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Social Networking: High Valuations, but Where is the Money?

Digital Sky Technologies (“DST”), a private, Russia-based investment fund, just paid $200 million for less than two percent of Facebook, yielding a valuation of approximately $10 billion. Facebook insists they do not need additional capital to continue operations, and that this deal was simply opportunitistic.

About a year and a half ago, Microsoft invested $240 million, which valued Facebook at approximately $15 billion. Mark Zuckerberg, Facebook's CEO, acknowledged that Microsoft’s investment came at the "absolute peak of the market". If Facebook truly does not need the capital, DST’s investment suggests that even Facebook realizes the 33 percent lower valuation is more realistic.

With 200 million users, Facebook is rapidly expanding into international markets. However, the question of how Facebook will be able to capitalize on this user base in order to monetize such a large valuation remains. The most likely scenario for the founders and current investors to monetize their investments is through the public market. Transparency on future revenue streams to the public is minimal, but based on current information, these investments could be aimed at guiding a public valuation more than actual cash flow streams.