Facebook Should Take the Money This Time

Sep.25.07 | About: Microsoft Corporation (MSFT)

Much has been written about the tension between venture capitalists and entrepreneurs on the topic of valuation. When we meet with someone who think’s they’ve got the next Google (NASDAQ:GOOG), I always say to my colleagues, “what if they are?”

And despite three warrant gains (Top Aces, Ventus and Longview {closing in November}) over the past three months, none of them have been of a “Googley” nature; although we are obviously pleased as these exits speak to the quality of companies we back. But hope for a Google-like win springs eternal across venture land.

Which brings us to Mark Zuckerberg. Perhaps he didn’t know what it felt like to sleep in a luxury hotel room at The Ritz in Paris, or the Il Pellicano in Italy, but he was reported to have turned down $1 billion for his company just over a year ago (see post “Wake me when they offer two billion“, October 11-06). Not too many 20-somethings would turn down US$300 million or so for their stake in a business, but that’s what he did.

Mocking ensued in many quarters. Those very people are now likely brushing up their Facebook profiles.

A year later? Microsoft (NASDAQ:MSFT) has given in and, according to the WSJ, is thinking about putting a US$10 billion pre-money valuation on Facebook. With a valuation that’s 7x estimated revenue, it isn’t all that crazy to be honest…given the growth and market position. Boring firms in the security space transact in the 8-10x revenue range with much regularity. And Facebook is now turning a profit at 40 million users. Nice work by VC firms Founders Fund, Accel Partners and Greylock Partners, who’ve led the US$40 million invested to date.

It certainly looks like they’ve got a win for the ages, even if it doesn’t appear to be a Google-sized return just yet. As for Mark Zuckerberg turning down that US$1 billion offer, his belief in the business has been rewarded.

But, this time, if I can give you some advice Mark, take the money. Canada’s investment version of Google, Research In Motion (RIMM) raised US$1 billion at US$78.25 in January 2004. The stock has split 6 for 1 since, and is trading above US$90. But you won’t hear any complaints out of Jim and Dennis about the dilution from that deal.

Traditionally, cash is all that stands in the way of timely growth or strategic acquisitions. Assuming Facebook has a multitude of choices, raising US$300-500 million now seems smart to me. And that isn’t in hindsight. The tough part will be picking the right partner.

But, as problems go in the VC world, it's a nice one to have.