a certain amount, in lieu of going public (employee pressure was part of what prompted Google to go public).<p>2. <i>"In other words, the evaluation is resting on the flawed assumption that Facebook could actually ever get 33 times as much money to change hands if they wanted to. There’s just no way, no how that’s happening right now. If it could, they’d IPO tomorrow."</i><p>Again not true. When you IPO you don't float 100% of your shares. In the case of Facebook, an IPO may not even see 10% of the company listed - ie. not a lot more than what is already being traded in secondary markets.<p>Most listed companies do not exchange 100% of their stock - <i>not even close</i>. By this reckoning then, no company in the world has a real valuation because at no time is all of their stock available for purchase. The author needs to go to Google Finance and lookup any of the Fortune 100 and see for himself that most have a lot of stock outstanding or not listed.<p>3. <i>"If the supposed billion dollars Facebook is allegedly pulling in this year was happening at anywhere a decent margin, they wouldn’t have needed a series E round of $120 million from Elevation Partners just three months ago."</i><p>You should have read the link you posted, because the story is that Elevation bought $120M of stock from private holders. ie. Facebook didn't raise that money. The last money they raised was $200M (on $10B) from Digital Sky in May of 09[2]<p>(btw if you did read the story at the link you referenced, the 4th paragraph mentions that Facebook revenue for '09 was $700-800M, not the 200 'best guess, being generous' that you work on).<p>But anyway, the recent (cheap) money they raised went into CAPEX (building datacenters to lower your overheads) and cashing out some stock holders for a very high valuation for non-voting stock.<p>Facebook is still at the growth stage so every dollar is (wisely) re-invested in the company in ways that will improve the bottom line. $100M is a drop compared to the cost of building datacenters (the new Google datacenter in Iceland cost 250M - <i>without servers</i>).<p>Having their own datacenters will reduce their infrastructure costs over time. While it is a lot of money - it will pay itself off within a few years because atm they are leasing space and bandwidth. Not a bad use of what is 1% of their company.<p>4. <i>"But let’s be charitable. Let’s imagine that Facebook miraculously made $200 million this year — a 20% margin. (I don’t think that’s true, otherwise why take another $120 million from Elevation Partners, but hey, let your imagination roam). That would put Facebook’s P/E at some 165."</i><p>How about we Get Real(tm) and say $1.1B this year[1], and that is before they start booking platform revenue from Facebook credits, which will be 30% of everything Zynga et al make (and Zynga made over $500M+ in '09). $700+ in 99, $1.1B+ this year, and at least an extra billion in the <i>first year</i> of Facebook credits. Not bad.<p>Each time they double revenue you can halve the PE - which is why it is so high atm.<p><i>"No outrageous profits after seven years and half a billion users"</i><p>They are profitable, and on a trajectory that will see them reach ridiculous numbers. See the more sane and informed discussion about Facebook revenue projetions and the business model here:<p><a href="http://news.ycombinator.com/item?id=1718512" rel="nofollow">http://news.ycombinator.com/item?id=1718512</a><p>(if you are actually interested in learning why Facebook is valued so highly, what the business model is and where it is going - check this link, the conversation took place earlier today and it will save me re-hashing a lot of the points here)<p>Facebook has reached every corner of the world in short time. We can all agree that their ads <i>suck</i> - yet even with this shitty advertising, which is mostly for Russian brides, they have managed to hit a cool $1B - without even trying. Imagine if they had some real ad technology behind that site. They will do something that Google has failed to do, that is, have two sources of revenue. 1. the ads. 2. the platform - both of these are billion dollar businesses.<p>What is more depressing than just how mis-informed and terrible this article is? The number of fans in the comments who eat up every word and cheer them on.<p>(Edit: updated)<p>[1] <a href="http://techcrunch.com/2010/06/22/facebook-revenues/" rel="nofollow">http://techcrunch.com/2010/06/22/facebook-revenues/</a><p>[2] <a href="http://www.crunchbase.com/company/facebook" rel="nofollow">http://www.crunchbase.com/company/facebook</a>

The argument between <i>spolsky</i> and <i>dhh</i> is funny but ultimately they seem to not be talking about the same thing. They are both right, but one is more right than the other.<p>Joel is talking about market value.<p>What Joel is saying is "dude, you don't understand value. Value is what people are willing to pay for. If someone - just one person - is willing to pay $100 for a millionth of a broken piece of crap, then that broken piece of crap is worth a hundred million dollars, <i>your opinion of it notwithstanding</i>".<p>He's right. Technically.<p>But David does not care about market value (although he tries to attack it and picturing it as not real). David is talking about <i>intrinsic value</i>; he's saying: "this thing has 500 million users, and that's amazing. But they don't make much money out of all those users, let alone any profit. So if we try to estimate the present value by actualizing future cash flows, we find the real price should be... well, not much".<p>He's also right. And I think he's fundamentally right.<p>During the housing bubble, some people (Peter Schiff for example, or the heroes of <i>The Big Short</i>) argued that the real value of housing was a multiple of rent (10-15 times rent), and that anything above that was crazy.<p>At the time, they were wrong -- they were very wrong; the value of a house was the market price, not the "intrinsic" price. The value of anything is always the market price.<p>But then suddenly there is no market. The bubble bursts and nobody's buying.<p>In that situation, if you're selling you don't have many options; but if you're buying how do you calculate a price at which you'd be willing to buy, and a price at which you may convince a seller to sell?<p>- - -<p>In a sellers' market (Joel's market) prices are fair because people accept them. If everyone wants a piece of Facebook at any price, just because they have to have it, then, well, the value of Facebook is infinite. It's not 33 billion dollars: it's the whole amount of dollars in the universe, plus one.<p>But this situation never lasts. There has to be a time when Facebook will be out of fashion, and someone will have to ask what is the intrinsic value of this thing.<p>The intrinsic value is hard to compute because you need to actually know how the company makes money, you need to understand its operations, its cost structure, strategy, etc. That's hard work for a public company; it's almost impossible, from the outside, for a private company.<p>But one thing is certain: the intrinsic value of Facebook is not infinite.<p>And then and there, David has a point.

Thing about making money off facebook is the same thing that happened with trying to make money off myspace.<p>Facebook has gotten increasingly annoying to use lately and the reason is changes are being made that benefit the company's ability to make money, not the interests of the users. I remember a time when all my friends were on myspace and suddenly everyone switched to facebook. The reason was facebook loaded instantly and you didn't get spammed by bots trying to make money off you. These two things are becoming increasingly less true of facebook today and I can feel the attempts to make money on facebook becoming more intrusive and more insulting of my intelligence.<p>Also as Cory Doctorow has pointed out, the inherent of value of a social network decreases over time the longer you use it [<a href="http://craphound.com/?p=1961" rel="nofollow">http://craphound.com/?p=1961</a>]<p>It's possible for facebook to become a real success but they need to figure out the difference between creating value and making money and not try to make money by destroying value. That is never a self-sustaining strategy.

Anyone want to help me come up with fair terms for a bet between myself (twitter.com/harryh) and dhh? See our back and forth on twitter.

I bet it's worth more than that.

Bless the 37signals guys. Always fun for a laugh.

Great job writing an article about other people's alleged delusions and then basing it on delusions of your own.<p>Facebook didn't raise a Series E from Elevation Partners; that firm purchased secondary shares.<p>Seriously, you can't ride in on a high horse of fact and reality and then get the basic tenets of your argument so wrong.

Apple's also not worth $267B. Based on the current rate that people are selling Apple stock, the demand for Apple stock makes for an equilibrium price such that Apple's market cap is $267B. But if every share of stock were up for sale, they'd have to lower the price to sell it all because there aren't an infinite number of people willing to buy Apple stock at a $267B valuation.<p>Facebook is probably more overvalued by this because so little Facebook stock is up for sale, but it's not really fair to make this argument about Facebook without mentioning that the same issue exists for all publicly traded companies as well (save a company where all of its stock is changing hands every day).

With respect to traditional brick-and-mortar businesses the skills required to successfully build, grow, and manage a small business are different from those required do the same for a big corporation.<p>That is, successfully running a neighborhood cheese shop requires different skills - and attention to different metrics - than successfully running GE.<p>One is not 'better' or 'worse' than the other. They are simply different.<p>37signals is a small business. This is not a knock against them.<p>The knock against them is that they readily forget (ignore?) this when they point fingers at other, large corporations for operating differently from them.

Sure it is, it is called Speculation <a href="http://en.wikipedia.org/wiki/Speculation" rel="nofollow">http://en.wikipedia.org/wiki/Speculation</a> Just because there is no real value going on for proper financial analysis behind it yet, doesn't mean prospective valuation couldn't be derived. Obviously, people that invested worked on a model that derived said valuation. Maybe it's a bubble, maybe it's not - but valuation is here. That's how speculative market works, without it there would be no investments.<p>My take is that Facebook is transitioning into a phase where they will try to monetize their user base by a large factor. Vector of their approach is widely speculated in media (they'll take on google, they'll make phone, they'll do this, they'll do that). The fact is that we don't know for sure what and where will they hit, but certain fact is they must hit somewhere. Speculation is fed with that fact.<p>Google had a 5 year span before it hit Adsense. Amazon was in the gutter for quite some time... I really see no point in this article from the arguments perspective.<p>I see a point in subjective matter where one who understands only a traditional commerce model (<a href="http://en.wikipedia.org/wiki/Commerce" rel="nofollow">http://en.wikipedia.org/wiki/Commerce</a>) would have trouble with speculative nature of business like this. From the tone of the post it looks like the message here is the messanger's emotions rather than fundamental aspect of point being made (since there isn't any to begin with).

Getting a valuation on this asset is interesting because it's hard for me to understand what 1-Billion dollars buys in today's world.<p>I often use the tallest building in the world as a reference for the value of 1.5 Billion dollars. So FB is worth about 20 of these.<p><a href="http://en.wikipedia.org/wiki/Burj_Khalifa" rel="nofollow">http://en.wikipedia.org/wiki/Burj_Khalifa</a><p>The sad thing is hearing how much our government loosely throws around a billion dollars. 50-Billion here, 100-Billion there... No biggie.

I don't want to put words in his mouth, but it sounds like David is arguing that should Zuckerberg decide to just walk away from Facebook today, he would have a very difficult time coming up with $6.9B in cash in exchange for his equity. (Not to mention if other equity holders wanted to liquify at the same time.)<p>It is important to point out however, this a valuation does not make. Liquidity is not part of the equation.

I largely agree with dhh’s thesis that “minority investment valuations aren’t real”, and I agree that the lack of liquidity is part of the problem. But I think it’s “liquidity preference” that totally breaks the investor valuation.<p>As a toy example, imagine a company that could be worth $3, $30, or $300 each with equal probability. The logical valuation of this company is $111. A risk tolerant investor would pay $11.1 for 10% of the company.<p>Now imagine you have a 3x liquidation preference. If the company liquidates for less than 3 times your investment, then you get it all and the suckers holding common stock get nothing. How much will you pay for 10% of the company in this situation?<p>Well, if the company exits at $3 or $30 then you’ll get all of it, and if it exits at $300 then you get $30. The total expected value is ($3 + $30 + $30)/3 = $21. That’s almost twice what you’d pay if didn’t have liquidity preference! Even though, with 3x liquidity preference, you’d pay $21 for 10% of the company, $210 is clearly a nonsense valuation for the company as a whole.

<i>If the supposed billion dollars Facebook is allegedly pulling in this year was happening at anywhere a decent margin, they wouldn’t have needed a series E round of $120 million from Elevation Partners just three months ago.</i><p>It's actually not at all uncommon for wildly profitable companies to take an additional round so they can continue to ramp up at accelerative rates.

The 100 million for schools is a preemptive publicity stunt ahead of "The Social Network" film premiere next week.<p>It will be interesting to see how hundreds of millions of people seeing a film (on- and off- cinema screen) – supposedly depicting shady roots of their favourite website – will react.<p>Most likely, with a "meh…" but let's wait and see.

I think one area people overlook with Facebook is that they pretty much leave social games to eat their lunch. There's only so much they can squeeze out of advertising (it's already starting to feel over-priced).<p>In Japan Mixi got eclipsed by Gree when it came to making an IPO because Gree focused on games and selling virtual goods. Gree had way more profits and growth potential. They eventually opened up to social gaming but their profits are still strong. Ditto Mobage.<p>The way Zynga built on Facebook is similar to how MicroSoft and Intel took off of IBM. Facebook's valuation and growth potential would be astronomical if they owned a piece of social gaming instead of just providing infrastructure.

Facebook has "demand". Once you have that the rest is just keeping your head on your shoulders. 500 million users and still counting. It would be interesting to see the number of internet users in the world, I think might become their biggest problem. Can you monetize each user more, maybe not a whole lot more without pissing 'em off, but 1c more per user for almost a billion users (should happen soon) is helluva lot.<p>Basically, a lot of people DONT wanna be on facebook, they probably detest the very idea! But they ARE! As a business owner what else could you want? And would someone pay $33b to get 500 million+ users, Absolutely!

In the past, FB's focus was almost solely on growth and they making planet-scale progress. If you reach some natural border in growth, you can throw your resources on sales, ads and novel revenue models, we haven't seen before.

DHH: you should read this Business Week article on Google in 2000: <a href="http://www.businessweek.com/bwdaily/dnflash/dec2000/nf2000127_947.htm" rel="nofollow">http://www.businessweek.com/bwdaily/dnflash/dec2000/nf200012...</a><p>I love 37signals, as I'm sure most of us here do too, but this analysis on Facebook is completely haywire. I bet he would've said the same thing about Google's prospects back in 2000, just like that BW article.

"In other words, the evaluation is resting on the flawed assumption that Facebook could actually ever get 33 times as much money to change hands if they wanted to. There’s just no way, no how that’s happening right now. If it could, they’d IPO tomorrow."<p>This is simply not true. There are many reasons why a company may want to stay private.

Don't underestimate FB. Every hour a user spends in front of FB is an hour not spent in front of a TV.<p>The ad spend has to go somewhere.

Not saying Facebook is worth $33B, but these justifications to why Facebook isn't worth $33B are at least as tenuous.

I'm surprised this isn't bloody obvious. At one point AOL was worth $247 billion, and then an open internet steamrolled over it.<p>The same thing will happen to Facebook with the open web. At least AOL had subscription revenue.

They printed the same article 3 year ago: <a href="http://37signals.com/svn/posts/670-can-microsoft-buy-cool-from-facebook" rel="nofollow">http://37signals.com/svn/posts/670-can-microsoft-buy-cool-fr...</a>

Sometimes I think the big names startups (and angels, as per that bin 38 stunt) intentionally create soap-opera-esque controversy as a way of distracting the upstarts from the work they need to be doing.

Unfortunately, you cannot convince the masses in the midst of a bubble that they are in one. The cows stampede in the direction of the stampede.

As far as I can tell MySpace only ever had 100M MAU tops. Comparing that to something 5x that is apples to oranges.

"valuation" != overvalued || undervalued

I wonder what the % of message traffic is on Facebook compared to SMS or e-mail?

the flaw here is that it assumes money is real. With no gold standard, money is entirely based upon perception. More fortunes have been made through adjusting this lens than actual hard work.

DHH can write my web framework but I wouldn't let him manage my money.

price is what you pay. value is what you get.

just a small point of disagreement here - Forbes is not a serious publication

Troll.